davidson et al - 2005 - internal governance structures and earnings management

Key words: Audit committee; Corporate governance; Earnings management; Internal Received 14 August 2003; accepted 29 April 2004 by Stephen Taylor Associate Editor... The mechanismswe exa

Internal governance structures and earnings management Ryan Davidsona, Jenny Goodwin-Stewartb, Pamela Kenta

aUQ Business School, University of Queensland, St Lucia, 4072, Australia

bSchool of Accountancy, Queensland University of Technology, Brisbane, 4001, Australia

of discretionary accruals Our additional analysis, using small increases in earnings

as a measure of earnings management, also found a negative association between thismeasure and the existence of an audit committee

Key words: Audit committee; Corporate governance; Earnings management; Internal

Received 14 August 2003; accepted 29 April 2004 by Stephen Taylor (Associate Editor).

Strong governance involves balancing corporate performance with an appropriatelevel of monitoring (Cadbury, 1997) In the present paper, we explore the relationshipbetween governance mechanisms and earnings management by firms in Australiaand, hence, our focus is on the monitoring role of governance The mechanisms

we examine are an independent board of directors (Shleifer and Vishny, 1997), anindependent board chairperson, an effective audit committee (Menon and Williams,1994), the use of internal audit (Clikeman, 2003) and the choice of external auditor

(Becker et al., 1998; Francis et al., 1999).

Prior research has investigated the role of governance mechanisms in reducing

fraudulent financial reporting (Beasley, 1996; Dechow et al., 1996; Jiambalvo, 1996).

These studies have established a negative relationship between effective governancemechanisms and financial reporting decisions that are in breach of Generally Ac-cepted Accounting Principles (GAAP) However, a relatively new area of research

is the association between corporate governance and earnings management Peasnell

et al (2000) document that earnings management is negatively associated with the

independence of the board of directors, while other studies find significant ships between audit committee characteristics and earnings management (Chtourou

relation-et al., 2001; Xie relation-et al., 2001; Klein, 2002a).

The examination of the association between internal governance structures andthe practice of earnings management in Australian firms is motivated by several

factors With the exception of Peasnell et al (2000), which uses UK data, existing

research is predominantly US based Therefore, we explore whether the internalgovernance–earnings management relationship holds in an institutional environmentwhere corporate governance is less regulated and choice of governance mechanisms

is voluntary (Von Nessen, 2003) In Australia, at the time of the present study (2000),listed companies were not required to have an audit committee or an internal auditfunction Furthermore, corporate regulators favour a principles-based approach togovernance rather than a rules-based approach (ASX, 2003) Although a similar ap-

proach exists in the UK, Peasnell et al (2000) examine only the relationships between

earnings management and the proportion of outside directors on the board and theexistence of an audit committee We extend this research by exploring the effect ofadditional audit committee variables such as size and frequency of meetings as well

as the independence of members We also extend board independence to examinewhether the separation of the chief executive and board chair roles is associated withearnings management A further contribution is the inclusion of internal audit as agovernance mechanism that is likely to be associated with a reduction in the level ofearnings management While there has been increasing emphasis on the role played

in governance by internal audit, no prior earnings management studies have includedthis variable Australia is an ideal setting to examine this issue as evidence sug-gests that many listed companies in Australia do not have an internal audit function.Goodwin and Kent (2003) report that the use of internal audit is associated with thesize of the company and its commitment to strong corporate governance and riskmanagement

Our principal tests, using absolute discretionary accruals to measure earnings agement, suggest that a lower level of earnings management is associated with thepresence of non-executive directors on the board We also find a negative associa-tion between earnings management and audit committees comprising a majority ofnon-executives, but no relationship between earnings management and committeescomprised solely of non-executives Our results do not support a relationship betweenearnings management and the use of internal audit or the choice of a Big 5 auditor.Additional testing, using small positive changes in earnings as an indication of earn-ings management, suggests that audit committees are associated with this measure ofearnings management These results have important practical implications because ofthe heightened interest in corporate governance matters from governments, regulatorsand standard setters.

man-The remainder of the paper is divided into four sections Section 2 provides thetheoretical background for the study and develops the hypotheses Section 3 outlinesthe research method used to test the hypotheses It also discusses the measurement

of earnings management through the estimation of discretionary accruals Section 4reports the present study’s results Section 5 concludes by discussing the implications

of the research findings, highlighting potential limitations and considering future areasfor research

