Jian Zhou

University of Hawaiʻi at Mānoa | UH Manoa ·  School of Accountancy

We examine the economic determinants and informational effects of credit rating affirmations (i.e., the reiteration of past credit ratings) for a sample of US public firms from 1995 to 2020. We find that credit rating affirmations typically follow major corporate events and changes in firm fundamentals that increase information uncertainty about a...

Listed companies in China have provided large numbers of loan guarantees for borrowers in recent years. The loan guarantee size of A-share Main Board listed companies was about RMB 3.85 trillion at the end of 2017. On the one hand, loan guarantees help borrowers access debt financing, which promotes the development of capital markets. On the other...

The Securities and Exchange Commission (SEC) requires firms to use a “suitable framework” as a basis for evaluating the effectiveness of internal control over financial reporting. The COSO 1992 framework was the most commonly used suitable framework until it was superseded by the COSO 2013 framework. Because strict compliance with the updated frame...

Studies suggest that when a language requires grammatical marking of future events, speakers prefer immediate payoffs and engage in less future-oriented behavior. If future costs of tax avoidance are non-trivial, we posit that strong future time reference (FTR) in languages would lower managers’ perceptions about costs, encouraging more tax avoidan...

We investigate whether board-interlocked firms via an audit committee (AC) board member exhibit correlated non-audit service (NAS) purchases, and whether financial reporting quality and future firm performance vary with the amount of correlated NAS purchases from the AC interlock. We find that AC interlocked firms have positively correlated total N...

The extant research has often examined the work-related experiences of corporate executives, but their off-the-job activities could be just as insightful. This study employs a novel proxy for the risky hobbies of chief executive officers (CEOs)—CEOs’ hobby of piloting a private aircraft—and investigates its effect on credit stakeholders’ evaluation...

We study the relation between independent director attention and the cost of equity capital. Masulis and Mobbs (2014; 2017) find that a director with multiple directorships distributes her time and effort (i.e., attention) unequally according to the relative prestige of each directorship. We investigate whether a firm's cost of equity capital refle...

Linguistics research shows that languages differ as to how they differentiate future from present events. Economics research finds that when the grammatical structure of a language disassociates the future from the present, speakers of the language also disassociate the future from the present in their behaviors. This study examines how linguistica...

Although ownership structure is fundamental to corporate accounting behaviors, the current literature provides scarce evidence about the governance effect of ownership structure on real earnings management (REM). We seek to address this issue by using a sample of Chinese listed firms which are likely to engage in earnings management during 2003–201...

We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful information for assessing risk management effectiveness. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modif...

In this study, we examine whether audit committee accounting expertise helps to promote audit quality by motivating auditors to conduct diligent internal control audits and make appropriate internal control assessments because audit committee accounting expertise safeguards auditors from dismissal following adverse internal control opinions. Among...

We investigate the relation between audit committee co‐option and financial reporting quality, where audit committee co‐option is measured as the proportion of audit committee members who joined the board after the appointment of the current Chief Executive Officer (CEO). Because CEOs are often actively involved in the director nomination and selec...

Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proport...

We investigate Big 4 pricing over the period of 2000 to 2010. We classify the data into five periods: 2000-2001 as the pre-Sarbanes–Oxley Act (SOX) period, 2002-2003 as the SOX period, 2004-2006 as the Auditing Standard 2 (AS2) period, 2007 as the AS5 period, and 2008-2010 as the Great Recession period. The shocks to the audit market associated wit...

We investigate Big 4 pricing over the period of 2000 to 2010. We classify the data into five periods: 2000-2001 as the pre-Sarbanes–Oxley Act (SOX) period, 2002-2003 as the SOX period, 2004-2006 as the Auditing Standard 2 (AS2) period, 2007 as the AS5 period, and 2008-2010 as the Great Recession period. The shocks to the audit market associated wit...

We predict that managers of firms in countries where languages do not require speakers to grammatically mark future events perceive future consequences of earnings management to be more imminent, and therefore they are less likely to engage in earnings management. Using data from 38 countries, we find that accrual-based earnings management and real...

The scandals surrounding questionable accounting practices and corporate wrongdoing during 2000-2008 have often been attributed to the lack of effective internal controls. We examine the relations between national culture and the incidence and the number of reported internal control material weaknesses (ICMW). We focus on three dimensions of nation...

