Browsing by Author "Jarva, Henry"

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    Accounting conservatism in impairment decisions
    (2020) Heinonsalo, Veera; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
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    Accounting conservatism through goodwill impairment under SFAS 142 - US banks versus other financial institutions
    (2017) Dang, Linh; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
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    Accruals and earnings volatility mispricing: Evidence from US Stock Market 1988-2017
    (2019) Jokinen, Saku; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    Academics have studied a lot of use of financial accounting information in predicting firms’ future performance, namely earnings. Firms’ net earnings are sum of period’s cash flows and period’s accruals and i.e. Sloan (1996) found out that relative magnitude of period’s cash flows and accruals predict future periods’ earnings differently. Remarkable finding of Sloan (1996) was that current periods cash flows predicts better future periods earnings than do accruals and hence there is negative association between earnings persistence and magnitude of accruals. Moreover, Sloan (1996) reported that capital markets misprice abovementioned information and abnormal returns can be yielded by following investment strategy based on magnitudes of accruals, opposite what efficient market hypothesis would forecast. Furthermore, Dichev and Tang (2009) found similar negative association between past earnings volatility and future earnings persistence. In this study empirical confirmation for following questions were to find; (i) to confirm negative association between earnings persistence and magnitude of accruals and earnings volatility (ii) to find evidence if above average return is possible to yield following investment strategy based on accruals and earnings volatility, and (iii) is there change in abnormal returns over time when following mentioned investment strategies. Study found supporting evidence for following hypotheses (i) abnormal returns have been possible to yield following accrual-based investment strategies on period 1988-1996, (ii) abnormal returns from following accruals based investment strategy have not been able to yield during 1997- 2017, (iii) abnormal returns has not been observed from earnings volatility based investment strategy during through sample data and, (iv) negative association between magnitude of earnings volatility and accruals is observable through data set. Study was conducted using previously proven robust research methods, so findings can be considered as at least indicative. However, research data set differs from other similar earlier studies and thus, findings may have different magnitudes. For example, sampling between earlier studies may be different in terms of sampling parameters and how outliers are handled producing slightly different results.
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    Accuracy comparison of accounting-based bankruptcy prediction models of Springate (1978), Ohlson (1980) and Altman (2000) to US manufacturing companies 1990-2018
    (2020) Laurila, Konsta; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    The importance of corporate bankruptcy has risen to ever more prominence since the recent financial crisis. The field of bankruptcy prediction has become even more popular among academics and is considered to be an industry itself. It is estimated that at least 40,000 people are dealing with corporate distress. The estimation of bankruptcy is intriguing but still a bankruptcy prediction model with high accuracy rate remains a challenge since the models are based on certain industries and tend to be sample specific. Recently, market-based bankruptcy prediction models have gained popularity among researchers in the field, however, there is no supportive evidence of their superiority compared to accounting-based models that aim to predict financial distress using financial accounting data. Although new complex models e.g. neural network techniques have emerged to the literature, the accounting-based techniques are still most popular in the research. This paper attempts to add finding to the literature by comparing three accounting-based bankruptcy prediction models of Altman (2000), Ohlson (1980) and Springate (1978) in order to present comprehensive computational comparison of methodologies to fulfil the strategic information needs of investors and other stakeholders. The aim is to statistically show that the models differ in accuracy rates in US manufacturing industry. The sample of the study consists of thirty-three bankrupt and 414 non-bankrupt United States manufacturing companies that were listed in either NYSE, Nasdaq or American Stock Exchange in 1990-2018. The result of one, two and three years prior to bankruptcy indicates that the three accounting-based bankruptcy prediction models of Altman (2000), Ohlson (1980) and Springate (1978) have different predicting power to bankruptcy in US manufacturing companies. Furthermore, the results show that the Altman´s (2000) model performs better than the models of Ohlson (1980) and Springate (1978) when predicting bankruptcy in US manufacturing companies but the differences in the accuracy rates are all not statistically significant.
