Accounting Restatements and Institutional Ownership: The Case of U.K - Dissertation Example

?Dissertation Proposal Table of Contents 0 Research 3 2.0 Introduction 3 3.0 Research Question 5 4.0 Aim and Objective of the Study 5 5.0 Rational and Justification for the Study 7 6.0 Methodology 8 7.0 Research Structure 10 7.1 Time Table for the Research 13 8.0 Literature Review 15 8.1 A Brief Introduction of the UK Stock Exchange Market (LSE) 15 8.2 Investor Relations in the UK Stock Exchange Market 16 8.3 Institutional Ownership and Earnings 17 References 19 Bibliography 24 1.0 Research Title Accounting Restatements and Institutional Ownership: The Case of the UK 2.0 Introduction Evidences have revealed that the instances of accounting restatements have increased considerably since the past years. The numbers of companies filing restatements with SEC (Securities and Exchange Commission) reached 25000 during the year 2005 and the initial nine months of the year 2006 which was evidently a record increase in the accounting history (Turner & Weirich, 2006). Empirical evidences based on the aspect revealed that the instances of accounting restatements increased almost eighteen-fold since 1997 (when the figure was 90) to 2006 (when the figure was 1,577). Researchers further stated that the frequencies of accounting restatements were recorded to accelerate from 2001 and gained historic heights in 2006 (Scholz, 2006). Subsequently, the question arises that what constitutes the instances of accounting restatements. It is the major faults recognised in the earlier presented financial statements by a firm which leads to the rectification and restatement of those financial statements (Plumlee & Yohn, 2010). The rise in the number of accounting restatements have raised various issues regarding the accountability of the auditors, the finance officers as well as the accountants who are responsible for the preparation of the financial statements (Aier & Et. Al., 2005). In the current scenario financial statements are not only used to manipulate the net profit earned by companies, but are also signified to reveal the net worth of the company as well as its financial position. Considering the fact, experts have stated financial statement to be quite significant for the investors of the company (e.g. shareholders, stakeholders and others). It is in this context that the increasing occurrences of accounting restatements are witnessed to influence the investors’ interests (Plumlee & Yohn, 2008). Moreover, the market reactions regarding the frequencies of accounting restatements have also been witnessed as negative. The reaction tends to be strongly negative when the managers of the firm intend to sell the equity or company stock to the external investors before the restatements. On the contrary, the reaction tends to be less pessimistic when the managers intend to make investments in the company through personal purchases of corporate purchases (Badertscher & Et. Al., 2009). Researches have also depicted that frequency of accounting restatements not only hamper the monetary well-being of a company, but also affect the corporate governance practised within the firm which are again influenced by the strong inclusion of institutional investors (Baber & Et. Al., 2009). The current study will thereby be focussed on the correlation existing between corporate governance with due consideration to the influence of institutional investors and the reluctance or non-reluctance of restating financial statement by the public firms listed in the UK stock exchange. 3.0 Research Question Do institutional investors create an impact on the managers’ interest of the public companies listed in the UK stock exchange in making restatements of prior period financial disclosures? 4.0 Aim and Objective of the Study The prime objective of the paper is to recognise the impact created by institutional investors on the interest of the managers of public concerns listed in the UK stock exchange to restate the prior period financial statements. Studies have revealed a significant linkage between institutional investors and the probability of accounting restatements. According to the study of Hribar & Et. Al. (2004), institutional investors are witnessed to condense their holdings in the public firms prior to the period of restatement which depicts an inverse relationship between the factors. The reduction in institutional investors’ holdings in turn affects the earnings of the firms which again influences the interests of the managers in terms of incentives and company well-being. Thus, the fact regarding the reduction of investments made by institutional investors also influences the decision of restating financial statements by the public firms (Plumlee & Yohn, 2008). To be specific, the reduction in the holdings of institutional investors can influence the managers’ interest in two ways, i.e. either it will reduce the incentive structure of the managers and create a negative impact for revising the financial disclosures, or it will enhance the incentive structure and motivate the managers for restatements. However, the impact created on the interest of managers differ due to the economic motivations or corporate governance of the institutional investors, i.e. the ‘efficient monitoring’ hypothesis in opposition to the ‘strategic alignment’ hypothesis and ‘conflict of interest’ hypothesis (Keasey & Et. Al., 1997). 