2 Theoretical background and hypotheses

2.1 Earnings management

The preparation and disclosure of true and fair financial information is central

to corporate governance, as it provides stakeholders with a foundation to exercisetheir rights, in order to protect their interests (OECD, 1999) However, earningsmanagement, defined as: ‘the practice of distorting the true financial performance of(a) company’ (SEC, 1999, p 3), effectively weakens this monitoring mechanism as

it might conceal poor underlying performance

The published literature has developed and empirically tested a variety of

moti-vations for earnings management to occur (Fields et al., 2001) These fall broadly

within the categories of agency costs, information asymmetries and externalities fecting non-contracting parties However, we are primarily concerned with the extent

af-to which certain corporate governance attributes limit the opportunity af-to manageearnings, rather than specific incentives for earnings management to occur Although

we attempt to control for two widely documented motives for earnings management;namely, avoiding breaching debt covenants (Defond and Jiambalvo, 1991, 1994)and avoiding political costs (Watts and Zimmerman, 1978; Jones, 1991; Jiambalvo,1996), our approach is to examine a broad cross-section of firms rather than identify-ing a specific subset with strong incentives to engage in earnings management Suchsubsets of firms are often context-specific (e.g recent managerial change, hostiletakeover or new capital raising) and these contexts are likely to be endogenous to theinternal governance mechanisms we examine

2.2 Internal governance structure

The internal governance structure of a firm consists of the functions and processesestablished to oversee and influence the actions of the firm’s management The role

of these mechanisms in relation to financial reporting is to ensure compliance withmandated reporting requirements and to maintain the credibility of a firm’s financial

statements (Dechow et al., 1995) The mechanisms that we examine in the present

study are the board of directors, the audit committee, the internal audit function and

2.2.1 Board of directors

Fama and Jensen (1983a,b) recognize the board as the most important controlmechanism available because it forms the apex of a firm’s internal governance struc-ture In terms of monitoring financial discretion, an effective board of directors shouldascertain the validity of the accounting choices made by management and the financialimplications of such decisions (NYSE, 2002)

From an agency perspective, the ability of the board to act as an effective monitoringmechanism is dependent upon its independence from management (Beasley, 1996;

Dechow et al., 1996) Board independence refers to the extent to which a board

is comprised of non-executive directors who have no relationship with the firm

is not employed in the company’s business activities and whose role is to provide

an outsider’s contribution and oversight to the board of directors (Hanrahan et al.,

2001) A non-executive director who is entirely independent from management isexpected to offer shareholders the greatest protection in monitoring management(Baysinger and Butler, 1985) Fama and Jensen (1983a,b) posit that the superiormonitoring ability of non-executives can be attributed to the incentive to maintaintheir reputations in the external labour market

The published literature is supported by Australian and international corporategovernance guidelines, which recognize the importance of the monitoring role ofnon-executive directors (AIMA, 1997, 1995; OECD, 1999; NYSE, 2002; ASX,2003; Standards Australia International, 2003; Bosch Committee, 1995; CadburyCommittee, 1992) These guides suggest that best practice with respect to board

1Another mechanism is the firm’s internal control system, but companies in Australia arenot required to report on the strength of controls We assume that external and internal au-ditors would ensure that controls are adequate Furthermore, earnings management by seniormanagement generally overrides controls that are in place

2According to the BRC (1999), audit committee members are independent if: (i) they, theirspouses or children do not currently work or have not worked at the organization or its affiliateswithin the past 5 years; (ii) they have not received compensation from the organization or itsaffiliates for work other than board service; (iii) they are not partners, shareholders or officers

of a business with which the organization has significant business

composition is, at least, a majority of non-executive or independent directors.3This

is supported by research evidence such as Beasley (1996), who finds that the presence

of independent directors on the board reduces the likelihood of financial statement

fraud, and Dechow et al (1996), who report that firms with a greater proportion

of non-executive directors are less likely to be subject to Securities and ExchangeCommission (SEC) enforcement actions for violating US GAAP Based on these

findings, both Peasnell et al (2000) and Chtourou et al (2001) predict that board

independence is also likely to be associated with a reduction in earnings

man-agement While Peasnell et al (2000) find empirical support for their prediction with respect to UK firms, Chtourou et al (2001) fail to find an association be-

tween earnings management and board independence for a sample of US firms.Despite these conflicting results, we hypothesize a negative association betweenboard independence and earnings management Therefore, we test the followinghypothesis:

H 1a : Earnings management is negatively associated with the independence of the board of directors.

