Selected Published Journal Articles
Skaife, H., & Wangerin, D. (2013). Target Financial Reporting Quality and M&A Deals that go Bust.
Contemporary Accounting Research
This study investigates the role of financial reporting quality in merger and acquisition (M&A) deals that are ultimately terminated, i.e., go bust. If a target is a U.S. publicly-traded company, an acquirer’s initial assessment of the potential benefits associated with the acquisition of the company is based on publicly available information. Generally, the acquirer obtains limited private information from the target prior to announcing the deal, but engages in transactional due diligence after signing the acquisition agreement to affirm that the financial reporting warranties made by the target are accurate. We construct a low quality financial reporting score based on measures prior research identifies as being associated with less-reliable, less-relevant, and less-precise financial reporting. We find that acquirers offer higher premiums for targets with low quality financial reporting. However, we also find that low quality financial reporting increases the likelihood of deal renegotiation, and contributes to the probability of deals going bust. We document that failed targets are more likely to restate their financial statements after the announcement of the deal, supporting our conjecture that low quality financial reporting contributes to deals being terminated. Our research provides new insights into the capital market consequences of financial reporting quality and identifies a new determinant of financial statement restatements.
(30), 719-749. doi: 10.1111/j.1911-3846.2012.01172.x.
Gordon, E., Greiner, A., Kolhbeck, M., Lin, S., & Skaife, H. (2013). Challenges and Opportunities in Cross-country Accounting Research.
A concurrent session at the 2011 American Accounting Association Annual Meeting featured the panel discussion “Results, Challenges, and Opportunities in Cross-country Accounting Research.” The panelists summarized major contributions from prior research in international settings, factors a researcher should consider when motivating and designing cross-country studies, and topical areas that could potentially contribute to future international accounting research. This paper summarizes the panelists’ prepared remarks, develops a framework for designing cross-country research projects, and provides illustrations of the framework.
(27), 141-154. doi: 10.2308/acch-50301.
Skaife, H., Veenman, D., & Wangerin, D. (2013). Ineffective Internal Control and Managerial Rent Extraction: Evidence from Insider Trading.
Journal of Accounting and Economics
This paper examines the association between ineffective internal control over financial reporting and the profitability of insider trading. We predict that noise and bias inherent in financial reporting as a result of ineffective internal control enhances insiders’ information advantage and profitable trading opportunities. Consistent with our prediction, we find the profitability of insider trades is significantly greater in firms reporting ineffective internal control. The positive association is present in the years leading up to the disclosure of material weaknesses, but disappears after remediation of the internal control problems. In addition, we find insider selling profitability is even greater in firms managed by insiders who are more likely to act in their own self-interest as indicated by weak “tone at the top”, and that the profitability of their insider selling contributes to them leaving their firms. These findings contribute to our understanding of the settings where shareholders are most at risk for wealth transfers via insider trading, and highlight other market consequences of ineffective internal control over financial reporting.
(55), 91-110. doi: 10.1016/j.jacceco.2012.07.005.
Liao, Q., Sellhorn, T., & Skaife, H. (2012). The Cross-Country Comparability of IFRS Earnings and Book Values: Evidence from France and Germany.
Journal of International Accounting Research
Beginning in 2005, the EU began requiring consolidated financial reports of publicly traded firms to be prepared in accordance with EU-endorsed International Financial Reporting Standards (IFRS) in an effort to increase the comparability of financial information across EU Member States. While some expect IFRS reporting to increase the comparability of financial information across the EU, others argue that comparability is unlikely because IFRS implementation will vary conditional on national institutions and culture. We investigate the cross-country comparability of IFRS earnings and book values of French and German firms because these two EU states have well-developed equity markets and use the same currency while having social-economic and cultural differences that can affect managers’ IFRS implementation choices. Our results indicate that French and German IFRS earnings and book values are comparable in the year subsequent to IFRS adoption, but become less comparable in the years that follow. We document differences in accounting estimates, recognition of special items, and other equity reserves between French and German firms, which help explain the decrease in comparability over time. Our study adds to the growing literature on the financial statement effects of mandatory IFRS reporting and points to possible reasons for a sustained lack of cross-country comparability of financial information under a common accounting regime.
(11), 155-184. doi: 10.2308/jiar-10215.
Skaife, H., & Gassen, J. (2009). Can Audit Reforms Affect the Informatiol Role of Auditing? Evidence from the German Market.
Contemporary Accounting Research
We investigate whether audit reforms affect the information role of audits in a country where the audit traditionally serves a statutory reporting function. Specifically, we investigate the audit market effects of audit reforms mandated by the German government in the Act on Control and Transparency of Enterprises. We test for differences in the types of audit reports issued, the information content of first time going-concern audit opinions, and the demand for dominant audit suppliers pre and post the implementation of the Act to draw inferences on whether the audit reforms enhanced the information role of German audits. We find an increase in the frequency of modified audit opinions after the audit objective changed from verifying assets in place to identifying and reporting concern uncertainties and non-compliant financial reporting practices. We also find an increase in the information content of first time going-concern audit reports issued after the audit reforms are implemented. In addition, the results also indicate an increase in the demand for dominant audit suppliers in the post-reform years. Moreover, we document a significant increase in the number of auditor lawsuits after the audit reforms went into effect. Collectively, our results suggest that the audit reforms improved the information role of German audits and that German firms responded to the improvement in audit reporting by increasing their demand for dominant audit suppliers.
(26), 867-898. doi: 10.1506/car.26.3.10.
Skaife, H., Collins, D., Kinney, W., & LaFond, R. (2009). The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity Capital. Journal of Accounting Research
(47), 1-43. doi: 10.1111/j.1475-679X.2008.00315.x.