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    Adoption Effects of IFRS 9 Financial Instruments: Empirical Evidence from Nordic banks
    (2020) Kankaanranta, Anni; Jarva, Henry; Myllymäki, Emma-Riikka; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    This study examines the implementation effects of IFRS 9 on banks’ loan loss provisioning. Loan loss provisioning arises from the credit risk faced by banks and it is an influential element in bank’s financial performance impacting its capital structure as well. Due to banks’ connection to financial stability of economies loan loss provisioning is of great interest to researchers and banking authorities alike. Therefore, the purpose of this study is to, firstly, verify whether loan loss provisioning has increased upon the adoption of IFRS 9 as expected and intended, and, secondly, to provide in-depth information on key drivers influencing loan loss provisions, particularly in cases where expectations are not met, if any. The empirical evidence provided in this study is based on data collected from 44 Nordic banks. The study was performed by analysing financial information collected from Orbis and banks’ Annual reports for the year 2018. The analysis is based on two research questions motivated by prior research and reviews. The increase in the level of provisioning is evaluated by quantitative methods and loan loss provision key drivers are assessed both by quantitative and qualitative analysis. The findings indicate that reported loan loss provisions increased for Nordic banks upon the initial implementation of IFRS 9 in the beginning of 2018, however, upon the passage of time this impact seems to have faded and instead average level of provisioning decreased during the following year. Net charge-offs signifying realized write-offs had explanatory value under the previous standard IAS 39 as expected, whereas under IFRS 9 this correlation has diminished and become insignificant. No other drivers were identified based on quantitative assessment possibly due to complex nature of loan loss provision models. Based on the qualitative review of banks’ Annual reports, banks have estimated loan loss provisions to have increased due to broader asset base covered and “Stage 2”, thus for the same reasons as proposed by prior research and in line with intentions of the standard. High level and/or valuation of collaterals was detected to be one frequent reason causing decreased level of loan loss provisions, even upon the first implementation of IFRS 9. Further, banks expect loan loss provisioning under IFRS 9 regime to be more volatile, procyclical and subject to forward-looking estimates of the management.
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    An analysis of non-GAAP financial metrics
    (2020) Granqvist, Mia; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    As non-GAAP financial reports have proliferated in the last three decades, market participants have begun to question the accuracy and credibility of non-GAAP information, particularly in the context of equity valuation. On the one hand, companies’ managers claim that non-GAAP earnings metrics have important value implication for investors as it can reduce ”accounting noises” and reveal relevant insider information that might be neglected through standardized recording systems like GAAP. On the other hand, market regulations and researchers are more critical towards nonGAAP metrics, criticizing that non-GAAP exclusions are more than relevant and excluding them will yield misleading and inaccurate information. This empirical study, therefore, firstly aims to examine the development of non-GAAP financial metrics both in term of frequency of publication and magnitude of non-GAAP exclusions. In the period from 2003 to 2015, the amount of nonGAAP earnings reports has doubled and the gap between non-GAAP and GAAP metrics has become larger, indicating managers have become more aggressive in their non-GAAP reporting. Secondly, in attempt to identify the key drivers behind the difference between GAAP and nonGAAP earnings metrics (non-GAAP exclusions), we find that special items are strongly correlated to non-GAAP exclusions, suggesting that managers are more likely to exclude special items to come to better earnings numbers. One interesting finding is that cost of goods sold and selling, and general administration expenses also have strong links to non-GAAP exclusions. One possible explanation is that as managers exhaust in choices of exclusions, they will resort to less obvious options; that would be more likely to yield flawed and inaccurate financial information.
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    The association between corporate credit ratings and leverage- evidence from the U.S.
    (2021) Xu, Wenyang; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    Credit ratings, as the evaluations of the creditworthiness of debt issuers, mitigate the adverse impacts of information asymmetry between the firms and external investors. Therefore, they have gradually become essential financial tools for investors in different financial markets. At the same time, it has been proved that credit ratings are considered as the second vital determinants when managers are making the choice of investments financing. In this study, the relationship between credit ratings and leverage ratios is examined to understand how credit ratings influence the firms’ capital structures. This study is based on the data gathered from Compustat North America database, including 21786 observations of 2687 listed firms in the U.S. from 1996 to 2006. OLS technique is applied to perform the statistical analysis. Empirical results show a negative relationship between credit ratings and leverage ratios, indicating that firms with better credit ratings have lower levels of debt financing than low-rated firms. When firms are classified into investment-grade and speculative-grade, it is shown that investment-grade firms have lower leverage ratios than firms graded as speculative. The findings back up the two hypotheses that were put forward in this study and give support to pecking-order theory.
