Accounting and Finance

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This is the collection for the University of Waterloo's School of Accounting and Finance.

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Browsing Accounting and Finance by Author "Chen, Changling"

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    Accounting Conservatism and Risk Disclosures
    (University of Waterloo, 2021-07-22) Wang, Xiaoqi; Chen, Changling
    This thesis adopts a broad view of conservative financial reporting—managers can use two ways to communicate business uncertainties to outsiders, namely, conservative accounting via timely loss recognition and narrative risk disclosures about a firm’s downside risk. I posit that managers trade off conservative accounting and risk disclosures because they both can alleviate information asymmetry about downside risk and reduce shareholder litigation, and they both impose significant costs on firms. Using a sample of U.S. industrial firms from 1995 to 2018, I find support for this substitutive (trade-off) relation when narrative risk disclosures were voluntary but not when they were mandatory in annual reports. Moreover, I hypothesize and find evidence that firms have stronger incentives to make such trade-offs in order to reduce overall reporting cost, when they are planning seasoned equity offerings, are closer to debt covenant violations, face higher proprietary costs, or have greater needs for debt financing. Additional tests show that external monitoring, by financial analysts or by shareholders through litigation threats, constrains firms’ flexibility in making such trade-offs. For the period after 2005 when the U.S. Securities and Exchange Commission (SEC) has mandated risk factor disclosures in annual reports, I find firms with lower analyst following or lower litigation risk exhibit a significant substitutive relation between these two accounting choices. Stock return tests show that, while investors fully anticipated managers to make such trade-offs when risk disclosures were voluntary, they reacted negatively to firms that appear to have made trade-offs between these two choices in the period after the SEC has mandated risk disclosures. Collectively, my research suggests that firms trade off conservative accounting recognition and risk disclosures, especially in the period when qualitative risk disclosures were voluntary, even though investors appear to prefer consistent information between quantitative accounting numbers and qualitative risk disclosures.
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    Corporate Innovation Strategy and Narrative Disclosures
    (University of Waterloo, 2024-07-04) Che, Yixing; Chen, Changling
    In this thesis, I examine how firms with different prioritizations of innovation strategy utilize narrative disclosures in their 10-K filings to communicate information about their innovation activities. I hypothesize and find that firms with a greater focus on exploratory innovations (versus exploitative innovations) disclose less narrative innovation information based on a cost-benefit tradeoff. Conducting a content analysis of the quality of narrative innovation disclosures, I find that exploration-focused firms tend to disclose fewer details but use a more positive tone in their disclosures compared to exploitation-focused firms. The tendency for exploration-focused firms to employ a more positive tone in narrative disclosures may be due to managerial overconfidence rather than management opportunism or firm performance. I also find that product market competition and technology spillover have opposite effects on narrative innovation disclosures due to their different proprietary cost implications. The negative relation between exploration-focused firms and narrative innovation disclosures is more pronounced when product market competition intensifies, while it becomes less pronounced when technology spillover becomes more prominent. Finally, I find that narrative innovation disclosures enhance investors’ understanding of innovative activities and reduce misvaluation and future stock price crash risk for exploration-focused firms. My thesis contributes to the disclosure and innovation literature with insights into how firms’ innovation strategies affect their narrative innovation disclosure decisions, which helps investors better evaluate corporate innovation strategy.
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    Does ESG-linked Executive Compensation Improve Responsible Sourcing?
    (University of Waterloo, 2024-08-20) Kuang, Yifei; Chen, Changling
    With the rising importance of firms’ environmental, social, and governance (ESG) performance, an increasing number of firms have adopted ESG-linked compensation that ties managers’ compensation to the firms’ ESG performance. Responsible sourcing is an important dimension of firms’ ESG engagement. In this thesis, I investigate whether firms’ adoption of ESG-linked compensation improves their responsible sourcing. To construct my sample, I identify customer-supplier relationships between 2010 and 2020 from FactSet Revere, and firms’ use of ESG-linked compensation from ISS Incentive Lab. Using a staggered difference-in-difference design, I find limited evidence that customer firms’ adoption of ESG-linked compensation affects supplier firms’ ESG performance, regardless of the length of customer-supplier relationships. Cross-sectionally, I find some weak evidence that customer firms’ adoption of ESG compensation leads to improved ESG performance amongst their large suppliers, suppliers with greater market share, and customers in the manufacturing industries. However, customer firms do not exhibit a greater tendency to terminate their low-ESG performance suppliers. My study extends the ESG literature by examining the effect of ESG-linked compensation on responsible sourcing, a specific dimension that is part of firms’ overall ESG performance. My findings imply that stakeholders need to find alternative ways to promote responsible sourcing practices due to the limited effect of customer firms’ ESG-linked compensation on supplier firms’ ESG performance.
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    The Effect of Canadian Tax Policy on Executive Equity Grants: Corporate Tax Planning and Managerial Power
    (University of Waterloo, 2018-08-20) Hlaing, Khin Phyo; Chen, Changling; Klassen, Kenneth
    This study examines how the tax treatment of corporate tax-deductible restricted share units and employee tax-favoured stock options at the employer and employee level affect the extent of their use in executive equity compensation packages among public firms. I appeal to two theories, namely, corporate tax planning and managerial power, to address the research question. I hand-collect executive compensation data of 143 top non-financial Canadian firms traded on the Toronto Stock Exchange for the 2005-2015 period. I find some evidence that firms expecting a high tax rate use the proportion of executive equity compensation via corporate tax-deductible RSUs to a greater extent compared to firms expecting a low tax rate at the vesting year. The results are consistent with the inference that managers demanding a higher level of employee tax-favoured options in their total equity compensation when they have power to influence the executive compensation. The results also support that managerial power weakens the positive association between firms expecting a high tax rate at the vesting year and the use of corporate tax-deductible RSUs in executive equity compensation. The findings suggest that tax policy that artificially distinguishes among types of equity compensation, such as the current Canadian legislation, affects executive equity compensation design.