[HWU Assignment] CRITICALLY REVIEW OF ‘ATTRIBUTES OF CORPORATE RISK DISCLOSURE: AN INTERNATIONAL INVESTIGATION IN THE MANUFACTURING SECTOR’ BY DOBLER ET AL. (2011)

Introduction

Risk disclosure came to the center of academic attention in recent years, especially from the accounting perspective. The literature sailed out to explore the unknown ahead, and therefore stimulated and inspired many researchers. The research might be horizontal approach for now, but with more and more studies involved, it would go vertical approach and this subject would become better understandable.

This article would continue as follow: first paragraph briefly outlined the review article ‘ATTRIBUTES OF CORPORATE RISK DISCLOSURE: AN INTERNATIONAL INVESTIGATION IN THE MANUFACTURING SECTOR’ by Dobler et al. (2011). The second paragraph presented critical review of the article brought up above. Lastly, this article finished with a conclusion and my most humble and modest thinking.

What about Dobler et al. (2011)

This paper of Dobler et al. (2011) tried to identify the attributes of corporate risk disclosure and the association between quantity of risk disclosure and level of firm risk by carrying out detailed content analysis of 160 annual reports from the U.S., Canadian, U.K., and German companies. There were three main research objectives Dobler et al. (2011) aimed to test: (1) risk disclosure characteristics, (2) differences in risk disclosure among different case countries, and (3) the relationship between risk disclosure quantity and the level of firm risk. Dobler et al. (2011) found that, among those case companies, managers made more qualitative and non-forward looking disclosure in management reports rather than quantitative and forward looking one. Furthermore, they found that there were different levels of disclosure content among case countries, for example, the U.S. firms tended to provide more risk disclosure, but the link between the amount of risk disclosure and domestic disclosure regulation only played a limited part explaining the difference, and that riskier companies tended to disclose more.

Critical review of Dobler et al. (2011)

The critical review of Dobler et al. (2011) would be structured into following sections: the research area, the literature review and the contribution, the sample selection and the research method, and the results.

The areas of research

Before the world famous financial scandals and crisis occurred, corporations and investors paid relatively little attentions to risk reporting or risk disclosure because the future seemed very promising at that time. One major issue is the asymmetric information between internal information users and external information users, often referring to managers and investors, misguiding information that could result in inappropriate judgment of relocating monetary resources. The literature has been pouring efforts related to in formation disclosure, extinguishing the reason of voluntary or mandatory disclosure (Beyer et al., 2010), the decision of investors (Daniel et al., 2002), the incentive for management decision (Deumes, 2008), and the correlation with regulation (Miihkinen, 2012), and even providing a framework (Healy and Palepu, 2001). Similarly, risk disclosure of the firm becomes gradually important due to globalization and severe competition, Abraham and Cox (2007) outlined that several different aspects of risk disclosure has been covered by researchers from the concern of insufficient information about risk and risk management, broadly examining risk disclosure and categorizing risk into different types, to investigating the quality of risk disclosure. However, as mentioned in Linsley and Shrives (2006), the difficulty of performing risk disclosures research started with the definition of risk. The literature has various definitions in terms of many aspects. Dobler et al. (2011) tried to bring together different studies done within individual country and then identify the key factors compared with other countries, broadening the horizontal aspect of the literature. Still, the problem of ill-defined 'risk' was seen also in Dobler et al. (2011). It would lead to ambiguity if the research failed to set boundary for the problem it set out to explore.

The literature review and the contribution

Linsley and Shrives (2006) investigated risk disclosures within a sample of 79 UK company annual reports and tried to recognize whether there was a relationship between the number of risk disclosures and company size, and company risk level. This article later provided foundation for Dobler et al. (2011) article, which was further built on in three aspects: a) a more international approach, b) a more detailed coding instrument and c) a multiple regression model for determining the relationship between risk disclosure and various proxies. Nevertheless, one could still make argument that the theoretical base for either Linsley and Shrives (2006) or Dobler et al. (2011) was relatively weak. The lack of theoretical base support really suggested that the literature should propose a consensus reaching framework or underpinning theory in order to explain or to develop.

Dobler et al. (2011) pointed out that the existing empirical studies about the attributes of risk disclosure only covered specific items or sections, without large-scale and cross-country examination to date, and didn’t prove the connection between the amount of risk disclosure and the level of firm risk. The term ‘risk disclosure’ used in Dobler et al. (2011) was not clearly defined; the authors provided a combination of definitions from other academic papers but later on when examining the contents of annual report adopted one specific paper’s definition, suggesting the difficulty of dealing with non-specialized term and there’s no final decision of its coverage.

The contribution of Dobler et al. (2011) was said to identify the similarity and differences among different countries, and provide insights for harmonization of international regulatory bodies. The debate arose again, approximate to the relevance of the international accounting standards and the question whether the world needed only one set of standards. Due to different cultural factors and actual practices among countries, the consequences of single set of regulations were remained unknown. After all, having a set of totally irrelevant unpractical rules could either bring chaos or regain balance, yet the effects needed further evaluation.