Another important characteristic of boards is whether there is a separation of theroles of the chairperson and the Chief Executive Officer (CEO) While Arthur andTaylor (1993) point out that the underlying economic determinants of separating theseroles are not well understood, corporate governance guidelines assume that a board’sability to perform a monitoring role is weakened when the CEO is also the chairper-son of the board (e.g Cadbury Committee, 1992; ASX, 2003; Standards AustraliaInternational, 2003) The appointment of the CEO to the position of chair can lead to

a concentration of power (Beasley, 1996) and possible conflicts of interest, resulting

in a reduction in the level of monitoring This leads to the following hypothesis:

H 1b : Earnings management is negatively associated with the separation of the roles

of CEO and board chair.

3There has been a global increase in the demand for non-executives on the board because ofthe requirement for audit committee members to be independent However, it is acknowledgedthat executive directors, with their in-depth knowledge of the business, also play an importantrole Hence, the key is to find the appropriate balance with regard to board composition (Klein,2002a,b)

In Australia, the Government’s Corporate Law Economic Reform Program dit Reform and Corporate Disclosure) Act 2004 (CLERP 9) (Commonwealth of

(Au-Australia, 2004) proposes mandatory audit committees for the Top 500 listed nies Furthermore, the Australian Stock Exchange (ASX) amended its listing rules in

compa-2003 to require any company that was included in the Standard and Poor’s 500/ASXAll Ordinaries Index at the beginning of its financial year to have an audit commit-tee during that year In addition, in March 2003, the ASX Corporate GovernanceCouncil released a best practice guide that recommends that all companies have anaudit committee (ASX, 2003) However, in the year 2000, there was no requirementmandating audit committees The only rule in place was that a listed company with

no audit committee should disclose the reasons for this in a corporate governancestatement in the company’s annual report

Prior published literature indicates that the effectiveness of an audit committee

is dependent, in part, on the extent to which the committee is independent, its

to function effectively when members are also executives of the firm (Lynn, 1996;BRC, 1999) Both the published literature and governance reports suggest that au-dit committees should consist exclusively of non-executive or independent directors

research that demonstrates a relationship between audit committee independence and

a higher degree of active oversight and a lower incidence of financial statement fraud(Jiambalvo, 1996; McMullen and Raghundan, 1996; Wright, 1996) In contrast, how-ever, Klein (2002a) reports a negative relation between earnings management and amajority of independent directors on the audit committee, but finds no meaningfulrelationship between earnings management and an audit committee comprised solely

of independent directors

To effectively monitor the financial discretion of management, the audit tee is expected to review the financial reporting process, as well as to facilitate aflow of information among the board of directors, the internal and external auditors,

commit-and management (McMullen commit-and Raghundan, 1996) However, both Cohen et al (2000) and Gibbins et al (2001) report that external auditors are sceptical of the role

that audit committees play in reducing conflicts between auditors and management.Hence, to effectively discharge their responsibilities, audit committees need to be

4It is recognized that other characteristics are also important indicators of an audit committee’seffectiveness These include the financial literacy or expertise of the committee members (KirkPanel, 1994; Goodwin and Yeo, 2001; Goodwin, 2003; ASX, 2003), the existence of an auditcommittee charter and the number of meetings held with the external auditor (BRC, 1999).However, as current disclosure requirements do not mandate such information, these variablescannot be tested using publicly available information

5The Corporate Governance Council recommends that all members of the committee should

be non-executive directors, with a majority (including the chair) being independent However, itacknowledges that international practice is for all members to be independent and it encouragescompanies to move towards such composition within the next 3 years (ASX, 2003)

active (Collier, 1993; Hughes, 1999) and to be of sufficient size (Cadbury Committee,1992; CIMA, 2000) Audit committee activity has been operationalized through the

number of committee meetings held during the financial year (Chtourou et al., 2001; Xie et al., 2001), with the expectation that the more often a committee meets, the

more likely it is to carry out its responsibilities Studies have found that the quency of audit committee meetings is negatively associated with both earnings

fre-management, as measured by discretionary current accruals (Xie et al., 2001), and

the likelihood of enforcement action by the SEC (McMullen and Raghundan, 1996).With regard to size, several corporate governance reports have proposed that thecommittee should consist of at least three members (BRC, 1999; NYSE, 2002; ASX,2003)

The existence of an effective audit committee provides a firm with an added layer

of governance, which is expected to constrain earnings management behaviour Thisleads to the following hypothesis

H 2 : Earnings management is negatively associated with the presence of an effective audit committee.

