Are stewardship and decision usefulness complementary of conflicting objectives of financial accounting?

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1 Are stewardshp and decson usefulness complementary of conflctng objectves of fnancal accountng? Tagung des SFB 649 Ökonomsches Rsko - Motzen 5 June 2007 Joachm Gassen Insttute of Accountng and Audtng Center for Appled Statstcs and Economcs School of Busness and Economcs Humboldt-Unverstät zu Berln gassen@ww.hu-berln.de Decson Usefulness vs. Stewardshp 2 Walkthrough Idea and motvaton Background What s decson usefulness? What s stewardshp? Research desgn and results Emprcal metrcs for decson usefulness and stewardshp Data Test desgn Results Lmtatons and conclusons Joachm Gassen SFB 649 Motzen 5 June 2007

2 Decson Usefulness vs. Stewardshp 3 Idea and motvaton Snce Beaver/Demsk (979) accountng theory tends to agree on the nformaton content perspectve of accountng Two objectves of accountng Provdng valuaton relevant and contractng relevant nformaton to market partcpants These objectves are conflctng n theory But: In ther current jont conceptual framework project FASB and IASB state: Thus, the objectve of fnancal reportng stated n paragraph OB2 [decson usefulness] encompasses provdng nformaton useful n assessng management s stewardshp Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 4 What s the role of accountng nformaton? Two overlappng vews Valuaton vew (aka decson usefulness) manager (agent) accountng nfo other nfo market partcpants expected return expected rsk manager (agent) shareholder (prncpal) accountng nfo contract space other nfo Contractng vew (aka stewardshp) market partcpants expected return expected rsk Joachm Gassen SFB 649 Motzen 5 June

3 Decson Usefulness vs. Stewardshp 5 So... what was the research queston agan? Are stewardshp and decson usefulness complementary of conflctng objectves of fnancal accountng? Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 6 Emprcal measures for decson usefulness No normatve model predctng the decson usefulness of accountng tems Instead measure actual decsons whch are related to arrval of accountng nformaton wth suffcently hgh probablty Beng decson useful for valuaton means havng nformaton content from a valuaton perspectve Focus on quarterly earnngs announcements (3-day wndow) Frm-specfc undrectonal measures Average abnormal turnover (ATOVER) Average change n closng bd-ask spread (ΔBAS) Frm-specfc drectonal measures Coeffcent of a regresson of 3-day CARs on change n earnngs (ERC) Coeffcent of a regresson of 3-day CARs on earnngs surprse (FCERC) Combned metrc based on ranks of the above (DUSCORE) Joachm Gassen SFB 649 Motzen 5 June

4 Decson Usefulness vs. Stewardshp 7 Measure for stewardshp: asymmetrc earnngs tmelness Economc news translate n accountng earnngs over tme, ganng verfablty as uncertanty unravels Accountng earnngs have to be verfable n order to be a sutable contractng devce Pror: Managers are reluctant to dsclose bad news Because of tha recognzng bad news as a loss needs a lower verfablty level than recognzng good news as a gan Thus, asymmetrc tmelness of accountng earnngs are an overall measure for the supply of contractng effcent accountng nformaton Asymmetrc Tmelness Bad News Good News Earnngs (loss) t Earnngs(gan) t Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 8 Demand sde measures for stewardshp Stewardshp-related control rsk can be expected to be n part dversfable Thus t should matter more to stakeholders wth hgh transacton costs (debt holders: DEBT, lenders: ACC_PAY, lessors: RENTEXP, employees: EMPL) In equlbrum the contractng relevance of accountng can be expected to ncrease wth the relatve mportance of these stakeholder groups. Joachm Gassen SFB 649 Motzen 5 June

5 Decson Usefulness vs. Stewardshp 9 Operatonalzed research questons. Do frms wth more pronounced captal market reactons around quarterly earnngs announcements have more or less asymmetrc tmely earnngs? 2. In a determnant model controllng for the nformaton envronment and other earnngs attrbutes: - Do frms wth more asymmetrc tmely earnngs experence more or less pronounced captal market reactons around quarterly earnngs announcements? - Do frms wth more hgh transacton cost stakeholders experence more or less pronounced captal market reactons around quarterly earnngs announcements? 3. In a determnant model controllng for the nformaton envronment: Do the ntensty of captal market reactons around quarterly earnngs announcements and/or asymmetrc earnngs tmelness have an mpact on the value relevance of accountng earnngs, measured by the relatve return to a hedge portfolo based on perfect accountng foresght? Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 0 Data Frm-specfc sample based on frm tme-seres data Cross-secton of quarterly Compusta IBES and daly CRSP data Requrng quarterly IBES forecasts bases the sample towards bg and more vsble frms ERC and FCERC are estmated based on frm-specfc tme-seres regressons, requrng a mnmum of 0 quarterly observatons CONS s estmated based on frm-specfc tme-seres regressons, requrng a mnmum of 0 quarterly observatons wth at least 5 observatons wth negatve returns Only frms wth non-mssng metrcs are ncluded n the analyss: Cross-sectonal sample conssts of frms, based on 9,86 frm-quarter observatons (panel sample). Stablty checks on full sample of quarterly Compustat data ( ): Up to 3,907 observatons Joachm Gassen SFB 649 Motzen 5 June