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    Audit firm tenure, auditor changes and earnings quality: evidence from the North America
    (2017) Perento, Martina; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
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    CEO's age and earnings volatility evidence from S&P1500 firms from 1992-2018
    (2021) Iivonen, Jussi; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    The purpose of this thesis is to examine the relation between Chief Executive Officer’s (CEO) age and earnings volatility in S&P1500 index firms. CEO is the highest ranking employee in the company and his/her personal characteristics have an effect on how he/she acts which makes this topic interesting to investigate. The mechanisms of earnings volatility are examined by looking at risk preferences and earnings management propensities of different aged CEO’s. There has been no previous studies, at least to my best knowledge, on this topic specifically, but previous research around CEO’s age has found mixed results regarding its effect on firm performance and CEO’s risk preferences. Data for this thesis is gathered from Compustat and ExecuComp databases and the final sample includes S&P1500 firms from years 1992-2018. Two different earnings volatility measures, return on assets (ROA) and net income (NI) based measures, are conducted to examine the relation between CEO’s age and earnings volatility. Accounting-based earnings measures are used to omit the factors related to market movements. In line with the study from Dichev & Tang (2009), earnings volatility is measured with 5-year forward standard deviation of both of the earnings measures. Also, 5-year backward standard deviations of the earnings measures are controlled since they naturally correlate highly with the 5-year forward standard deviations. Finally, Ordinary Least Squares (OLS) regression analyses are conducted to answer the research question. After conducting my regression analysis, I find no statistically significant relation between Chief Executive Officer’s age and both of the earnings volatility measures. However, research and development spendings of the sample firms seems to have positive relation with both of the earnings volatility measures. Furthermore, revenue growth and firm size seems to have positive relations with the net income based earnings volatility measure.
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    CEOs and Earnings Management: the Distributional Anomalies of Discretionary Accruals in Post-SOX Era
    (2016) Pantzar, Jere; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    This thesis examines anomalies related to the discretionary accruals usage during the tenures of CEOs in listed U.S. companies since the implementation of Sarbanes-Oxley Act. The approach used in this thesis is quantitative in nature. Four well-known discretionary accruals models: Healy model, DeAngelo model, Jones model and modified Jones are used in to separate discretionary accruals from the total accruals. The sample consists of financial and executive data of listed U.S. companies between the years 2003-2013. The results of this study strongly support the idea that income-increasing accruals are used in the final year of the average CEO’s tenure. Furthermore, support for the usage of income-increasing discretionary accruals during the early years of CEO’s tenure was found. In addition, in the transition year between two CEOs, weak evidence for the downwards management of discretionary accruals was observed.
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    Challenges in disclosing interest rate risk and risk management activities - evidence from European banks
    (2017) Varmo, Hanna-Maria; Jarva, Henry; Melgin, Jari; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
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    Changes in earnings quality over the last three decades: evidence from rounding of Street and GAAP earnings numbers
    (2017) Ojala, Suvi; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    This study examines the changes in earnings quality over the last three decades, measured by a rounding-up behavior of earnings figures. Previous studies have stated that the distribution of digits in earnings numbers deviate from Benford’s law, which determines the probability of each digit to appear as the first, the second, the third or the fourth significant digit in different numbers. A deviation from Benford’s law often refers to a manipulation of earnings figures, which means rounding up of the second significant digit, in order to increase the first significant digit by one. This behavior results in a situation where there appear more zeros and less nines than expected in the second significant digit of an earnings number. The changes in earnings quality have been investigated over a time period from 1986 to 2014. The study has been conducted by using a sample of U.S. companies, focusing on two different earnings per share (EPS) figures. The first EPS figure is based on the generally accepted accounting principles (GAAP EPS), whereas the other EPS figure (Street EPS) is often excluding extraordinary items. The results indicate that the quality of earnings has improved over the sample period. In the late 1980s and during the 1990s, the rounding-up behavior has been striking, which appears as significant deviations from Benford’s law. In the early 2000s, the rounding-up behavior has reduced significantly, and the declining trend turns out to continue until the end of the sample period. The results also show that the deviations from Benford’s law are higher in Street EPS numbers, which indicates that Street EPS figures are manipulated to a larger extent.
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    Comparison between target and acquirer leverage and their relation at the time of the merger: evidence from U.S. data during 1984 and 2014
    (2017) Kirjalainen, Katriina; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    In this thesis, I compare target and acquirer leverage and study the relation between target and acquirer leverage at the time of the merger. By constructing a large over time sample with various explaining variables, my objective is to recognize factors affecting target leverage. Factors of interest are referred as qualitative variables and they are takeover year, industry, takeover type, and size. Theoretical framework for this thesis is based on trade-off theory. Trade-off theory and leverage associated with mergers has been of interest to many researchers over years. Existing studies have focused on premerger and postmerger leverage and their special interest is on acquirer leverage. Leverage at the time of the merger is relatively unstudied topic. Overall, the aim of this thesis is to study whether targets have more leverage than acquirers at the time of the merger, the relation between target and acquirer leverage, whether it is positive or negative, and determinants to explain target leverage at the time of the merger. The sample of this thesis consists of 10,825 transactions in U.S. during 1984 and 2014. The data is derived from SDC U.S. Mergers and Acquisitions database. Year 1984 is selected as the starting year, since the data tends to be consistent only since 1984. The sample is limited to public U.S. targets and acquirers. Hypotheses are constructed based on prior financial research and they are formulated individually on each research topic. Key findings of this thesis provide a new study angle to financial literature associated with mergers and the findings are mostly contrary to existing literature. Targets tend to be, on average, as leveraged as acquirers at the time of the merger. Quite exactly half of the transactions represent targets with higher leverage and other half represents targets with lower leverage than acquirers. Target and acquirer leverage ratios are positively related but the relation is not perfect. Industry and takeover type tend to be statistically significant variables on explaining target leverage, whereas takeover year and size tend to statistically insignificant variables. Additionally, the results indicate that acquirers bid for targets significantly smaller in size, measured by total amount of assets.