2.2.3 Internal audit function

In addition to the audit committee, firms can voluntarily establish an internal auditfunction to supplement their existing internal governance framework If established,this function provides firms with an assurance and consulting service, which can im-prove the effectiveness of their risk management, control, and governance processes(IIA, 1999) An internal audit function is also expected to facilitate the operationand effective functioning of the audit committee, as the goals of the audit functionare closely aligned with the financial reporting oversight responsibilities of the audit

committee (Scarbrough et al., 1998; Goodwin and Yeo, 2001; Goodwin, 2003) The

formation of an internal audit function is endorsed by governance reports (NYSE,2002) and prior literature (Collier, 1993; Goodwin and Kent, 2003) as a means ofimproving internal governance processes

Although traditionally internal audit has focused more on controls and operationalrisks, there has been increasing emphasis in the professional literature on the need

to also focus on earnings management and inappropriate financial reporting (Eighme

and Cashell, 2002; Martin et al., 2002; Rezaee, 2002; Clikeman, 2003; Hala, 2003).

Sherron Watkins, former Enron vice president, believes that internal auditors shouldlook for warning signs such as undue pressure from senior management to meetearnings targets and compensation arrangements that might encourage employees

to manipulate earnings in order to receive financial rewards (Hala, 2003) Clikeman(2003) argues that internal auditors should not only be actively involved in detectingearnings management, but that they should take a proactive approach to educatingmanagers and directors about the dangers of the practice Eighme and Cashell (2002)regard the role of internal audit in detecting earnings management as being a com-plementary one to that of external audit They believe that both should be actively

involved in the detection of inappropriate earnings management, thereby providingtwo unrelated opinions to the audit committee.

These arguments suggest that the presence of an internal audit function should beassociated with a lower level of earnings management Accordingly, the followinghypothesis is proposed

H 3 : Earnings management is negatively associated with the presence of an internal audit function.

2.2.4 External audit

The choice of a firm’s auditor is another internal governance mechanism that islikely to be associated with earnings management Research evidence suggests thatthe large audit firms are perceived to perform higher quality audits than smaller auditfirms (DeAngelo, 1981) While examples such as Enron in the USA and HIH inAustralia might suggest otherwise, the large firms are considered to be more effective

monitors of the financial reporting process compared to smaller firms (Francis et al., 1999; Francis and Krishnan, 1999; Kim et al., 2003) Krishnan (2003) argues that,

not only do the large audit firms have more resources and expertise to detect earningsmanagement, but they also have a greater incentive to protect their reputation because

of their larger client base Past studies demonstrate that clients of Big 5 auditors reportlower levels of earnings management than clients of non-Big 5 auditors (Becker

et al., 1998; Francis et al., 1999).6 Therefore, we expect that firms that choose aBig 5 auditor are less likely to engage in earnings management This gives rise to thefollowing hypothesis:

H4: Earnings management is negatively associated with the use of a Big 5 auditor.

3 Research design

The present study involves a cross-sectional analysis of 434 firms listed on the ASXfor the financial year ending in 2000 To test our hypotheses, we use two primarymodels which regress absolute discretionary accruals on a set of governance andcontrol variables The two models differ only in their measure of audit committeeindependence We also conduct additional tests, using alternative measures of boththe dependent variable and a number of independent variables

3.1 Sample selection

Our preliminary sample of 568 firms comprised companies for which annualreports were available either on the Connect4 database, on company websites or inhard copy Financial information and information pertaining to boards of directorsand audit committee characteristics were obtained from disclosures made in annual

6For the reporting period ending in 2000, there were five main audit firms (the Big 5)

reports However, annual report disclosure concerning the use of internal audit isnot mandatory Therefore, this information was obtained by one of three methods.The first method involved consulting the University of Queensland/KPMG Centre for

not included on the database or whose annual reports made no mention of an internalaudit function