5.0 Rational and Justification for the Study There are various studies that confirm the frequencies of accounting restatements in the US and the UK. The probability of accounting restatements is termed to be quite transparent in the developed countries such as the US and the UK. It is due to the reason that the structure of institutional ownership is significantly apparent in these countries which in turn assists in recognising the ‘conflict of interest’ between the institutional investors and public companies (Alyousef & Almutairi, 2010). However, there are only few studies that have been proved to be effective in compiling these facts to comprehensively represent the relationship between the identified factors (Audit Committee Institute, 2007). On the similar aspect, the fact that corporate governance which is also signified as economic motivation differs from one region to another in terms of socio-cultural and socio-economic aspects. The effect of globalisation can also termed as an effective influencing factor to fuel up the divergences (Li, 1994). The accounting standard practiced in the publicly listed companies in the UK had been recorded to be altered recently in order to eradicate deformities taking place on presenting financial statements transparently. This change significantly caused various transformations in the accounting practice which in turn influenced the institutional ownership, and the interests of managers in terms of incentives (Audit Committee Institute, 2007). Furthermore, institutional investors is terms to be quite significant in the ownership structure of publicly listed firms in the UK that on the whole influences the corporate governance practiced in the business concerns (Hribar & Et. Al., 2009; Shleifer & Vishny, 1986). 6.0 Methodology The methodology that will be employed for the research shall comply with a descriptive research approach. The role of a descriptive research is to identify the various facets related to the research problem in order to support the purpose of the research and attain the ultimate objective of the study (De Vaus, 2002). With this concern, the paper shall initiate to elaborate on the identified research problem, i.e. the correlation between the institutional investors and the managers’ interest in restating the financial disclosures. Two variables can be apparently identified in this context, i.e. the institutional ownership, which is the independent variable and the frequencies of accounting restatements in the publicly listed organisations of the UK stock exchange, which can be stated as the dependent variable. Based on the quantitative method of research, the paper shall employ a logistic regression model to recognise the relationship between the dependent and independent variables. According to the logistic regression model, it can be stated that the dependent variable is categorical (Peng & Et. Al., 2002). That is, the frequency of accounting restatements (the dependent variable) is determined to be 1 with the given condition that the managers of firm i decide to restate the financial disclosures. On the other hand, if the firm decides not to restate the financial statements, the occurrences of accounting restatements will be determined as 0. On the similar context, two substitutes shall be considered in the research method to measure the independent variable, i.e. the institutional ownership of the firm. The substitutes are the percentage of total shares that the institutional investors are holding in the publicly listed company at the end of the financial year prior to the year of announcement of the restatement. The other substitute can be identified as the total digit of institutional investors who have shares acquired of each company for each financial year. Other variables shall also be considered in the research process such as the age of the firm, its size, profitability and others which can be stated as the control variables. The research process shall thereby use two sample variables, i.e. the treatment sample and the control sample. The treatment sample can be identifies as the firms that have decided to announce the restatement of financial disclosures, whereas, the control samples can be identified as the firms that have decided otherwise. Furthermore, these samples are matched on the basis of the total assets acquired by the firms and the market sector. The sample size determined in the research process shall consider all the publicly listed organisations in the UK stock exchange from the fiscal period of 2007 to 2010. In order to collect relevant data, the index listings of FTSE shall be considered which can be obtained from the home website of FTSE, LSE and the official website of Office for National Statistics. There are 100 listed companies in the London Stock Exchange which shall be taken into account to measure the relationship between the institutional ownership and the restatement announcement of the UK public firms. Therefore, the secondary data sources shall be used in the research process to collect relevant data for the accomplishment of the research objective. 