Accounting →
- 23 May 2011
- Op-Ed
Leading and Lagging Countries in Contributing to a Sustainable Society
To determine the extent to which corporate and investor behavior is changing to contribute to a more sustainable society, researchers Robert Eccles and George Serafeim analyzed data involving over 2,000 companies in 23 countries. One result: a ranking of countries based on the degree to which their companies integrate environmental and social discussions and metrics in their financial disclosures. Closed for comment; 0 Comments.
- 19 May 2011
- Working Paper Summaries
Mandatory IFRS Adoption and Financial Statement Comparability
In the past decade, many countries have adopted International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board, which has impelled economists to examine the benefits of the standards. This paper discusses how IFRS adoption affects financial reporting comparability—that is, the properties of financial statements that allow users to identify similarities or differences between the economics of different reporting entities over any given period of time. Research was conducted by Francois Brochet and Edward J. Riedl of Harvard Business School, and Alan Jagolinzer of the University of Colorado at Boulder. Key concepts include: Mandatory IFRS adoption results in a reduction of abnormal returns to insider purchases. IFRS adoption also results in a reduction of abnormal returns to analyst recommendation upgrades. These improvements can also accrue in settings in which information quality is already high, and incumbent domestic standards are already similar to IFRS. All results are consistent with IFRS adoption improving financial statement comparability. Closed for comment; 0 Comments.
- 17 May 2011
- Working Paper Summaries
The Consequences of Mandatory Corporate Sustainability Reporting
The number of firms reporting sustainability information has grown significantly in the past decade, both due to voluntary actions and to mandates from several national governments and stock exchange authorities. In this paper, London Business School's Ioannis Ioannou and Harvard Business School's George Serafeim investigate whether mandatory sustainability reporting has any effect on a company's tendency to engage in socially responsible management practices. Key concepts include: The researchers show that mandatory sustainability reporting effectively promotes socially responsible managerial practices. Overall, supervision of managers by boards of directors improves, bribery and corruption decreases, and credibility of managers in society increases. In companies where sustainability reporting is a requirement, employee training becomes a higher priority, and corporate boards supervise management more effectively. These positive results are more pronounced in countries that have stronger law enforcement, countries where assurance of sustainability data is more frequent, and countries that are generally more developed. Closed for comment; 0 Comments.
- 19 Apr 2011
- Working Paper Summaries
Top Executive Background and Financial Reporting Choice: The Case of Goodwill Impairment
In the management literature, some theories hold that corporate actions and strategic choices can be partially predicted by knowing the functional background of executives. The authors provide evidence on how CEOs and CFOs who were former investment bankers, auditors, and private equity/venture capital executives managed decisions around goodwill impairments (essentially goodwill charge-offs)—a complex accounting choice involving a high degree of managerial discretion. Research by HBS professor Francois Brochet and doctoral candidate Kyle Welch. Key concepts include: Results of the research suggest that executive functional background is a significant explanatory factor of goodwill impairment reporting, and that its effect is better understood in the context of upper echelons theory and agency theory. The results can help researchers explore the role of the individual manager in explaining financial reporting choices and also help them to control for executive-level characteristics when investigating determinants of goodwill impairments. Since executive background is an actionable variable for corporate boards, a better understanding of its role in executives' financial reporting choices can be informative to those who monitor executive reporting. Closed for comment; 0 Comments.
- 09 Mar 2011
- Working Paper Summaries
Accounting Scholarship That Advances Professional Knowledge and Practice
Accounting scholars generally do a fine job of analyzing how we process accounting data, but they ought to spend more time looking at how that data is produced, says Harvard Business School professor Robert S. Kaplan. In this paper—in response to a newly minted professor who sought his advice—Kaplan reminds young scholars that accounting is more of a professional discipline than an academic subject. To that end, he advises them not just to teach their students the common body of accounting knowledge, but also to advance that body of knowledge by bridging the gap between scholarship and practice. Key concepts include: Accounting professors have a responsibility not just to dispense knowledge but also to advance it, especially in a time when the profession is changing rapidly. Risk management is a great issue for accounting academics to tackle. One, it is clearly relevant, due to the massive bank failures in the past few years. Two, it encompasses issues important to both academic study and professional practice-including reporting, disclosure, management control, and auditing. Young accounting professors should spend time teaching in executive education programs, which will give them an opportunity to get feedback from experienced professionals. Closed for comment; 0 Comments.