6 Decson Usefulness vs. Stewardshp Some descrptves for the cross-sectonal sample (n=) Varable Frst Quartle Medan Thrd Quartle Mean Std. Dev. ATOVER ΔBAS ERC FCERC CONS Varable ATOVER ΔBAS ERC FCERC DUSCORE CONS ATOVER ΔBAS ERC FCERC DUSCORE CONS Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 2 NI Results RQ = γ tyeart + t= 990 j= δ FFINDUSTRY + β NEG j β RET + β RET * DUSCORE + β RET * NEG + β RET * NEG * DUSCORE + ε β DUSCORE + β NEG * DUSCORE t NEG DUSCORE NEG *DUSCORE RET RET *DUSCORE RET *NEG RET *NEG *DUSCORE R n Estmate Panel Sample 9,86 Prob. Joachm Gassen SFB 649 Motzen 5 June

7 Decson Usefulness vs. Stewardshp 3 Results RQ 2: CONS as supply-sde stewardshp metrc n DUVAR = δffindustry + βsize + β2 log( NUMEST ) + β3mtb + = β PRED + β PERS + β ZRETURN + β CONS + ε DUVAR = ATOVER Estmate 6 DUVAR = ΔBAS Estmate SIZE log(numest ) MTB PRED PERS ZRETURN CONS R DUVAR = ERC Estmate DUVAR = FCERC Estmate DUVAR = DUSCORE Estmate Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 4 Results RQ 2: Demand-sde stewardshp metrcs, DUSCORE SIZE log(numest ) MTB PRED PERS ZRETURN DEBT ACC_PAY RENTEXP EMPL CONS R 2 n Estmate ,978 Estmate ,978 Estmate ,978 Estmate ,978 Estmate ,978 Joachm Gassen SFB 649 Motzen 5 June

8 Decson Usefulness vs. Stewardshp 5 Results RQ 3: Impact on value relevance SIZE log(numest ) ZRETURN CONS ATOVER ΔBAS ERC FCERC DUSCORE R n Dep. Var = RHRET Estmate Prob. Dep. Var = RHRET Estmate Prob. Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 6 Some lmtatons Robustness: Checked for senstvty to Outlers Requred length of the frm-specfc tme-seres Alternatve specfcatons of the earnngs change varable Addtonal control varables amng at the operatonal envronment of the frm ncluded n the determnant models Internal Valdty Measures: Do they capture the underlyng economc concept of decson usefulness and stewardshp? Potentally omtted varables n determnant models Functonal form: determnants of value relevance, decson usefulness and value relevance consttute a smultaneous equaton problem External Valdty: Non IBES frms? Outsde U.S.? Other tme perods? Joachm Gassen SFB 649 Motzen 5 June

9 Decson Usefulness vs. Stewardshp 7 Conclusons Stressng the mportance of the lmtatons dscussed above: Lke predcted by theory, stewardshp and decson usefulness seem to be conflctng objectves of fnancal accountng Both have a postve mpact on value relevance The valuaton relevance of accountng appears to be more pronounced for frms from poor nformaton envronments For frms from rcher nformaton envronments, accountng appears to play prmary a confrmatory role What do we learn from ths about rsk? Informaton about rsky assets s used by two dfferent channels contractng valuaton As they both at least partly conflc nformaton desgn needs to address both Lnk between nformaton and cost of captal mght be drven by both as well Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 8 Do both vews produce the same rankng of accountng systems? Smple state dependent nvestment and ncentve problem state of nature m provdes low effort m provdes hgh effort pay-off to nvestor bad so so good dscomfort 3 5 Two possble accountng systems Dsclose the state of nature Dsclose the effort of the manager The contractng vew would favor the latter, whle the valuaton vew would favor the former, assumng that early uncertanty unravelng s preferred by the nvestor Joachm Gassen SFB 649 Motzen 5 June