Skaife, H., Collins, D., Kinney, W., & LaFond, R. (2008). The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality. The Accounting Review
(83), 217-250. doi: 10.2308/accr.2008.83.1.217.
Skaife, H., Collins, D., & Kinney, W. (2007). The Discovery and Reporting of Internal Control Deficiencies Prior to SOX-Mandated Audits. Journal of Accounting and Economics
(44), 166-192. doi: 10.1016/j.jacceco.2006.10.001.
Skaife, H., Collins, D., & LaFond, R. (2006). The Effects of Corporate Governance on Firms' Credit Ratings. Journal of Accounting and Economics
(42), 203-243. doi: 10.1016/j.jacceco.2006.02.003.
Skaife, H. (2004). Ethical Issues Related to the Provision of Audit and Non-Audit Services: Evidence from Audit Research. Journal of Business Ethics
(52), 143-148. doi: 10.1023/B:BUSI.0000035912.06147.22.
Skaife, H., & Warfield, T. (2003). Audits as a Corporate Governance Mechanism: Evidence from the German Market. Journal of International Accounting Research
(2), 1-21. doi: 10.2308/jiar.2003.2.1.1.
Skaife, H., LaFond, R., & Mayhew, B. (2003). Do Nonaudit Fees Impact Auditor Independence? Further Evidence.
The Accounting Review
This paper was recognized as the Notable Contribution to Auditing Research by the American Accounting Associations Auditing Section in 2013.
(78), 611-640. doi: 10.2308/accr.2003.78.3.611.
Skaife, H. (2001). Non-US Firms' Accounting Standard Choices. Journal of Accounting and Public Policy, 25.
Skaife, H. (1999). Corporate Reporting on the Internet. Accounting Horizons
(13), 241-257. doi: 10.2308/acch.1918.104.22.168.
Selected Submitted Journal Articles
Feng, M., Li, C., McVay, S., & Skaife, H. (2012). Ineffective Internal Control over Financial Reporting and Firm Operations.
The Accounting Review
We investigate whether ineffective internal control over financial reporting has implications for firm operations. Many of the same policies, procedures and controls that lead to effective internal control over financial reporting also affect internal reports used by management when making operating decisions. We focus on ineffective internal control over inventory because we expect a direct link between inventory-related internal control problems and poor inventory management. We predict and find that firms with ineffective internal control over inventory have systematically lower inventory turnover. We also predict and find that firms with inventory-related internal control weaknesses have a higher likelihood and magnitude of inventory impairments. Finally, we find that inventory turnover, sales, and gross margin improve among those firms that remediate their internal control problems. Our study provides evidence that is consistent with the notion that the lack of policies and procedures that result in material weaknesses in internal control over financial reporting can also have significant adverse effects on firm operations.
Submitted Working Papers
Skaife, H., Swenson, L., & Wangerin, D. A Study of Discretionaryl R&D Reporting.
U.S. generally accepted accounting principles (GAAP) requires firms to expense all costs incurred in their research and development (R&D) activities and to disclose R&D expense in their financial statements when material. U.S. GAAP, however, allows managers substantial discretion in deciding what period costs reported on the income statement are classified as R&D expense. Our study investigates the factors that contribute to and the market consequences of managers’ discretionary R&D reporting. We use firm-specific residuals from a R&D expectation model to proxy for firms’ discretionary R&D reporting. We predict and find evidence consistent with our conjecture that managers engage in discretionary R&D reporting in order to obtain R&D tax credits. We also find evidence consistent with our conjecture that managers engage in discretionary R&D reporting to justify not meeting earnings expectations. Turning to our market reaction tests, results indicate that the penalty associated with missing analysts’ forecasts is mitigated for firms most likely to be engaging in discretionary R&D reporting relative to firms most-likely to be over-investing in R&D and other projects. Our research provides new insights into how managers can report biased financial information and how investors respond to discretionary expense classification.
Daly, A., & Skaife, H. Accounting for Biological Assets and the Cost of Debt.
This study discusses the accounting for biological assets under International Accounting Standards 41 Agriculture and investigates whether agricultural firms’ cost of debt is associated with operating risk induced by holding different types of biological assets. The biological assets of agriculture firms, firms engaged in the cultivation of crops and livestock production, forestry, hunting, and fishing are important drivers of the economy for developing and developed countries. On one hand, biological assets present greater operating risk to agricultural firms when the time between the assets’ inception and harvest is longer, i.e., longer organic growth cycles. On the other hand, operating risk for biological assets may be greater when agricultural firms have no ability to replace biological assets damaged, impaired, or destroyed during the growth cycle, i.e., no market replacement option. Examining the biological assets of publicly traded EU firms between the date of issuance of IAS 41 and 2009, we find that biological assets, on average, account for 35% of agricultural firms’ asset base. After controlling for firm characteristics, we find agricultural firms’ cost of debt is positively related to the level of biological assets held conditional on operating risk when operating risk is defined as not having a market replacement option. Our paper is one of the first to explore the accounting for biological assets and to demonstrate the nature of biological assets matter for debt capital providers.
Skaife, H., & Werner, T. The Effects of Corporate "Free Speech" on Firm Value.
This paper examines the economic consequences of the U.S. Supreme Court’s 2010 decision in Citizens United v. FEC through event studies of key moments in the case and of a follow-up advisory opinion issued by the Federal Election Commission. After controlling for various measures of financial performance, corporate governance, and political activity, we find that firms in regulated industries and firms with both high levels of political engagement and CEO power experienced significantly lower abnormal returns as a result of events related to Citizens United. These findings condition previous research that finds regulated firms are among the few that do not experience a negative return on investment in corporate political activity, and they bolster those critics of corporate political activity that view it as a manifestation of the principal-agent problem.