- 02 Feb 2011
- Working Paper Summaries
Lawful but Corrupt: Gaming and the Problem of Institutional Corruption in the Private Sector
In the business world, "gaming" refers to the act of subverting the intent of rules or laws without technically breaking them--a skillful if unsavory way to achieve private gain. Harvard Business School professor emeritus Malcolm S. Salter explores how gaming the system can lead to institutional corruption, citing examples from Enron and early efforts by some banks to game the implementation of the Dodd-Frank financial reform act. Key concepts include: A Rule-Making Game involves influencing the writing of societal rules such that deliberate loopholes, exclusions, and ambiguous language provide future opportunities for sneaky behavior. A Rule-Following Game involves the actual exploitation of these gaming opportunities. Enron's story includes both types of games. The paper explores three hypotheses. First, extensive lobbying by business interests during rule-making sessions aims not only to minimize regulatory constraints, but also to ensure future gaming opportunities for the firms. Second, the gaming of rules is often fueled by the short-term goals and incentives of both corporate executives and investment managers, ignoring possible long-term consequences. Third, corporate boards become complicit in gaming when they allow gaming to take root and persist as an acceptable organizational norm, and fail to identify and monitor behavior that threatens compliance with socially mandated rules and regulations. Remedying rule-making gaming likely will require policies that address both lobbying efforts and campaign contributions. Meanwhile, extending the decision-making time horizon for investment managers and corporate executives should help to diminish rule-following gaming. Closed for comment; 0 Comments.
- 14 Dec 2010
- Op-Ed
Tax US Companies to Spur Spending
With traditional monetary and fiscal policy instruments to stimulate the economy seemingly exhausted, professor Mihir Desai offers a radical proposal: Use taxes to motivate corporations to spend a trillion dollars in cash. Open for comment; 0 Comments.
- 07 Dec 2010
- Working Paper Summaries
Towards an Understanding of the Role of Standard Setters in Standard Setting
Accounting standards promulgated by the Financial Accounting Standards Board (FASB) play an important role in the development and maintenance of capital markets worldwide, so it is important to understand how these standards come to be. Prior research has focused on the effect of corporate lobbying on the development of FASB standards, but has largely overlooked the role of the FASB members themselves. Looking at these individuals between 1973 and 2007, Harvard Business School doctoral candidate Abigail M. Allen and professor Karthik Ramanna examine how board members' professional experience, length of service on the board, and political leanings influenced accounting standards. Key concepts include: While corporate lobbying is likely to influence the nature of accounting standards proposed by the FASB, the board members themselves are likely to shape Generally Accepted Accounting Principles (GAAP) by controlling which standards are proposed. Length of service on the board is associated with proposing standards perceived both as more favorable by big auditors and as decreasing accounting "reliability." Affiliation with the Democratic Party, measured by political donations, is associated with proposing standards perceived both as less favorable by big auditors and as increasing accounting reliability. The evidence in this study can be used toward building a more comprehensive theory of accounting standard setting, which can be helpful in informing future efforts at designing standard setting institutions, including considerations on term limits and prior work experience. Closed for comment; 0 Comments.
- 19 Nov 2010
- Research & Ideas
The Landscape of Integrated Reporting: An E-Book
An e-book written by participants of a recent HBS workshop on integrated reporting is now available. HBS Dean Nitin Nohria offers a forward. Closed for comment; 0 Comments.
- 17 Nov 2010
- Working Paper Summaries
Network Effects in Countries’ Adoption of IFRS
Between 2003 and 2008, 75 countries adopted, to various degrees, International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board. More countries, including the United States and China, are currently engaged in convergence projects. Researchers Karthik Ramanna (Harvard Business School) and Ewa Sletten (MIT Sloan School of Management) report on the role that perceived network benefits play in convincing some countries to shift from local accounting standards to IFRS. Key concepts include: In a country's decision to adopt IFRS, perceived network benefits from IFRS adoption—that is, lower transaction costs expected to accrue to foreign users of financial statements—come to outweigh institutional differences (e.g., auditing technology) that make IFRS adoption costly. The results suggest IFRS adoption among countries is self-perpetuating. Low GDP countries and countries more dependent on foreign trade have a differentially higher response to these perceived network benefits. Perceived network benefits are unlikely to be realized in low GDP countries since these countries are unlikely to rapidly adapt their corporate governance institutions to IFRS. Closed for comment; 0 Comments.
- 12 Nov 2010
- Research & Ideas
One Report: Integrated Reporting for a Sustainable Strategy
What a company externally reports shapes how it behaves internally. The key question is, "What should companies report?" Key concepts include: Integrated reporting takes corporate reporting to the next level. The state of integrated reporting is embryonic, more an aspiration than a codified management practice. Expanding adoption will change how society thinks about the role of companies. An action plan for integrated reporting to drive its adoption has been developed. Closed for comment; 0 Comments.
