Do audited firms have a lower cost of debt?

The purpose of this study is to investigate if audited financial statements add value for firms in the private debt market. Using an instrumental variable method, we find that firms with audited financial statements, on average, save 0.47 percentage points on the cost of debt compared to firms with unaudited financial statements. We also find that using the big, well-known auditing firms does not yield any additional cost of debt benefits. Lastly, we investigate if there are industries where alternative sources of information make auditing less valuable in reducing the cost of debt. Here, we find that auditing is less important in lowering cost in one industry, agriculture, where one lender has a 74% market share and a 100-year history of lending to firms within that industry. As such, it seems that lenders having high exposure to a certain industry might act as an alternative to auditing in reducing the information asymmetry between the firm and the lender.

Robotizing bond portfolio selection on the Russian debt market on the basis of a modified strategy of riding the yield curve

The modern global debt market features historically low average interest rates, convergence of yields on bonds with different maturities, an increase of yield curve inversion emergence frequency and a large-scale trend to automate financial decision making. The researchers’ attention in these fields is mainly focused on designing models that describe the state of the debt market as whole or its individual instruments in particular, as well as on risk management methods. At the same time, the specialized literature offers very few works concerning the topic of computer algorithms for bond portfolio selection based on traditional or advanced investment strategies. The aim of the present research is to create a modification of the existing algorithm of riding the yield curve strategy application, employing, first, average bond yield over the holding period instead of traditional bond yield to maturity; second, a developed algorithm for calculating the market spread on bonds; and, third, alternative risk evaluation indicators (compensation coefficients), which allow us to measure objectively price risk, liquidity risk, transaction costs risk and a general risk. The modification and the development of the algorithm for calculating the market spread were carried out using the direct measurement of the result technique, which entails application of the strategy to the data on bond issues received through the Moscow Exchange API. The selection of financial instruments was conducted in all sectors of the Russian debt market: public bonds, sub-federal and municipal bonds, corporate bonds. The modified algorithm enabled us to get extra yield for each selected bond issue, thereby proving the high effectiveness of the technique compared to the traditional strategy. Software implementation of the algorithm can be integrated into any robotized or semi-robotized stock exchange trading application.

A Critical Analysis of Volatility Surprise in Bitcoin Cryptocurrency and Other Financial Assets

The purpose of this paper is to investigate the viability as compared with other financial assets of cryptocurrencies as a currency or as an asset investment. This paper also aims to see which macro variable relates more to the price of cryptocurrencies, especially Bitcoin. Since the whole concept of cryptocurrencies is quite novel, an attempt has been made to briefly explain the underlying blockchain technology that forms the bedrock of cryptocurrencies. In this study, we use secondary data, i.e., the price history of Bitcoin from September 2014 to September 2021 for the last seven years, captured from trading exchanges. We predicted monthly returns of Bitcoin with that of Standard & Poor’s 500 Index (S&P 500), gold, and Treasury Bonds. Our findings show that Bitcoin has very high volatility compared to S&P 500, Gold and Treasury Bonds. Also, our findings show that there is a positive correlation between Bitcoin’s price volatility and the other three financial assets before and during COVID-19. Hence, Bitcoin is acting more as a speculative asset rather than a steady store of value. This can be drawn from the comparison with the debt market i.e., a Treasury Bond that invests in long-dated (30 years) US treasuries with which Bitcoin shows no relationship. The findings of this study could help with understanding the future of Bitcoin. This has important implications for Bitcoin investors. The current study contributes to the extant literature by providing empirical evidence on long-term social sustainability vis-à-vis supply chain traceability.

