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Essays on the relation between accounting and employment, risk and valuation

Hart, Daphne (2019) Essays on the relation between accounting and employment, risk and valuation. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.hj927pn7a59i


The thesis is a collection of three separate papers on accounting consequences. Specifically, the papers examine the relation between accounting and employment, risk and valuation. The first chapter (solo-authored) documents that approximately 20% of large US public firms choose to disclose employment information quarterly, at a higher frequency than mandated by the US Securities and Exchange Commission (SEC). I use these voluntary disclosures to examine whether managers modify their firms’ workforces to manage earnings. Using firm-level analysis, I find that managers alter their firms’ workforce in the short-run to meet financial reporting benchmarks. I separately investigate the decision to voluntary disclose employment information more frequently than mandated by the SEC. I show that providing quarterly employment disclosures is associated with managerial myopic behavior. Overall, in the first chapter I present evidence that more frequent disclosures of workforce information provide valuable insights into firm operations and managerial decisions. I demonstrate that financial measures may govern decisions regarding real resource allocations, specifically, the firm’s workforce size. The second chapter (co-authored with Brian Burnett and Paige Patrick) investigates the effect of adopting more principles-based standards on litigation risk. A common perception is that principles-based accounting standards, such as International Financial Reporting Standards (IFRS), allow for more managerial discretion over financial reporting. This suggests that adopting principles-based standards may alter the litigation risk exposure of companies and their directors and officers. We study changes in litigation risk in Canada following IFRS adoption in 2011. Canada switched its reporting standards from Canadian Generally Accepted Accounting Principles (GAAP) to IFRS, which is considered more principles-based. We examine the effect of IFRS adoption on litigation risk using two established proxies for litigation risk: Directors’ and Officers’ (D&O) liability insurance, which Canadian firms are mandated to disclose, and excess cash holdings. We document that more principles-based accounting standards reduce litigation risk and provide evidence for a benefit of adopting such standards, in the form of lower insurance premiums. The third chapter (co-authored with Bjorn Jorgensen) develops an accounting-based valuation model for an economy with multiple firms and demonstrates the effect of crossholdings on firms’ prices. We illustrate how market values appear distorted when firms have mutual minority interest equity investments. We discuss possible empirical implications for valuation of multiple firms and articulate why corporate equity investments may distort firms’ market-to-book ratios. Overall, we show how the accounting treatment for corporate equity investments may alter prices and provide theoretical predictions regarding the mechanism and magnitude of these distortions. We also model linear information dynamics in a setting with multiple firms, allowing for inter-firm information transfers for firms with and without crossholdings. Our analysis illustrates how inter-firm accounting information shape prices. Moreover, we describe possible implications of our model for firms that exhibit variation in reporting dates or reporting frequency.

Item Type: Thesis (PhD)
Additional Information: © 2019 Daphne Hart
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Accounting
Supervisor: Jorgensen, Bjorn and Athanasakou, Vasiliki

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