10 Decson Usefulness vs. Stewardshp 9 Decson usefulness metrcs ATOVER ΔBAS ERC FCERC DUSCORE Cumulatve daly turnover from the day pror to the day after the Compustat quarterly earnngs announcement date mnus the average daly turnover of a combned pre and post wndow, the pre wndow begnnng 30 days and endng 5 days pror and the post wndow begnnng 5 days and endng 30 days post the earnngs announcement date. Averaged over all avalable observatons of frm, requrng a mnmum of ten observatons. Dfference between the average BAS d, from a wndow begnnng 2 days and endng 5 days post the quarterly earnngs announcement date and the average BAS d, from a wndow begnnng 5 days and endng 2 days pror the earnngs announcement date. Averaged over all avalable observatons of frm, requrng a mnmum of ten observatons. Coeffcent α, from the regresson: CAR = α 0, + α, ΔNI + ε over the tme seres of quarterly observatons of frm, requrng a mnmum of ten observatons. Coeffcent α, from the regresson: CAR = α 0, + α, FCEt, + ε over the tme seres of quarterly observatons of frm, requrng a mnmum of ten observatons. Sum of the decle ranks of ATOVER, - ΔBAS, ERC, and FCERC, [0,] dstrbuted. Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 20 Stewardshp metrcs CONS Knk n the regresson lne of the regresson, NI = β 0, + β, NEGt, + β2, RETt, + β3, NEGt, * RETt, + ε calculated n degrees as CONS = arctan( β2, + β3, ) arctan( β2, ) for each frm, requrng a mnmum of ten observatons and a mnmum of fve observatons wth NEG equal to one. DEBT Average of total debt dvded by total assets for frm. ACC_PAY RENTEXP Average of accounts payable dvded by total assets for frm. Average of rental expenses dvded by net sales for frm. EMPL Average of employees n thousands dvded by net sales n mllon USD for frm. Joachm Gassen SFB 649 Motzen 5 June

11 Decson Usefulness vs. Stewardshp 2 The CONS-metrc NI Knk α n the regresson lne of the regresson: NI = β 0, + β, NEGt, + β2, RETt, + β3, NEGt, * RETt, + ε Calculated n degrees as CONS = arctan( β2, + β3, ) arctan( β2, ) for each frm, requrng a mnmum of ten observatons and a mnmum of fve observatons wth NEG equal to one. β 2 β 3 γ δ α RET α = δ γ γ = arctan β δ = arctan ( β2 + β3) ( β2 + β3) arctan β2 Joachm Gassen SFB 649 Motzen 5 June α = arctan Decson Usefulness vs. Stewardshp 22 Results RQ2: ERC estmated on postve earnngs changes only POSERC = δ FFINDUSTRY + βsize + β 2 log( NUMEST ) + β 3MTB + = β PRED + β PERS + β ZRETURN + β CONS + ε SIZE log(numest ) MTB PRED PERS ZRETURN CONS R n Dep. Var. = POSERC Estmate 2,798 Prob. Joachm Gassen SFB 649 Motzen 5 June 2007

12 Decson Usefulness vs. Stewardshp 23 Some related lterature Analytcal models comparng stewardshp and decson usefulness: Gjesdal (JAR, 98), Lang (CAR, 2000), Arya/Glover/Mttendorf/Zhang (RAS, 2004), Chrstensen/Demsk (SBR, 2004) Management compensaton role and valuaton role of earnngs: Bushman/Engel/Smth (JAR, 2006) Decson usefulness and ts determnants: Landsman/Maydew (JAR, 2002), Francs/Schpper/Vncent (TAR, 2002), DeFond/Hung/Trezevant (JAE, 2007) Fnancal accountng and complementary/competng nformaton sources: Francs/Schpper/Vncent (JAE, 2002), Chen/Cheng/Lo (WP, 2006) Earnngs attrbutes: Lo/Lys (WP, 2000), Schpper/Vncent (AH, 2003), Francs/LaFond/Ohlson/Schpper (TAR, 2004) Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 24 FASB/IASB defnton of decson usefulness n OB2 nformaton that s useful to present and potental nvestors and credtors and others n makng nvestmen cred and smlar resource allocaton decsons nformaton that s useful n makng nvestmen cred and smlar resource allocaton decsons nformaton that s useful n makng resource allocaton decsons nformaton that s useful n makng decsons nformaton Joachm Gassen SFB 649 Motzen 5 June

13 Decson Usefulness vs. Stewardshp 25 Narrower defnton (OB3) fnancal reportng should provde nformaton to help present and potental nvestors and credtors and others to assess the amounts, tmng, and uncertanty of the entty s future cash nflows and outflows Lendng from Chrstensen/Demsk (2003, pp. 47 ff.): E T t j [ PV θ ] = E[ CF θ ]( + r) t t j t j= t+ Informaton content n a valuaton settng (valuaton relevance of nformaton) exst for any change n θ f and only f value vares systematcally wth the nformaton change δe [ PV θ ] δe[ CF θ ] δθ t t t j t 0 j 0 δθt Joachm Gassen SFB 649 Motzen 5 June 2007 Decson Usefulness vs. Stewardshp 26 Defnton of stewardshp FASB/IASB explan the stewardshp role as follows: Management of an entty s accountable to owners (shareholders) for the custody and safekeepng of the entty s economc resources and for ther effcent and proftable use (OB 27) Stewardshp related nformaton provdes users wth nformaton about how management dscharged ts stewardshp role Thus, stewardshp related nformaton contans nformaton about management s actons for controllng purposes (Gjesdal (98), Bushman et al. (2006)) Conceptual defnton of stewardshp s closely related to nformaton content n a contractng settng (contractng relevance) as defned by Chrstensen/Demsk (2003, pp. 229 f.) Joachm Gassen SFB 649 Motzen 5 June