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    Cosmetic earnings management and audit quality: evidence from the U.S.
    (2017) Hienonen, Kaisu; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    This research examines the correlation between audit quality and cosmetic earnings management. Here cosmetic earnings management stands for small rounding of income statement figures that aims to influence the perceptions of financial statement users. The existence and level of cosmetic earnings management is measured by comparing the deviations of observed percentages of second digits to the expected probabilities constituted by Benford’s law. Significant deviations of zeros and nines from Benford’s law argue for the existence of cosmetic earnings management. This research investigates whether cosmetic earnings management exists less (more) in circumstances where audit quality is perceived to be of higher (lower) quality. As the variables for audit quality, three dimensions are used, i.e. audit firm size, auditor tenure and the level of non-audit services purchased from the audit firm. The research was conducted as a single-country study including over 75 000 observations from the U.S. during 2000-2016. The findings indicate that cosmetic earnings management is practiced in the U.S. and especially net sales and net profit figures are manipulated. It was also found that the size of the audit firm affected the level of cosmetic earnings management, i.e. companies audited by large audit firms practice less cosmetic earnings management than companies audited by smaller auditors. In addition, companies that have had an auditor-client relationship of over four years practice less cosmetic earnings management than companies that have had only a short, 2-3 years relationship with their auditor. The level of non-audit fees was not seen to affect the magnitude of cosmetic earnings management.
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    Cost stickiness around the financial crisis – empirical evidence from the field of electronic equipment
    (2017) Määttänen, Nelli; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    Over the past decade, there has been an increasing amount of discussion on the topic of short-run asymmetric cost response to activity changes. This kind of cost behaviour has been labelled as cost stickiness in the accounting literature. The model of cost stickiness suggests that the direction of the change in cost driver influences the magnitude of the change in the sense that cost are found to increase more than they decrease from an equivalent activity rise and fall. This is what differentiates the model from the traditional textbook cost model, which argues that cost changes follow linearly and proportionally the changes in the cost driver. Prior literature successfully finds cost stickiness in cross sectional samples and different individual factors that influence its existence. This study contributes to the literature by considering whether the existence and the degree of cost stickiness is conditional to external circumstances in a field specific sample. The purpose is to evaluate the influence of economic downturn to the existence and degree variation of cost stickiness. The focus is on degree variations before and after the financial crisis of 2008 in the field of electronic equipment. This study is conducted through an empirical model that evaluates selling, general and administrative cost changes relative to contemporaneous sales revenue changes. The data sample consist of US listed companies in the field of electronic equipment during 2001-2015. The data is derived from Compustat database of Wharton Research Data Services. The results of the study suggest that economic downturn influences the degree of cost stickiness but the variation is subject to the field in question. No statistically significant results are found in the degree variation of the field of electronic equipment. However, results from additionally conducted robustness test identify that the field of retail and wholesale, shows more cost stickiness after the beginning of the crisis than before it. This study strengthens the findings of prior literature and offers evidence of the influence of external factors to the degree of cost stickiness.
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    Credit ratings and the changing properties of accounting earnings over the last 28 years - Evidence from the United States
    (2018) Kortelainen, Mika; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    Abstract PURPOSE OF THIS STUDY This Master’s Thesis examines the association between earnings quality and credit ratings. As earnings quality has been studied to have declined over the last decades, most of the research with decision-usefulness perspective have studied earnings associations to stock market valuations. Credit ratings being another quantitative source of data for evaluating reactions on earnings figures, the study examines earnings quality from a novel perspective. DATA AND METHODOLOGY: Basing on prior research on earnings quality and credit ratings, an empirical analysis was done by OLS-regression between years 1989 to 2016 with credit ratings as a dependent variable. The independent variables used were earnings, cash-flow from operations, accruals, earnings volatility, company size and leverage. The assertion that earnings quality has declined over the decades was also examined with the usefulness of earnings to credit ratings agencies as a proxy for earnings quality. RESULTS: The results indicate a strong positive association between earnings and credit ratings. Also, cash-flows were found to be more prominent in correlation to ratings than the accrual component of earnings, while both being positively associated. Earnings volatility is negatively associated with credit ratings possibly as it lowers the predictability of earnings and makes inference from the earnings value to indicate future cash-flows more dubious. As for the decline in earnings quality, some indication did emerge that the decline would also be observable from the credit rating association, however the statistical significance was faint and inference from the results is questionable.