To arrive at the final sample, exclusions were made on the basis of industryclassification and insufficient governance or financial information For the purpose

of industry classification, the Global Industry Classification Standard (GICS) was

with prior research, industries with less than 8 firms were eliminated Firms in thefinancial sector were also excluded because of their unique working capital structures(Klein, 2002a) and the added layer of governance imposed through regulation (Barn-

hart et al., 1994) Those firms with missing financial or governance information were

these exclusions were made, the sample for the study was limited to 434 firms in 24

showing the broad cross-section of firms included within the sample

3.2 Measurement of the variables

3.2.1 Earnings management

The published literature has developed several tests of earnings management, cluding the assessment of accounting policy changes (Healy, 1985; Sweeney, 1994),specific accounting transactions (McNichols and Wilson, 1988), discretionary accru-als (Jones, 1991) and small profits or small changes in earnings (Holland and Ram-say, 2003) The present study uses discretionary accruals as the primary measure of

in-7This database comprises information on 464 firms that responded to a survey sent to all firmslisted on the ASX in 2000 The survey included a question concerning the use of internal audit.Approximately 65 per cent of the final sample was generated from this source

8Firms were recorded as having an internal audit function when the words ‘internal audit’ werecontained within the annual report Approximately 20 per cent of the final sample providedthis information in their annual reports

9The GICS classification structure consists of 10 broad economic sectors aggregated from

23 industry groups, 59 industries and 122 sub-industries The present study adopts the GICSstructure as it has become the new industry classification scheme of the ASX since 1 July2002

10These firms had discretionary accruals divided by lagged assets of 1.5 or more and testsrevealed that they could be considered to be outliers

11From the original 568 firms, 48 were in industries with less than 8 firms, 58 were in thefinancial sector and 24 had missing data, giving 438 firms before excluding the four outliers

Table 1

Analysis of sample by GICS sectors and industries

Construction materials (4) 151020 8 Metals & mining (6) 151040 116 Paper & forest products (7) 151050 8

Construction & engineering (10) 201030 14 Industrial conglomerates (12) 201050 15 Commercial services & supplies (15) 202010 16

discretionary Hotels, restaurants & leisure (26) 253010 23

Health care Health care equipment & supplies (38) 351010 9 5.76 7.28

Health care providers & 351020 8 services (39)

Information Internet software & services 451010 8 6.45 11.17

Equipment & instruments 451030 8 Telecommunication Diversified telecommunication 501010 17 3.92 3.06

Services Services (54)

a Based on 1218 listed entities, as of 31 March 2002.

ASX, Australian Stock Exchange; GICS, Global Industry Classification Standard.

earnings management while we also use small profits and small changes in earnings

in our additional analysis

Earnings management research has been dominated by studies that have followedthe general discretionary accruals framework proposed by McNichols and Wilson(1988) This framework partitions accruals into non-discretionary and discretionary

components on the assumption that a high level of discretionary accruals (DAC)

suggests that a firm is engaging in earnings management The most frequently used

method to decompose accruals is the modified-Jones model (Dechow et al., 1995) This model assumes that the non-discretionary component of total accruals (NDAC)

is a function of the change in revenues adjusted for the change in receivables and thelevel of property, plant and equipment, which drive working capital requirements anddepreciation charges, respectively

We use the cross-sectional version of the modified-Jones model (DeFond and

Jiambalvo, 1994; Becker et al., 1998; Bartov et al., 2000) Under this model, the level

of discretionary accruals for a particular firm is calculated as the difference between

the firm’s total accruals and its non-discretionary accruals (NDAC), as estimated with

revenues are expected to be positively related to changes in working capital accounts

of fixed assets is expected to drive depreciation expenses and deferred taxes (Klein,

above, the amount of discretionary accruals (DAC) for firm i in industry j for year t

is calculated as the residual value from equation (3):

We use a cash-flow approach to estimate total accruals as this is considered superior

to the balance sheet approach (Hribar and Collins, 2002) This approach involves ducting the cash flow from operations obtained from the statement of cash flows fromthe amount of net income (before extraordinary items) from the income statement

de-12The adjustment for changes in receivables (i.e modified-Jones model) is only applied to theexpectations model To estimate the industry specific regression coefficients in equation (2),

the original Jones model is used (Dechow et al., 1995; Bartov et al., 2000).