Accounting Conservatism

<p>This thesis provides an in-depth examination of accounting conservatism, which is one of the oldest and most important principles of accounting (Sterling, 1967;Watts, 2003a). Two main questions relating to accounting conservatism are extensively studied in this thesis: (1) How to measure accounting conservatism? (2) Why do firms adopt accounting conservatism? This thesis consists of three main chapters that answer these two questions from three different perspectives. The first chapter studies the existing empirical measures of accounting conservatism from a construct validity perspective and concludes that construct validity of the existing measures is mixed to low. The second chapter examines the validity and bias in the Basu (1997) measure of accounting conservatism - one of the most widely used measure of conservatism in the accounting literature. The second chapter shows, analytically and empirically, that the Basu (1997) measure is biased upwards by the default risk of a firm, and proposes a new measure of conservatism that is free from this bias. This new measure of conservatism is called the "Default-Adjusted-Basu" measure. The third chapter investigates the economic rationale for accounting conservatism, and proposes a signalling theory for accounting conservatism. In a debt market characterized by information asymmetry, a borrower firm's degree of conservatism can serve as a credible signal about that borrower firm's level of operating risk to the lenders in the debt market. Thus, one potential benefit of accounting conservatism is that it can reduce the degree of information asymmetry in the debt market.</p>

Accounting Conservatism

<p>This thesis provides an in-depth examination of accounting conservatism, which is one of the oldest and most important principles of accounting (Sterling, 1967;Watts, 2003a). Two main questions relating to accounting conservatism are extensively studied in this thesis: (1) How to measure accounting conservatism? (2) Why do firms adopt accounting conservatism? This thesis consists of three main chapters that answer these two questions from three different perspectives. The first chapter studies the existing empirical measures of accounting conservatism from a construct validity perspective and concludes that construct validity of the existing measures is mixed to low. The second chapter examines the validity and bias in the Basu (1997) measure of accounting conservatism - one of the most widely used measure of conservatism in the accounting literature. The second chapter shows, analytically and empirically, that the Basu (1997) measure is biased upwards by the default risk of a firm, and proposes a new measure of conservatism that is free from this bias. This new measure of conservatism is called the "Default-Adjusted-Basu" measure. The third chapter investigates the economic rationale for accounting conservatism, and proposes a signalling theory for accounting conservatism. In a debt market characterized by information asymmetry, a borrower firm's degree of conservatism can serve as a credible signal about that borrower firm's level of operating risk to the lenders in the debt market. Thus, one potential benefit of accounting conservatism is that it can reduce the degree of information asymmetry in the debt market.</p>

Consequences of Weak Internal Controls Over Financial Reporting: Foreign versus U.S. Firms

For a sample of both foreign cross-listed firms and U.S. firms that report material weaknesses in internal control over financial reporting (MWICFR) from 2007- 2016, we utilize event studies and multivariate techniques to examine if there are differential consequences of reporting MWICFR across the two groups. Specifically, we examine the reactions of the equity and debt markets, external auditors, and the firm’s governance. We find that after receiving an audit report with material weakness issues, foreign firms face a significantly more negative stock market reaction and decrease in credit ratings. These firms are more likely to receive a going-concern audit opinion than U.S. firms and are also significantly less likely to change their CEOs or CFOs. Additionally, we find that the strength of the home market regulatory environment mitigates the negative equity and debt market reactions for foreign firms. Lastly, we also find that the presence of foreign auditors for foreign firms alleviates audit market consequences, resulting in a lower likelihood of auditor resignations and going-concern audit opinions. This paper extends and complements the existing literature on cross-listed firms by documenting differences in the consequences for firms reporting weaknesses in ICFR and exploring the traits driving these differences.

Labor lawsuits and debt maturity

Purpose This paper aims to investigate how firms’ relationships with employees define their debt maturity. The authors empirically test the role of employee litigations in influencing firms’ choice of short-term versus long-term debt. The authors study employee relations by analyzing the importance of the workplace environment on capital structure. Design/methodology/approach The author’s test hypotheses using a sample of US publicly traded firms between 2000 and 2017, including 3,056 unique firms with 4,256 unique chief executive officer, adopting the fixed effect panel model. Findings The authors document that employee litigations have a significant negative effect on the use of short-term debt and a significant positive affect on long-term debt. Employee litigations, along with legal fees, outcomes and charging parties, matter the most in explaining debt maturity. In addition, frequently sued firms abandon the short-term debt market and use less shareholders’ equity to finance their operations while relying more on the longer debt market. Originality/value To the best of the authors’ knowledge, this is the first study to examine the role of employee mistreatment in debt maturity choice. The study extends the lawsuit and finance literature by examining unique, hand-collected data sets of employee lawsuits, allegations, violations, settlements, charging parties, case outcomes and case durations.