- 20 Oct 2010
- Research & Ideas
HBS Workshop Encourages Corporate Reporting on Environmental and Social Sustainability
The concept of integrated reporting could help mend the lack of trust between business and the public, Harvard Business School Dean Nitin Nohria tells attendees at a seminal workshop. Closed for comment; 0 Comments.
- 12 Oct 2010
- Working Paper Summaries
Crashes and Collateralized Lending
This paper presents a framework for understanding the contribution of systematic crash risk to the cost of capital for a variety of different types of securities. The framework isolates the systematic crash risk exposure of different collateral types (equities, corporate bonds, and CDO tranches), and provides a simple mechanism for allocating the cost of bearing this risk between a financing intermediary and investor. Research was conducted by Jakub W. Jurek (Bendheim Center for Finance, Princeton University) and Erik Stafford (Harvard Business School). Key concepts include: A typical loan extended by a broker to an investor for a purchase on margin is collateralized by the underlying security and protected by the investor's capital contribution (the collateral, margin, or "haircut"). The haircut protects the intermediary from changes in the liquidation value of the collateral. The researchers' focus is looking at haircuts as an effective protection against large market declines. They derive a schedule of haircuts and financing rates (spreads above the risk-free rate), which represents the intermediary's fair charge for providing leverage to the investor. The framework also can be used to stress test different types of collateral by examining the predicted financing terms as market conditions change. This systematic credit risk channel has not been explored in the banking literature, despite the growing role of collateralized borrowing in the economy (e.g. repo market) and the seeming relevance of ensuring collateral robustness in adverse economic states. Closed for comment; 0 Comments.
- 30 Sep 2010
- Working Paper Summaries
Does Mandatory IFRS Adoption Improve the Information Environment?
Created by the International Accounting Standards Board, the International Financial Reporting Standards (IFRS) comprise several principles designed to help public companies increase transparency in their financial reports. But are they worth the hefty compliance costs associated with them? This paper investigates whether adopting the IFRS improves the information environment for firms in which the standards are legally required. Research was conducted by Joanne Horton at the London School of Economics, George Serafeim at Harvard Business School, and Ioanna Serafeim at the Greek Capital Market Commission. Key concepts include: Consensus forecast errors decrease significantly after mandatory IFRS adoption at firms that mandatorily adopt the International Financial Reporting Standards, relative to early voluntary IFRS adopters and firms that continue to report under local GAAP. The extent of the error decrease is associated with the differences between the IFRS and the firm's existing generally-accepted accounting principles. The decrease in forecast errors is driven both by improved comparability across companies and better information being communicated in the reports. Closed for comment; 0 Comments.
- 12 Apr 2010
- Research & Ideas
One Report: Better Strategy through Integrated Reporting
Stakeholders expect it. And smart companies are doing it: integrating their reporting of financial and nonfinancial performance in order to improve sustainable strategy. HBS senior lecturer Robert G. Eccles and coauthor Michael P. Krzus explain the benefits and value of the One Report method. Plus: book excerpt from One Report: Integrated Reporting for a Sustainable Strategy. Key concepts include: Integrating reporting in One Report means to describe, simply and clearly, management's view of the relationships between financial and nonfinancial metrics. Companies like Philips, Novo Nordisk, Natura, and United Technologies are leaders in conducting and communicating integrated reporting. The four key benefits of integrated reporting are: greater clarity about the relationship between financial and nonfinancial key performance indicators; better management decisions; deeper engagement with the broad stakeholder community; and lower reputational risk. Closed for comment; 0 Comments.
- 03 Feb 2010
- Working Paper Summaries
Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results
The need for organizations to both exploit current resources and explore new opportunities is a central and long-standing theme in the literature of organizations. The challenge, of course, is that these two imperatives require very different structures and skills. Exploitation demands a focus on efficiency and effectiveness in executing preset plans and procedures. Exploration requires the ability to step outside these routines by emphasizing experimentation, creativity, and novelty. In this study, HBS professor Robert L. Simons focuses on the relationship between two organization design variables—span of control and span of accountability. Using data from 102 field studies, he illustrates how these variables can be manipulated by managers to tilt the balance toward either exploration or exploitation in response to different tasks, different organizational contexts, and changing competitive environments. Key concepts include: Managers can fine-tune their organization along the dimensions of exploitation and exploration more easily than we may have suspected. For these situations, accountability and control can be adjusted to create an opening for entrepreneurship. It is the tension between the resources allocated by organizational architecture and accountability for those resources that provides a powerful catalyst for strategic exploitation and exploration. Most of the research on exploration and exploitation has focused on design architecture (centralization/decentralization, internal venture groups, alliances) and related organizational coordinating mechanisms. We must remember, however, that these structures are merely tools to affect the behavior of individuals. It is individuals, in the end, who must devote their energy and attention to either exploiting current resources or exploring new opportunities. Closed for comment; 0 Comments.