We examine whether auditor-provided tax consulting services are associated with the likelihood of tax and non-tax material internal control weaknesses consistent with knowledge spillover benefits. In initial tests we find a significant association between tax consulting and a reduced likelihood of tax-related internal control weaknesses, which is e...

We examine the characteristics and incentives of companies that filed their sworn financial reports prior to the deadline set by the SEC’s June 27, 2002 order. Consistent with our theoretical predictions, we find that larger firms, firms with higher quality of earnings, and firms with higher levels of institutional holdings filed early. These resul...

This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management, and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers et al. (), we find that firms with stronger shareholder rights are assoc...

In this paper, we investigate whether companies that voluntarily comply with the provisions under Section 404(b) of the Sarbanes-Oxley Act of 2002 enjoy a lower cost of capital. While accelerated filers have been required to comply with Section 404(b) for several years, non-accelerated filer compliance has been (and, under the Dodd-Frank Act of 201...

In this paper, we examine the relation between audit committee characteristics and the safeguarding of auditor independence, as proxied for by whether auditors are dismissed following the issuance of internal control material weakness reports. We use the proportion of current audit committee members that joined the board prior to the Chief Executiv...

We investigate the impact of audit committee co-option on financial reporting quality. We adapt the Coles et al. (2010) measure of board co-option and calculate audit committee co-option as the proportion of audit committee members who joined the board after the appointment of the current Chief Executive Officer (CEO). Because CEOs are often active...

We examine the relation between Big N industry specialist auditors and analyst forecast properties using a national and city level industry specialist framework. Consistent with the assumption that audit quality is positively related to financial reporting quality and predictability of accounting earnings, our results show that firms audited by joi...

In this paper, we study a sample of companies that fail to remediate previously disclosed material weaknesses (MWs) in their internal control systems and, thus, disclose the same MWs in two consecutive annual reports. Their failure to remediate is surprising given that regulators, credit rating agencies, and academics contend that the remediation o...

We investigate the relationship between audit quality as measured by audit firm size and industry specialization, and earnings management as measured by discretionary current accruals, for companies making seasoned equity offerings (SEOs). Earnings management in the SEO process is of concern because of the underperformance of seasoned equity offeri...

We identify instances in which the auditor-client relationship has been terminated but the auditor continues to complete a subsequent quarterly review. We refer to these instances as “lame duck auditor” quarters, and we contrast financial reporting quality in these quarters with that in non-lame duck auditor quarters. Using discretionary accruals a...

SYNOPSIS We investigate the impact of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS5) on audit fees and audit quality. AS5 supersedes Auditing Standard No. 2 (AS2), and became effective for audits for accelerated filers for fiscal years ending on or after November 15, 2007. Using a large sample of accelerated fil...

span style="font-family: Times New Roman; font-size: small;"> We investigate the relationship between underwriter reputation and earnings management of IPO firms over the period of 1991-2005. We find that IPO firms engage in less earnings management if they are underwritten by prestigious investment bankers. Furthermore, the role of prestigious und...

This paper documents stock market responses to the arrest of Shanghai's top leader by the Chinese central government in September 2006. The effects of personal-level and organizational-level connections to the local state are found to be negative and insignificant, respectively, on cumulative abnormal returns (CARs). Furthermore, companies having b...

This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers, Ishii, and Metrick (2003), we find that firms with stronger shareholder...

In this paper, we investigate whether the role of discretionary accruals in predicting future operating cash flows changes after the passage of the Sarbanes-Oxley Act (hereafter SOX). We also examine the information content of discretionary accruals in industries where litigation is more common. We find that discretionary accruals are positively as...

We examine the relation between industry specialist auditors and cost of debt financing using a national and city level industry specialist framework. Consistent with the assumption that higher audit quality is associated with lower information risk, which benefits clients in raising debt capital, we find that firms audited by city level industry s...

We examine the effect of the Sarbanes-Oxley Act (SOX) on the extent of aggressive versus conservative reporting behavior of public companies. SOX imposes considerably greater potential penalties on chief executive officers (CEOs) and chief financial officers (CFOs) who engage in financial wrongdoing. Therefore, risk-averse managers are likely to re...

Manuscript Type: Empirical Research Question/Issue: This study examines the determinants of forming a governance committee and whether such a committee constrains managerial opportunism. Research Findings/Insights: This study examines a sample of S&P 1,500 firms over the period of 1996 to 2002. It finds that firms with a larger, more independent, a...