13All variables in the accruals expectations model (equation (2)) are scaled by lagged assets

to reduce heteroscedasticity, as it is assumed that lagged assets are positively associated withthe variance of the disturbance term (Jones, 1991)

3.2.2 Corporate governance variables

In our primary models, board independence is measured by two dummy variables,the first taking a value of 1 if the board of directors is comprised of a majority of

non-executive directors and 0 otherwise (BDIND), and the second variable taking a

value of 1 if the roles of the chairperson and CEO are separated and 0 otherwise

(INDCHAIR) We acknowledge that some non-executive directors are not entirely

independent from management as they might have a relationship with the firm inaddition to their role as a director Therefore, we attempt to refine this measure

by eliminating those non-executive directors who are reported to have engaged in

nies results in a smaller sample, we test this measure on the subset of nies for which this information is available and report the results in our additionalanalysis

compa-The existence of an audit committee is identified by a dummy variable with a value

of 1 if the firm has an audit committee operating during the year and 0 otherwise

(AC) As noted, our models differ in their measure of audit committee independence (ACIND) In model 1, ACIND is a dummy variable taking the value of 1 when

the committee is comprised entirely of non-executive directors and 0 otherwise In

model 2, ACIND takes the value of 1 when the committee is comprised of a majority

of non-executive directors and 0 otherwise

Other indicators of audit committee effectiveness, activity and size, are measured

by the number of committee meetings held during the year (ACMEET), and the number of directors assigned to the audit committee (ACSIZE), respectively To test

the internal audit function hypothesis, a dummy variable is employed, taking a value

of 1 if the firm has its own internal audit function or it outsources its internal audit

activities, and 0 otherwise (IAF) Similarly, a dummy variable is used to test the

external audit hypothesis, with a value of 1 when the firm uses a Big 5 auditor and 0

otherwise (BIG5).

3.2.3 Control variables

We control for the effect of possible confounding factors (Bartov et al., 2000)

by including in our models variables that prior studies have found to be associatedwith earnings management or governance variables To control for the existence

of concentrated shareholdings that might improve monitoring (Agrawal and

Knoe-ber, 1996; Peasnell et al., 2000), we include a variable defined as the percentage

14This information is reported in the related party transactions footnote in the financial ments

state-15The Corporations Act 2001 defines a substantial shareholder as one who has attained 5 per

cent or more of the total votes attached to the voting shares in the company

measured as the ratio of total liabilities to total assets, captures the incentives topractice earnings management when close to debt covenant violations (Beasley andSalterio, 2001; Klein, 2002a) The absolute change in earnings has been found to bepositively associated with earnings management (Klein, 2002a) and we measure this

by the absolute change in net income between the current and prior periods scaled

by total assets (ABSCH) We include the log of total assets (SIZE) to control for

the effect of size as this has been found to be negatively associated with earningsmanagement and positively associated with audit committee and board independence

and the use of internal audit (Bartov et al., 2000; Klein, 2002a; Goodwin and Kent, 2003) Following Klein (2002a,b), absolute current earnings (ABSNI), measured by

the absolute value of net income before extraordinary items scaled by total assets, is

capital-ization divided by the book value of shareholders’ equity Klein (2002b) finds thislatter variable to be related to board and audit committee independence Finally, toalleviate the concern that the modified Jones model provides biased estimates of dis-cretionary accruals when firms experience extreme earnings performance (Dechow

et al., 1995), we include a control variable for extreme performance (EXTP) This

variable takes a value of 1 if the firm is within either the top or bottom 10 per cent ofthe sample for performance (measured by net income divided by total assets), and 0otherwise

3.3 Regression models

The following regression equation is adopted to test the hypotheses, with models

1 and 2 differing, as previously noted, only in their measure of audit committeeindependence

+ β5ACMEET + β6ACSIZE + β7IAF + β8BIG5 + β9SUBSH

+ β10LEV + β11ABSCH + β12SIZE + β13ABSNI

where DAC is the absolute value of discretionary accruals, as measured by the

cross-sectional modified-Jones model and the remaining variables are as previouslydefined

16Klein (2002a) also tests her model using signed earnings because both Kasznik (1999) and

Kothari et al (2001) find earnings management is related to firm performance We repeat our

test using signed net income and obtain qualitatively similar results