Review of Accounting and Finance

Yuan Ding; Herve Stolowy

2006 Review of Accounting and Finance

doi: 10.1108/14757700610668949

Purpose – This paper aims to investigate the changes in the properties of accounting income published by French listed companies during the 1990s. It also analyzes the impact of certain corporate characteristics such as size, international financing, and audit firm, on such changes. Design/methodology/approach – Multivariate regression is used. Findings – In French companies, good news has a delayed impact on earnings, as accountants only allow the effect of such news to be recognized gradually in the earnings measure. Conversely, bad news is reflected rapidly in earnings. The results confirm a general upward trend in the degree of conservatism of accounting earnings over the period as a whole. However, except for firm size, none of the corporate characteristics examined can predict a company's accounting earnings properties. Research limitations/implications – In future studies, it will be interesting to develop and test other possible corporate and/or institutional factors relating to accounting earnings properties. Practical implications – The paper provides an insight analysis on the evolution of institutional environment in France and its impact on accounting. Originality/value – First study on properties of accounting income in France.

Yong Keun Yoo

2006 Review of Accounting and Finance

doi: 10.1108/14757700610668958

Purpose – Aims to examine a comprehensive approach to combine several simple multiple valuation, so as to improve the valuation, accuracy of the simple multiple valuation technique. Design/methodology/approach – In order to combine several simple multiple valuations, the equity value is estimated by a weighted average of the valuation outcomes obtained from several simple multiple valuations. To calculate the weight of each valuation outcome, the out‐of‐sample price‐deflated regression of stock prices on several simple multiple valuation outcomes is conducted. Next, the alternative hypothesis of whether the composite approach yields a higher valuation accuracy than the simple multiple valuation is tested, using the actual stock price of the valued firm as the benchmark to measure the valuation accuracy under the assumption of market efficiency. Findings – It was found that combining several simple multiple valuation outcomes of a firm, each of which is based on a stock price multiple to a historical accounting performance measure of the comparable firms (historical multiple), improves the valuation accuracy of the simple multiple valuation using a single historical multiple. However, further analysis shows that the combination of the simple multiple valuation outcomes based on a stock price multiple to analysts’ earnings forecasts of the comparable firms (forward earnings multiple) and several simple multiple valuation outcomes based on historical multiples does not improve the valuation accuracy of the simple multiple valuation using a forward earnings multiple. Research limitations/implications – One caveat of this study is that only the linear combination of the simple multiple valuation outcomes is considered. Non‐linear combination of the simple multiple valuation outcomes based on both forward earnings multiple and historical multiples may be able to improve the valuation accuracy of the simple multiple valuation using a forward earnings multiple. This possibility is still an open question. Practical implications – The findings imply that a historical multiple contains incremental information not captured by other historical multiples, which is useful for the improvement of the valuation accuracy. However, the historical multiples may have no incremental information beyond a forward earnings multiple. Originality/value – The forward earnings multiples as well as the historical multiples for the equity valuations of broader firms are considered. Given the previous finding that forward earnings multiple presents the highest valuation accuracy among the valuation multiples, it is further investigated whether the composite approach using forward earnings multiple and historical multiples can improve the valuation accuracy of the simple multiple valuation using a forward earnings multiple. In addition, the potential problem of selection bias in the previous study is addressed, which examines only the equity valuations in the tax court.

Sharad C. Asthana; Yinqi Zhang

2006 Review of Accounting and Finance

doi: 10.1108/14757700610668967

Purpose – This paper sets out to test the effects of firms’ and industry's R&D intensity on persistence of abnormal earnings. Design/methodology/approach – Ohlson's valuation model is used with pooled regressions along with Fama–Macbeth methodology on yearly regressions and partitioning on Herfindahl index to conduct the tests. Findings – It was found that firms’ and industries’ R&D intensities are both positively correlated with persistence of abnormal earnings. The evidence suggests that the positive effect on earnings persistence caused by R&D's effectiveness in mitigating competition dominates the negative effect brought by more risk from R&D projects Practical implications – The fact that the firm's own R&D investment leads to incremental earnings persistence beyond that of the industry suggests the importance of incorporating both industry and firm's R&D intensity in earnings persistence. While industry R&D investment leads to competition mitigation via creation of entry barriers, a firm's own investment in R&D differentiates its products from those of its competitors, and thereby results in further competition mitigation by creating replacement barriers. Originality/value – Finally, since R&D intensity is correlated with earnings persistence, inclusion of R&D intensity in future earnings persistence studies may lead to better model specification by reducing the problem of correlated omitted variables.

Erkki K. Laitinen

2006 Review of Accounting and Finance

doi: 10.1108/14757700610668976

Purpose – Seeks to present a microeconomic model to analyse theoretically BSC, to develop a simplified model version and to apply it empirically. Design/methodology/approach – The model assumes exponential production and demand functions with constant scale factors and elasticities. It is estimated for Nokia's time‐series 1993‐2002 and partly for 35 Compustat firms. Findings – Direct statistical estimates act properly only as initial values iteratively adjusted for the level of the model. Model parameters show in experiments a significant effect on decision variables such as selling price. Most firms show decreasing returns to scale that are found also in a cross‐sectional analysis. Research limitations/implications – The model assumes constant elasticities and growth which should be relaxed. Most numerical experiments are limited to Nokia's data. Estimates applied in experiments are not fully justified on statistical grounds. More effort should be made to reach a consistent set of estimates at the level of the model. Practical implications – In growth strategy, price discounts may lead to declining profitability, while productivity is increasing. This results in peculiar causal relationships in strategic mapping of BSC. If strategy is shifted towards revenue maximization, more focus should be given to customer relationships and development and learning in BSC. Firms should in strategic planning pay special attention to rate of discount and planning horizon, because they affect selling price. Originality/value – This research paper presents a new model specification. It gives novel empirical evidence on parameter estimation and strategic behaviour in BSC framework.

Ronald D. Picur; Ahmed Riahi‐Belkaoui

2006 Review of Accounting and Finance

doi: 10.1108/14757700610668985

Purpose – Tax compliance has been studied by analyzing the individual decision of a representative person between planning and evading taxes. A neglected aspect of tax compliance is the impact of bureaucracy and corruption. Both bureaucracy and corruption are hypothesized to have a negative impact on tax compliance. Aims to examine this issue. Design/methodology/approach – Based on empirical evidence from 30 developed and developing countries. Findings – Finds that tax compliance internationally is negatively related to the levels of bureaucracy and positively related to the successful control of corruption. The paper shows that a powerful deterrent is the creation of a tax morale or climate, where citizens are protected from corruption and bloated burequcracies. Originality/value – The findings are of great value to developing countries that need to reduce both the level of corruption and bureaucracy in order to create the type of tax morale conducive to both tax compliance and economic development.