We study auditors' client risk management in the first year of the Sarbanes-Act Oxley (SOX) 404 implementation, and find that a pecking order exists among auditors' strategies to manage control risk resulting from internal control weaknesses. We first examine the relation between internal control weaknesses and audit fees, modified opinions, and au...

We first examine the relation between Big N audit firms that are industry specialist auditors and analyst forecast properties. Consistent with the assumption that audit quality is positively related to financial reporting quality and predictability of accounting earnings, the evidence shows that analysts' earnings forecast accuracy is higher and th...

We examine the effect of the Sarbanes-Oxley Act (SOX) on the extent of aggressive/conservative reporting behavior of public companies. SOX imposes considerably greater potential penalties on CEO/CFOs who engage in financial wrongdoing; therefore, risk averse managers are likely to report lower earnings by reducing discretionary accruals following S...

Member States in the European Union will be required to establish audit committees for all public-interest entities, according to the EU 8th Directive on Company Law. This EU 8th Directive creates a convergence of corporate oversight for both audit processes and financial reporting process and thus provides an opportunity to examine and contrast as...

We investigate the value of political connections to Chinese companies using a sample of companies registered in Shanghai during the Shanghai Social Security Fund scandal. Shanghai Social Security Fund scandal was a major Chinese scandal in 2006, which brought down Chen Liangyu - the top official in Shanghai. Around 72% of the 137 sample firms are...

We investigate the relationship between underwriter reputation and earnings management of IPO firms. We find that IPO firms engage in less earnings management if they are underwritten by more prestigious underwriters. We also find that IPO issuers with less incentive for earnings management are more likely to choose more prestigious underwriters. F...

We study auditors' client risk management in the first year of the Sarbanes-Act Oxley (SOX) 404 implementation, and find that a pecking order exists among auditors' strategies to manage control risk resulting from internal control weaknesses. We first examine the relation between internal control weaknesses and audit fees, modified opinions, and au...

This paper documents for the first time the relationship between mutual fund governance and mutual fund performance. Using the first release of the Morningstar Stewardship Grades on August 24, 2004, we find that funds receiving good grades outperformed funds with bad grades by 19 to 23 basis points per month over 1/2001-7/2004 and by 10 to 16 basis...

One of the goals of the Sarbanes-Oxley Act (hereafter SOX) was to restore confidence in financial reporting by providing incentive for firms to report financial results that reflect the underlying economic performance. Early findings are inconclusive on the success of the Act. Cohen, Dey and Lys (2005) show that firms engage in less earnings manage...

Using a sample of hand-collected data on 821 firms, which dismissed Arthur Andersen as their auditor between October 15, 2001 and August 31, 2002, we investigate the role of audit committees and boards of directors in the auditor switch decisions by Andersen's clients. This provides a unique setting to examine auditor choice in a situation where th...

The choice of a non-Big 5 audit firm is optimal for some IPO companies. The choice of audit firm is important because auditor reputation may influence the pricing of the offering. This paper investigates the relationship between IPO underpricing and auditor compensation and proxies for non-Big 5 audit quality. We develop a continuous measure of aud...

In this paper we investigate the relation between audit committee quality, auditor independence, and the disclosure of internal control weaknesses after the enactment of the Sarbanes-Oxley Act. We begin with a sample of firms with internal control weaknesses and, based on industry, size, and performance, match these firms to a sample of control fir...

This paper documents for the first time the relationship between mutual fund governance and mutual fund performance. Using the first release of the Morningstar Stewardship Grades on August 24, 2004, we find that funds receiving good grades outperformed funds with bad grades by 19 to 23 basis points per month over 1/2001-7/2004 and by 10 to 16 basis...

We examine changes in discretionary accruals following the Sarbanes-Oxley Act (SOX). SOX imposes considerably greater potential penalties on CEO/CFOs who engage in financial wrongdoing; therefore, risk averse managers are likely to report lower earnings by reducing discretionary accruals following SOX. Our results indicate that (1) Canadian firms s...

Fudenberg and Tirole (1995) analytically demonstrate that income smoothing can arise in equilibrium if managers are concerned about job security. Consistent with their model, DeFond and Park (1997) show that managers smooth income in consideration of both current and future relative performance. We provide more direct evidence on whether job securi...

Previous research such as Cohen, Dey and Lys (2005) and Lobo and Zhou (2006) document that there is a decrease in discretionary accruals following the Sarbanes-Oxley Act (hereafter SOX). More specifically, Cohen et al. (2005) document that firms' management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley...