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    Determinants of Payout Policy – US Evidence of When and How Much
    (2017) Suvas, Petra; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
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    Determinants of Transaction value in Bank Mergers and Acquisitions: Evidence from the United States
    (2018) Takkunen, Riina; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    This study focuses on understanding the determinants of transaction value in bank mergers and acquisitions. The determinants of transaction value are studied by reviewing prior literature on bank merger pricing and by conducting an empirical study. In the empirical part, I analyze how different accounting-based measures as well as other transaction characteristics influence transaction value. To date, literature on the topic has mainly focused on analyzing merger premiums. Prior research shows that premiums are dependent on target and acquirer characteristics as well as other transaction characteristics. More specifically, the evidence indicates that target characteristics such as profitability, capital structure and quality of loan portfolio influence the premium paid in bank mergers and acquisitions. This study differs from prior literature on bank mergers and acquisitions pricing as it examines transaction values instead of merger premiums. The relationship between transaction value and value determinants is tested with OLS regression models. The sample used in this thesis covers 105 bank mergers and acquisitions where at least 90 % of shares were acquired. The mergers are completed between January 1994 and December 2017 in the United States. Furthermore, only public targets are included in the sample. The data on the mergers and acquisitions is collected from the Securities Data Company’s (SDC) Mergers and Acquisitions database. The financial statement data is extracted from the COMPUSTAT database, a market database published by Standard & Poor’s. Transaction value in bank mergers and acquisitions is found to be dependent on target characteristics. Consistent with prior research on bank merger premiums, transaction value is associated with target characteristics such as size, profitability, capital adequacy as well as quality of loan portfolio, particularly after the financial crisis of 2007-2008. This study also provides evidence that transaction value is more dependent on profitability indicators than capital adequacy indicators.
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    Development of audit fees in the 21st century – Evidence from the US audit market
    (2019) Kestilä, Laura; Jarva, Henry; Laskentatoimen laitos; Kauppakorkeakoulu; School of Business
    Since accounting environment changed remarkably in the beginning of 21st century, it raised concerns whether audit fees have increased excessively after that. The main reason for concern was additional regulation know as SOX, introduced in 2002. It tightened the requirements for both, firms preparing financial statements, as well as for auditors reviewing those statements. Besides of additional requirements, SOX also prohibited the providence of certain non-audit related services that auditors offered pre-SOX. This added pressure for auditors, and therefore expectations were that audit fees increased considerably post-SOX. For examining this, the purpose of this research was to study what the relative audit fee ratio has been, and how it has developed over time during years 2000-2017. By this it was possible to observe if audit fees have increased or not, and is there clearly visible long-term trends or changes that occurred only at certain time. In addition to general view of audit fee development, relative audit fees were also examined by controlling client size. This way it could be studied whether relative audit fees have been acting differently between smaller and bigger clients. Method used in this study was quantitative analysis, where time series analyses over years 2002-2017 were created for audit fees that are in relation to company’s sales. Besides this, relative audit fees were also examined by regression analyses that included both, simple regression analysis as well as multiple regression analysis. These were for achieving more accurate results of growth over time. Both methods were used for different samples, such as whole sample, deciles and BIG4 auditors versus non-BIG4 auditors. Especially with deciles the tests concentrated on client size. The data was obtained from Audit Analytics’ database, and final sample was comprehensive, including 123,880 firm-year observations. Study’s main findings were that audit fees have increased remarkably during the investigation period, and that main growth occurred during SOX adjustments, that is, between years 2001-2005. It was also clearly proved that smaller firms faced relatively higher audit fees, and that fees have also increased more for them than for bigger firms. It was also found that BIG4-premium existed, but only for smaller firms, and that after SOX came into effect, majority of audit firms’ fees were coming from audits, not from audit related or non-audit services as was before. As a conclusion, it can be said that audit fees increased considerably during the past two decades, but the relative share was only high for smaller firms. Audit fee ratios for bigger firms were surprisingly low, and rather decreasing than increasing, especially after SOX came into force.