- 02 Sep 2009
- Working Paper Summaries
Information Risk and Fair Value: An Examination of Equity Betas and Bid-Ask Spreads
What is the role of fair values in the current economic crisis? The interplay between information risk—that is, uncertainty regarding valuation parameters for an underlying asset—and the reporting of financial instruments at fair value has been a subject of high-level policy debate. Finance theory suggests that information risk is reflected in firms' equity betas and the information asymmetry component of bid-ask spreads. HBS professor Edward Riedl and doctoral candidate George Serafeim test predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Overall, banks with higher exposures to level 3 financial assets have both higher equity betas and higher bid-ask spreads. Both results are consistent with higher levels of information risk, and thus cost of capital, for these firms. Key concepts include: Banks with higher exposure to level 3 (or more illiquid) financial assets reflect higher information risk, revealed both in higher equity betas and higher bid-ask spreads. This is suggestive that current disclosures surrounding level 3 financial instruments are insufficient to mitigate investor perceptions of greater information risk for highly opaque financial assets. The regulatory implications may include enhancements to the disclosures (particularly for level 3 financial instruments), as well as increased movement towards risk-weighted regulatory capital. Closed for comment; 0 Comments.
- 14 Aug 2009
- Working Paper Summaries
Insider Trading Preceding Goodwill Impairments
Do insiders strategically sell their stock holdings prior to the accounting disclosure of goodwill impairment losses? While a number of recent studies provide evidence of insider trading prior to the announcement of earnings performance measures, a remaining puzzle is what types of information aggregated into reported earnings constitute the source of insiders' private information. This study provides evidence of a specific reporting item, goodwill impairments, about which insiders are able to strategically trade before its full discovery by the equity market and its recognition within the financial statements. Goodwill impairments represent likely sources of information for insiders to trade on for two reasons. First, they tend to be economically large, averaging 11.9 percent of the market value of equity during the sample period of 2002-2007. Second, managers likely have material private information regarding future cash flow estimates through their internal budgeting processes; and managers' private information advantage may be relatively long-lived due to goodwill impairment testing rules that may delay the accounting recognition of economic goodwill impairments. Key concepts include: Up to 24 months preceding the announcement of goodwill impairment, insiders exhibit higher net selling behavior relative to firms not reporting such losses. In addition, among firms reporting goodwill impairments, those with net selling among insiders exhibit significantly more negative abnormal stock returns relative to those not reporting net selling among insiders. Overall, these results build on prior research investigating managers' discretion over goodwill impairments by providing evidence of a managerial incentive to delay the accounting recognition of goodwill impairments. Closed for comment; 0 Comments.
- 25 Jun 2009
- Working Paper Summaries
Why Do Countries Adopt International Financial Reporting Standards?
Why do some countries adopt the European Union (EU)-based International Financial Reporting Standards (IFRS) when others do not? To expand our understanding of the determinants and consequences of IFRS adoption on a global sample, HBS professor Karthik Ramanna and MIT Sloan School of Management coauthor Ewa Sletten studied variations over time in the decision to adopt these standards in more than a hundred non-EU countries. Understanding countries' adoption decisions can provide insights into the benefits and costs of IFRS adoption. Key concepts include: Countries with high quality corporate governance systems and more powerful countries are less likely to adopt IFRS. There are network benefits to IFRS adoption, i.e., the likelihood of IFRS adoption for a given country increases with the number of IFRS adopters in its geographical region and with IFRS adoption among its trade partners. As more countries adopt the international standards, the relative import of network benefits from IFRS adoption (over direct economic benefits) are likely to increase. Similar effects might be seen in the adoption of accounting methods and standards, and of corporate governance best practices by firms and jurisdictions. Closed for comment; 0 Comments.
Accounting for Crises
A key endeavor of modern economic theory is to understand the causes of panics. This paper shows empirically that currency investors are more likely to get spooked unnecessarily when they have too much information. This finding accords well with global games models, which argue that self-fulfilling panics—i.e., panics unrelated to fundamentals—are more likely to occur when the quality of public information available to investors is very high. Research was conducted by Venky Nagar (University of Michigan) and Gwen Yu (Harvard). Key concepts include: Because crises in high accounting precision countries are more likely to have no fundamental cause, accounting fundamentals are more likely to predict crises when accounting information has low precision. Closed for comment; 0 Comments.