Are Aggressive Reporting Practices Indicative of Risk-Taking Corporate Environments?

June 22, 2013 Leave a comment

Are Aggressive Reporting Practices Indicative of Risk-Taking Corporate Environments?

Mary Margaret Frank University of Virginia – Darden School of Business

Luann J. Lynch University of Virginia – Darden School of Business

Sonja O. Rego Indiana University – Kelley School of Business

Rong Zhao University of Calgary

March 31, 2012
Darden Business School Working Paper No. 1066846

Abstract: 
We examine whether firms with aggressive financial and tax reporting also have greater risk-taking corporate environments. We use investing, financing and operating policies and measures of firm risk to assess a firm’s risk-taking environment. We separate our analyses into the periods before and after the Sarbanes-Oxley Act (SOX) because prior evidence suggests SOX affected reporting and risk-taking practices. Our results provide strong evidence that before SOX, firms with greater risk-taking environments also engaged in more aggressive reporting. Our results also suggest that SOX eliminated the positive association between corporate risk-taking environments and aggressive reporting. Results from shareholder valuation tests indicate that in the pre-SOX time period, shareholders valued aggressive reporting – but not corporate risk-taking – at a premium. However, the passage of SOX substantially altered how shareholders assess aggressive reporting and corporate risk-taking.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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