7.0 Research Structure The structure of the research will be amended as follows. CHAPTER ONE: Accounting Restatements 1.1 Introduction 1.2 Motivations for studying the issue 1.3 Research problem 1.4 Research methodology 1.5 Organisation of the dissertation CHAPTER TWO: Literature Review 2.1 UK Stock Exchange (LSE) Market 2.2 Corporate Disclosure practices and Institutional Investors 3.3 The Governance Role of Institutional Investors CHAPTER THREE: Hypothesis Development CHAPTER FOUR: Research Methodology 4.1 Sample Selection and Data Sources 4.2 Descriptive Analysis 4.1 Research methodology CHAPTER FIVE: Results 5.1 Empirical Results 5.2 Conclusion CHAPTER SIX: Conclusion and implications of the research 5.1 Objectives and summary of research 5.2 Summary of results, comparison with previous research findings 5.3 Discussion and conclusion REFERENCES The aim of chapter one shall be to provide an overview of the research study. With this concern the discussion of the chapter shall intend to provide comprehensive background information regarding the issue identified in the research and thus develop a foothold for the research. In this chapter the motivations of the study, the identified research problem and the methodology of the study shall be described. The next chapter, i.e. chapter two shall emphasise on developing definitions of the theories used in the research which shall further be used in chapter three with the purpose of developing the research hypotheses. Chapter four shall again intend to provide a detail description of the entire research methodology with an in-depth and rational demonstration of the sample selection and the data collection process. It shall further aim at rationalising the descriptive research design and the research methodology applied in the process to attain the research objective. Chapter five shall concentrate on the results obtained from the research maintaining an evident linkage with the data obtained from the secondary data sources. The conclusions of the research study signifying the research objective shall be provided in chapter six. Thereby, this chapter shall intend to answer the research question based on the research findings. 7.1 Time Table for the Research The research plan also includes the time planning of research with specific allocations of time duration for each phase of the research. A research process initiates with the development of the research problem or the identification of the issue that is intended to be studied. The development of the research problem can take 10 days to 15 days as it requires in-depth scrutinising of various attributes related to the subject determined for research (in this case accounting). The identification of research problem leads to the collection of background information in order to provide a base to the study which can require another 10 to 15 days. After developing a comprehensive understanding of the research problem, the research methodology should be determined based on which the data collection and data analysis should be conducted. The development of the research methodology shall engage at least 10 days. The next phase of data collection shall take 30 days as it requires the study of various companies listed in the LSE (London Stock Exchange) analysing the holdings of the institutional investors and the announcement decisions of the firms related to accounting restatements. The data analysis shall take 30 days to be completed and another 15 days can be allotted to the discussion of the research findings and conclusions. The remaining 30 days can be utilised in the checking and re-checking of the paper in order to rectify the faults and drawbacks in the research process. Identification of research problem May 10th to May 26th Collection of background information 27th May to 10th June Planning of the research and preparation of the proposal 11th June to 26th June Data collection 27th June to 25th July Data analysis 26th July to 25th August Interpretation of the research findings 26th August to 8th September Conclusion 9th September to 15th September Checking and Re-checking of the research process 16th September to 29th September Final Submission of Draft 1 30th September 8.0 Literature Review 8.1 A Brief Introduction of the UK Stock Exchange Market (LSE) Christiansen & Kolderstova (2009) states that stock exchanges have a string inclusion in the corporate governance structure of listed companies. It is due to the fact that stock exchanges tend to contribute in defining the disclosure standards of the companies listed as well as monitoring the compliance of the companies in adhering to the standards. Considering the fact, the authors have termed stock exchanges quite significant facet of a national corporate structure (Christiansen & Kolderstova, 2009). The national stock market of the UK is influenced by the inclusion of London Stock Exchange which also has a significant influence over the corporate governance practices of the listed companies (Nielsson, 2009). For instance, the stock exchange focuses on specified rules to list a company in the index. The company has to have a market capitalisation of ?700,000 to be listed and should essentially execute the auditing of the financial statement by an external auditor adhering to the accounting rules as prescribed by the exchange (Luck, 2008). These rules certainly play a crucial role in defining the corporate governance of the listed companies. The London Stock Exchange is said to be ‘at the heart of the world’s financial community’. It is further observed to possess a considerable size in the national as well as in the international stick market with most of its shares owned by foreign companies (London Stock Exchange Group, 2011). 