We investigate the influence of controlling shareholders, including governmental ownership, on the debt levels of Chinese firms during varying economic conditions. Consistent with previous research, we find that listed firms in China have significantly more short‐term debt than long‐term debt. We also find that as the percentage ownership of the largest shareholder increases, less debt (as a percentage of total assets) is generally preferred. During economic slowdowns, firms tend to reduce their short‐term debt levels, although long‐term debt appears to increase. Further tests reveal that entrepreneur‐controlled firms reduce long‐term debt during economic slowdowns, suggesting that they take into consideration the implications of changes in macroeconomic conditions for earnings and liquidity when making debt financing decisions. However, we also find that State‐controlled firms in China tend to increase short‐term borrowing during declines in macroeconomic conditions, consistent with the implications of “tunneling and propping.”

No abstract

Bagnoli and Watts (2005) proposed that a manager could reduce information asymmetry by choosing an income-decreasing accounting choice that signals the firm's relatively good future prospects. A limitation in testing this theory is that most income-decreasing accounting choices over time reverse such that aggregated earnings would be the same, regardless of the choice. One income-decreasing accounting choice that never reverses is the choice of upward asset revaluation, where the resulting gains are recognized through other comprehensive income and reduce future earnings by increasing future depreciation expense. In the United Kingdom, prior to FRS15, firms had the option to upwardly revalue on a one-time basis. FRS15, and subsequently International Financial Reporting Standards, however, require those firms that upwardly revalue precommit to revalue on a consistent basis. This precommitment sacrifices future reporting discretion, which, according to the aforementioned study, serves as a costly signal of a firm's relatively good future prospects that reduces information asymmetry. The choice not to upwardly revalue, therefore, serves as a signal of a firm's relatively poor future prospects and also reduces information asymmetry, but this choice does not require precommitment such that the reduction in information asymmetry would be less than the choice to precommit to upward revaluations. Using a propensity-score matched-pair design on a sample of United Kingdom firms to test our predictions during the period requiring precommitment, we find lower forecast dispersion, lower return volatility, and a lower cost of capital for firms that precommit to upward asset revaluations, relative to those firms that choose not to upwardly revalue their operating assets.

Researchers and practitioners have expressed concern that matching has declined over time, as evidenced by a decreasing association between revenues and expenses. They attribute this decline to the shift in financial reporting from a revenue–expense view that emphasizes matching to an asset–liability view that emphasizes the measurement of economic resources that incorporates more fair values. When revenues rise with inflation but the expenses remain tied to historical costs, the two streams tend to diverge. We hypothesize that upwardly revaluing the long-lived fixed operating assets resets the expense stream; thus, changes in revenues will be more closely associated with changes in expenses for firms that revalue than firms that do not upwardly revalue. Based on a sample of United Kingdom firms, we find evidence supporting our expectations, particularly in those higher inflationary industries.

COSO has developed frameworks for firms to improve their internal controls with the objective of reducing fraud and managing enterprise risk. The frameworks are widely used by firms and their auditors to comply with the internal control requirements of the Sarbanes-Oxley Act (SOX). We investigate two issues involving the most recent COSO internal control framework (COSO 2013): the determinants of a firm's decision to adopt it in a timely manner; and the consequences of adoption on internal controls. In our sample, firms that report internal control problems under SOX 404, especially firms with information technology (IT) problems, are likely to be late adopters. Regarding the consequences of adoption, for late adopters, we find that firms using the revised COSO framework have a lower probability of reporting weaknesses in IT-related controls. We also find evidence that COSO 2013 adoption is helpful in remediating internal control weaknesses.