Abstract

With the International Accounting Standards Board (IASB) now considering the question, we examine 16 different definitions of income across three applications: information content, predictive ability and executive compensation contracting. Our results reveal that comprehensive income defined by FASB Statement 130 (NI130) dominates both traditional net income (NI) and fully comprehensive income (NIbroad) in explaining equity returns, but that NI dominates NI130 and NIbroad in explaining executive compensation. These findings are strikingly consistent with prior lobbying positions. In predictive ability, no definition clearly dominates. When income components are considered, NIbroad dominates in all three applications, thus lending support to the disclosure of comprehensive income components.

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Abstract

We document a negative relation between voluntary disclosure and proxies of information asymmetry, showing that transitory voluntary disclosure matters. Informed and uninformed trading factors are isolated from the variability of the proxies. Our analysis demonstrates that higher levels of informed trading increase bid-ask spreads, trading volume and price volatility whereas higher levels of uninformed trading reduce spreads and increase trading volume. The results suggest that while increased voluntary disclosure reduces adverse selection and lowers the level of informed trading, transaction cost and risk, average trading volume may lessen due to diminished informed trading activity.

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Abstract

This paper examines the use of discretionary current accruals by firms that make seasoned equity offers (SEOs). We find evidence suggesting that firms borrow future income to manage earnings in pre-issue years and consequently earnings decrease in post-issue year 2. However, we find no evidence that pre-issue discretionary accruals affect future stock returns. We find evidence that family-owned firms are more likely to use positive discretionary accruals prior to making an SEO, independent directors and outside blockholders constrain earnings management in family-controlled firms and SEO firms that have a larger board size have a higher degree of earnings management around SEOs.

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Abstract

In 2001, the Malaysian Securities Commission decided to suspend poorly performing companies from trading on the Kuala Lumpur Stock Exchange (KLSE) and enacted a regulation referred to as Practice Note 4 (PN4). According to this regulation, if a company's shareholder equity is negative, if it receives a going concern qualification, or if a receiver is appointed, then KLSE could classify it as a PN4 company. Using a sample of 21 PN4 and 42 non-PN4 comparable companies over the period 2001-2004, this paper investigates the governance mechanisms, disclosures and financing strategies that identify the PN4 companies and studies the economic consequences of this regulation. The study finds that outsiders in PN4 companies incurred agency costs due to extremely high insider ownership and poor internal governance. The Malaysian institutional environment is used to discuss the reasons why the PN4 regulation fails to lower managerial agency costs.

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