By : Ridwan Islam Amanda Lafave Fion Li Greg Milosek Norek Paprocki Micky Petit Frere Magie Soliman

French Accounting Academic MBA, PhD and DESCF Professor Auditor for KPMG and Ernst & Young

Findings  Higher financial reporting quality (FRQ) improves investment efficiency by reducing information asymmetries  High FRQ facilitates investment for constrained firms and curbs investment for firms likely to over-invest  Firms with higher FRQ are less likely to deviate from their predicted level of investment

Research Design  Estimates whether FRQ is negatively (positively) associated with investment when firms are more likely to over-invest (under-invest)  FRQ Index (AQ, AQWi, and FOG Index)  Sample size = 34,791 firm-year observations from 1993 to 2001  Examines capital expenditures, acquisitions, and asset sales

Relevance  Dechow and Skinner (2000) Earnings Management article  Information asymmetries give rise to adverse selection and moral hazard  Opportunistic earnings management extracted from accruals quality  Dechow cited three times in papers related to earnings, cash flows, and quality of accruals

Findings  Companies with larger auditors are more likely to issue equity as apposed to debt.  Companies audited by Big 6 firms are less likely to be affected by market conditions in the amount of equity issues and in their debt ratios.

Research Design  20 years of data for main sample  Exclusion of unique business models  Focus on large companies  Analyzing companies switching between differently sized audit firms

Relevance  Daniel Thornton and the “Rats”  Revsine’s Selective Financial  Misrepresentation Hypothesis  Skinner’s mention of manager bias’  Signaling theory

Findings  Higher quality accounting enhances investment efficiency by reducing information asymmetry between managers and outside investors  This effect should be stronger in economies where financing is largely provided through arm’s-length transactions compare with countries were creditors supply more capital

Research Design  Regression of cash flow activities on accounting quality in a cross country sample  Examining accounting quality on investment efficiency at the firm level in two selected countries (US and Japan)

Relevance  Agency Theory  Gibbins, Richardson and Waterhouse “Managing Financial Disclosures”

Findings  Accounting Firms gained clients after receiving clean opinions and lost clients after receiving modified or adverse opinions  Self-regulated audit firm reviews vs. audit firm reviews administered by PCAOB

Research Design  Examined the hiring and firing of audit firms in the 12-month period following the issuance of a peer review  Sampled 1,000 reviews of audits from 1997 to 2003 including their annual reports  Excluded new listings, going private, and audit firm resignations

Relevance  Revsine’s Selective Financial Misrepresentation Hypothesis  Richardson and McCononomy’s Three Styles of Rule  Thornton’s Agency Theory

As accounting quality, auditor quality, financial reporting quality increases, information asymmetry, earnings management, adverse selection, and moral hazard decreases. “If managers could commit to revealing their private information, investors would not fear buying securities at an inflated price."

 Does Religion Matter in Corporate Decision Making in America?  Organized Labor and Information Asymmetry in the Financial Markets  Does Past Success Lead Analysts to Become Overconfident?  Analyst Coverage and Financing Decisions