In this paper we investigate the relation between underwriter reputation and earnings management by IPO firms and further examine if the relation changes over time. We document a systematically negative relation between underwriter reputation and the level of earnings management by IPO firms during the entire sample period (1991-1999). Furthermore,...

In this paper, we study a broad sample of Arthur Andersen clients and investigate whether the decline in Andersen's reputation, due to its criminal indictment on March 14, 2002, adversely affected the stock market's perception of its audit quality. Because these reputa-tional concerns are more of an issue if an auditor's independence is impaired, w...

We examine changes in discretionary accruals following the Sarbanes-Oxley Act (SOX). SOX imposes considerably greater potential penalties on CEO/CFOs; therefore, risk averse managers are likely to be more conservative in their financial reporting and report lower discretionary accruals following SOX. We find that Canadian firms that are listed on b...

In this paper, we investigate the change in managerial discretion over financial reporting following the Sarbanes-Oxley Act (hereafter SOX). We document an increase in conservatism in financial reporting following SOX and the resulting requirement by the SEC that financial statements be certified by firms' CEOs and CFOs. First, we find that firms r...

Earnings management is a corporate decision subject to costs. Both earnings management in the IPO process and the ex ante delisting risk of newly issued firms are related to firm fundamental. With a sample of IPOs between 1980 and 1999, we find that the degree of earnings management possesses significant predictive power on IPO failure. IPO firms a...

March 2006 * * Contacts: Li (jin.li@neu.edu, 617-373-4707, or jli1@statestreet.com, 617-664-9619); Zhang (zhanglu@simon.rochester.edu, 585-275-3491); and Zhou (jzhou@binghamton.edu, 607-777-6067). The authors wish to thank Abstract Earnings management is a corporate decision subject to costs. Both earnings management in the IPO process and the ex a...

We investigate the relationship between auditor brand name, industry specialisation, and earnings management as measured by discretionary accruals for a sample of listed companies in Taiwan, where the litigation risk against auditors is much less than the risk in the USA. We find that the use of Big 5 auditors is related to less earnings management...

Purpose This paper investigates the relationship between audit quality (as measured by auditor size and industry specialization) and earnings management (as measured by unexpected accruals) for Taiwan IPO firms. Design/methodology/approach First uses unexpected accruals in the modified Jones model to measure earnings management in the IPO process....

We examine a large sample of IPO firms between 1991 and 1999 to see whether earnings management in the IPO year has significant prediction power in forecasting subsequent delisting rates. Consistent with Seguin and Smoller (1996), we find that lower-priced stocks have a higher mortality rate than higher-priced issues. Consistent with Fama and Frenc...

We examine whether firms engage in less income-increasing earnings management following the Sarbanes-Oxley Act and the resulting requirement by the SEC that financial statements be certified by firms' CEOs and CFOs. Unlike other research on this topic that examines US firms, we focus on Canadian firms that are listed on both Canadian and US exchang...

On June 27, 2002, the SEC ordered the CEOs and CFOs of public companies with revenues during their last fiscal year of greater than $1.2 billion to file written statements, under oath, regarding the accuracy of their companies' financial statements. The SEC's order required the sworn statements to be filed with each company's next periodic disclosu...

In this paper, we study a comprehensive sample of Andersen clients and investigate whether the deterioration of Andersen's reputation after its criminal indictment on March 14, 2002 adversely impacted the perceived credibility of their audit quality. Since these reputational concerns are more of an issue if an auditor's independence is impaired, we...

This paper investigates the relationship between audit quality (as measured by audit firm size and industry specialization) and earnings management (as measured by discretionary accruals) in the initial public offering process. Earnings management in the IPO process is of particular concern given the information asymmetry between management and inv...

This study investigates whether financial analysts correctly weight cash flows, accruals and components of accruals in forecasting future earnings. This examination is in the spirit of Sloan (1996) who documents evidence that investors do not correctly distinguish between the cash flow and accrual components of earnings. We find that analysts do di...

Drawing upon the results of theoretical and empirical research on the relation between corporate disclosure and information asymmetry and on the relation between information asymmetry and earnings management, we hypothesize that the extent of earnings management is negatively related to corporate disclosure quality. We measure disclosure quality us...

The release of the Morningstar Fiduciary Rankings gives a new source of information to investors previously unable to gauge the inner workings of mutual funds and their management companies. We find that this information source is useful and confirms the findings of Gompers, Ishii and Metrick (2003) and Cremers and Nair (2004); namely, governance i...