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Dr. Gilles Hilary

By : Ridwan Islam Amanda Lafave Fion Li Greg Milosek Norek Paprocki Micky Petit Frere Magie Soliman. Dr. Gilles Hilary. Background. French Accounting Academic MBA, PhD and DESCF Professor Auditor for KPMG and E rnst & Young.

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Dr. Gilles Hilary

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  1. By : Ridwan Islam Amanda Lafave Fion Li Greg Milosek Norek Paprocki Micky Petit Frere MagieSoliman Dr. Gilles Hilary

  2. Background • French Accounting Academic • MBA, PhD and DESCF • Professor • Auditor for KPMG and Ernst & Young

  3. How Does Financial Reporting Quality Relate to Investment Efficiency? 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

  4. How Does Financial Reporting Quality Relate to Investment Efficiency? (Cont.) 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

  5. How Does Financial Reporting Quality Relate to Investment Efficiency? (Cont.) 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

  6. The Effect of Auditor Quality on Financing Decisions 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.

  7. The Effect of Auditor Quality on Financing Decisions (Cont.) 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

  8. The Effect of Auditor Quality on Financing Decisions (Cont.) Relevance • Daniel Thornton and the “Rats” • Revsine’s Selective Financial • Misrepresentation Hypothesis • Skinner’s mention of manager bias’ • Signaling theory

  9. Accounting Quality and Firm-Level Capital Investment Findings • ..

  10. Accounting Quality and Firm-Level Capital Investment (Cont.) Research Design • ..

  11. Accounting Quality and Firm-Level Capital Investment (Cont.) Relevance • ..

  12. The Credibility of Self-Regulation: Evidence from the Accounting Profession's Peer Review Program Findings • Accounting Firms gained clients after receiving clean opinions and lost clients after receiving modified or adverse opinions • When the PCAOB find weaknesses in audit firms, the weaknesses will be made public only if firms fail to take corrective actions within twelve months. In contrast, peer review opinions were made publicly available by the AICPA as soon as reviews were completed.

  13. The Credibility of Self-Regulation: Evidence from the Accounting Profession's Peer Review Program (Cont.) 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 • Developed a numerical scale on which to code these peer review opinions that incorporates both the nature of the opinion as well as the number of weaknesses identified

  14. The Credibility of Self-Regulation: Evidence from the Accounting Profession's Peer Review Program (Cont.) Relevance • Daniel Thornton and the Theory of Three Party Liability • Revsine’s Selective Financial Misrepresentation Hypothesis • Richardson and McCononomy’s Three Styles of Rules

  15. Recurring Theme 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."

  16. Other Articles • 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

  17. Questions?

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