Every year, the SMU School of Accountancy Research (SOAR) organises a series of conferences to facilitate exchanging ideas and stimulate debate through paper presentations.
The 2022 Accounting Research Summer Camp brought together PhD candidates and faculty to share their latest findings and connect with fellow academics. This year’s event marked a return to in-person discussions as pandemic restrictions eased, and was held at the Yong Pung How School of Law on 27 May. The event was a platform for showcasing the findings of accounting researchers and included a presentation by an international scholar.
Shedding light on situations faced by a fast-changing financial realm, the topics ranged from the valuation accuracy of firms emerging from bankruptcy and how financial analysts affect corporate innovation, to investment advantages that arise from high-quality analyst forecast dispersion, and the extent to which commercial ties affect ESG ratings. The insightful debates and findings demonstrated how quality accounting research could make a meaningful impact on our economy and society.
How questioning corporate activities plays a role in building innovation
Although there has been a wealth of research examining the influence of financial analysts on corporate innovation, little has been done to explore the actual mechanisms that affect company outcomes. The paper “Analysts’ Site Visits and Corporate Innovation”, presented by SMU Associate Professor of Accounting Dr Holly Yang, fills this gap by assessing the extent to which questions posed by analysts about innovation impact business behaviour.
Dr Yang found that firms with analysts who asked more questions during site visits invested more in research and development, and filed more subsequent patents. Moreover, the association is more pronounced when the analysts are equipped with greater information and play a monitoring role. Conversely, the positive effects of the analysts’ enquiries are diminished when managers are pressured to reduce research investment to meet capital markets’ earnings expectations.
Spike in Glassdoor reviews in a competitive labour market
The labour market is where employers vie for workers and workers compete for jobs. It's a market like any other, governed by the fundamental laws of supply and demand. And when more jobs are available than workers to fill them, the labour market is considered "tight" or "competitive."
SMU Associate Professor of Accounting Rencheng Wang found that firms facing more intense labour market competition have more overly positive employer reviews on Glassdoor. Glassdoor is an online platform that offers employees anonymity to rate their employers and provides job seekers with insight into companies.
According to the paper “How Labour Market Competition Shapes Workplace-Related Information on Social Media: Evidence from Glassdoor Reviews”, unhappy employees and market rivals may resort to circulating negative information about a firm to lure away prospective employees in a competitive labour market. Consequently, the firm would ramp up efforts to inject more positive information about itself to offset the negative news.
Because the paper has found a trend of employers managing Glassdoor reviews in response to labour market competition, it calls for future researchers, Glassdoor users, and social media platforms to be more discerning in interpreting Glassdoor data.
The impact on ESG ratings by commercial ties
Demand for ESG ratings — the measurement of a company's environmental, social, and governance performance — has gone up as many investors are interested in aligning their portfolios with their personal values. Besides gunning for financial returns, savvy investors target companies that are positively impacting the world, and ESG ratings provide a way to measure such priorities.
However, ratings can be notoriously difficult to accurately assess. The paper “Do Commercial Ties Influence ESG Ratings? Evidence from Moody’s and S&P”, for example, highlights the potential conflicts of interest arising from commercial associations.
In 2019, risk assessment firm Moody’s acquired a majority stake in Vigeo Eiris, a global leader in Environmental, Social and Governance (ESG) research, data and assessments; while the creator of financial indices S&P Global acquired the ESG ratings business of RobecoSAM.
Presented by Associate Professor of Accounting Yun Lou, the paper found that such commercial ties between ESG rating agencies and their rated firms lead to conflicts of interest that influence ESG ratings. Following the acquisitions, the ESG rating agencies issued higher ESG ratings to firms with existing credit rating businesses with Moody’s or S&P, relative to those that do not. In particular, firms with stronger credit rating relationships with Moody’s or S&P and firms that issue green bonds received more noticeable improvements in their ratings — a fact that deserves attention from investors and regulators.
Consensus forecast vs average forecast of superior analysts
Investors place great importance on forecasts when deciding where to put their money. After all, if one can accurately predict future economic conditions, they should be able to reap higher returns than if they simply invested blindly.
Often, investors favour consensus estimates generated by a group of analysts of varying quality to forecast a metric such as earnings or economic growth. However, the difference in analyst quality could affect investment outcomes, as Professor of Accounting Dan Segal (Reichman University and Warwick University) came to discover.
His paper “Do Differences in Analyst Quality Matter for Investors Relying on Consensus Information?” found that forecast dispersion — a measure of the degree to which analysts' earnings forecasts differ from one another — by high-quality analysts provides an advantage to investors when dealing with uncertainties. As such, they ought to offer more opportunities for better returns.
That said, Dr Segal concludes that because the economic implications of these findings are modest, investors are better off focusing on the consensus and ignoring differences in quality among analysts.
How firms respond to changes in judicial proficiency
Running a business is often an activity fraught with risks. For example, firms may experience the holdup problem, which occurs when one party (usually a supplier) has invested significant time or resources in a project, only to have the other party (usually the customer) demand unjustifiably high prices or terms at the last minute.
This problem is often seen in customer-supplier relationships, where the supplier has made a significant investment in developing a product or service, only to have the customer demand unrealistic prices or terms.
The paper “Courts vs Contracts: Evidence from Customer-Supplier Relationships” delves into how the proficiency of business courts influences firms’ contracts and organisational structure. SMU Associate Professor of Accounting Sterling Huang revealed that firms respond to changes in the legal environment, such as improved judicial proficiency, by adjusting the structure and terms of supply contracts.
He also found that contracts are shorter in duration and include fewer covenants following the creation of business courts, as contracting parties trade the upfront costs of contracting against the expected cost of enforcement and potential losses in a contractual breach.
The event was held mostly in-person with the option for online participation for a small group of faculty
Industry peer information provides insights into firms emerging from bankruptcy
Firms tend to face multiple challenges when emerging from Chapter 11 bankruptcy: They may find themselves with limited resources and struggle to get back on their feet, or regain the trust of customers and suppliers who the company's financial troubles may have alienated. Most crucially, it is an uphill task accurately valuing a reorganised firm, due to limited firm-specific, market-based information and conflicting incentives of claimholders.
“Industry Peer Information and the Equity Valuation Accuracy of Firms” by SMU Assistant Professor of Accounting Bingxu Fang found that industry peer information goes a long way in making accurate value determinations for companies making a comeback from bankruptcy.
This is especially true when firm-specific information is sparse and experienced financial advisors and bankruptcy courts utilise the industry peer information. By incorporating information about bankrupt firms’ industry peers, inaccurate estimates that could lead to inefficient reorganised value distribution outcomes upon emergence can be avoided.