8.2 Investor Relations in the UK Stock Exchange Market Investor relation in the UK stock exchange is termed to be the interdependent relationship existing between the institutional and private investors and the companies listed in the stock exchange. Notably, the institutional investors in the UK stock exchange refers to the financial institutions based in the UK as well as overseas, various insurance companies, various trusts (e.g. unit trusts, venture capital trusts, and investment trusts), enterprise investment scheme investors, and the funding institutions (e.g. pension funds, hedge & sovereign wealth funds) (London Stock Exchange, 2010). According to the data obtained from the statistical report of the investments made by institutional investors in the UK stock exchange, most of the investments in the stock market of UK are made by the foreign investors or the overseas institutional investors. This indicates to the fact that a major proportionate of the institutional ownership of the listed companies in the UK is majorly held by the foreign institutional investors (Office of National Statistics, 2010). Therefore, it can be stated that the foreign investors and the institutional investors at large play a significant role in the UK stock exchange market which in turn influences the corporate governance of the listed companies. This in turn also influences there decision regarding the announcement of accounting restatements (Larcker & Et. Al., 2007). 8.3 Institutional Ownership and Earnings In other words, the proportionately larger shares held by the institutional investors in comparison to private investors depict the situation of institutional herding in the UK stock exchange market. This institutional herding again influences the price structure of the shares and thus influences the corporate governance of the listed companies (Dasgupta & Et. Al., 2010). Based on this thought Dasgupta & Et. Al. (2010) and Lee & Fang (2011) have stated that institutional herding will also have a considerable impact on the earnings of the analysts in the stock exchange market and the managers of the listed companies. Furthermore, Chang & Dong (2004) demonstrates the strong inclusion of institutional ownership, also referred to as the institutional herding is directly related to the idiosyncratic volatility of listed companies as well as the earning structure of the firms. It is in this context that the earnings of the firm and the stock prices of the equity is highly influenced by the institutional ownership which in turn influences the incentives earned by the managers of the listed companies. As stated by the Committee on the Global Financial System (2003), defining an effective incentive structure for the institutional owners as well as for the institutional managers is quite important in order to maintain a balance between the earnings of the investors and the managers. Based on the similar context the study of Campbell & Et. Al. (2008) describes that institutional ownership also influences the earning announcement of the listed companies which apparently differ in the long-term and the short-terms perspectives. It is due to the fact that prices depend on the liquidity of the firm which in turn trend of sells in the stock exchange (Campbell & Et. Al., 2008). Barniv & Cao (2006) states an apparent demonstration regarding the influence of institutional investors on the stock prices of the listed companies and the announcement decisions of the managers regarding restatements. According to the authors, the decision of institutional investors to create a pressure on the listed companies to announce the financial disclosures depend on various attributes. However, the study signifies the level of uncertainty to be the most influencing factors which determines the liquidity of the company, its stock prices, incentives of the managers, and thus creates a strong impact on the financial disclosure announcements (Barniv & Cao, 2006). Hence, a string relationship between the factors, i.e. stock exchange, institutional ownership, and interest of the managers in terms of incentives can be observed apparently. References Alyousef, H. Y. & Almutairi, A. R., 2010. An Empirical Investigation of Accounting Restatements by Public Companies: Evidence from Kuwait. International Review of Business Research Papers, Vol: 6, pp. 513?535. Aier, J. K. & Et. Al., 2005. The Financial Expertise of CFOs and Accounting Restatements. Accounting Horizons, Vol: 19, pp. 123–135. Audit Committee Institute, 2007. Accounting Judgements, Estimates, and Restatements Implications for Audit Committee Oversight. KPMG. Baber, W. R. & Et. Al., 2009. 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Restating Prior Reported Earnings: Is It A Rush Or A Misleading Of Traders? Alwaten Newspapers: 64. Sengupta, P. 1998. Corporate Disclosure Quality and the Cost of Debt. The Accounting Review, Vol: 73(4), pp: 459-474. Read More