The sample selection and the research method

Dobler et al. (2011) stated that the rationale of choosing these case countries (US, UK, Germany and Canada) was because 1) these countries represented largest domestic economics in North America and Europe, 2) these countries were more concerned with risk disclosures and thus with most advanced regulations on risk disclosures, 3) these countries had more complex institutional settings, and 4) these countries were the initial members of International Accounting Standards Board. Apparently, the researchers chose to evaluate countries with more regulatory upon financial markets rather than investigate emerging financial markets. Considering the complexity of analyzing emerging financial markets without controlled environment, future research could carefully apply the findings in Dobler et al. (2011) and make further suggestion.

The focus group in Dobler et al. (2011) would be manufacturing sector, for its broad coverage of different risks. The researchers especially excluded financial firms because the risk financial institutions faced differed in the essentials. Linsley and Shrives (2005) pointed out that the essence of any bank was based on risk-taking business and therefore the market expected relevant risk-related information disclosures. Deumes (2008) outlined that prior studies in risk disclosure put much weigh on quantified risk disclosure and specifically on market risk. This might provide good reason for Dobler et al. (2011) to add more aspects into risk disclosure research field. It seemed reasonable to follow the trail of thinking. As for the aspects of risk types, one might consider manufacturing sector covering more aspects than merchandising sector, but if taking the complexity to extreme, the oil industry would be considered to cover the most aspects of risk type. The justification of rationale was not very convincing and thus the effort to determine attributes of risk disclosure might be in vain, especially when dealing with cross-country analysis. The researchers should give more description about the selection and again set the boundary of the discussion. For a project covering multi-country data analysis, any in-depth cross referencing research would take a lot of time and energy, and consequently lead to tentative conclusion. Abraham and Cox (2007) chose the year of 2002 and provided an explanation behind the choice: significant stock market decline and volatility, which was a benchmark year for analyzing risk disclosure. The boundary line was clearly drawn here in Abraham and Cox (2007).

The content analysis carried out in Dobler et al. (2011) was assessed through two means of risk disclosure: the management report and the notes to financial statements. Adopting the sentence count rather than the word count, the researchers aimed to estimate the quantity of risk disclosure not the quality, making a further suggestion which could be improved in future study.  This would also help reducing biases while processing the counting procedure. Therefore, the accuracy level was not so demanding. However, the process of coding was questionable for the researchers only extract five sample annual reports from each country handing to the independent coder. After coding completed, one of the researchers then tested the consistency of the coding. Similar situation happened in Abraham and Cox (2007), the way these studies ensured their reproducibility was to have another inspector to view the work. To certain level, bringing an independent inspector would definitely cut down the biases and ambiguity, but it still remained controversial whether this so-called independent third party proved to be unbiased. Also the time spending on the reexamination of the results of coding wasn't reported, which might be crucial in terms of thoroughly evaluating the results.

The results

Dobler et al. (2011) presented the finding among four case countries, UK, US, Germany and Canada, included the amount of disclosure sentences, the traits of risk disclosure, the relationship between the level of risk management and the risk sources, the type of risk disclosure, the time frame of risk disclosure, and the type of risk. Here I would only concentrate on discussing the amount of sentences disclosure, and the time frame of risk disclosure. Firstly, in terms of the amount of sentences disclosure, no surprisingly US had the highest disclosure amount than others. Considering the social situation such as financial scandal and the power U.S. Securities and Exchange Commission therefore possessed, the disclosure requirement environment in US should be more demanding than other countries. However, onerous regulations could cause an illusion of what was not written down should be permitted. This would bring up the dispute of whether to have principle-based rules or code-based ones. Indeed making disclosure was crucial for firms but there should be an authority to supervise the compliance (Linsley and Shrives, 2005). Secondly, the time frame of risk disclosure meant whether the risk disclosure identified any past, present, non-time specific and forward-looking information. Similarly to the amount of sentences disclosure result, US firms outperformed others in terms of providing forward-looking risk disclosure. Clearly, the key issue here for analyzing the difference among countries should put cultural, political and economic factors into consideration and thus narrow the gap instead of widening it.

The regression model Dobler et al. (2011) used contained many proxies, the variable sought to identify size effect and the quantity of risk disclosure. The researchers applied beta factor as systematic risk proxy and also consider leverage, operation leverage, share of foreign revenue, and the existence of major customer as other risk proxies. Considerably, compared to Abraham and Cox (2007) regression model, the one that Dobler et al. used to evaluate the relation was carefully built. In quantifying the type of risks, the researchers obviously sketched the blueprint in a broader view.

Conclusion

After discussing these following perspectives of Dobler et al. (2011): the areas of research, the literature review and the contribution, the sample selection and the research method, and the results, I have come to a conclusion that Dobler et al. (2011) has provided a rich discussion concerned with risk disclosure and opened up further opportunities despite some minor defect. However, the researchers made a huge effort to undermine the possible drawbacks they could foresee. Credits must be given to the attempts even though the effects might be insignificant.

Reference list

Abraham, S., & Cox, P. (2007). Analysing the determinants of narrative risk information in UK FTSE 100 annual reports. The British Accounting Review, 39(3), 227-248.

Beyer, A., Cohen, D. A., Lys, T. Z., & Walther, B. R. (2010). The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50(2), 296-343.

Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics, 49(1), 139-209.

Deumes, R. (2008). Corporate Risk Reporting A Content Analysis of Narrative Risk Disclosures in Prospectuses. Journal of Business Communication, 45(2), 120-157.

Dobler, M., Lajili, K., & Zéghal, D. (2011). Attributes of corporate risk disclosure: an international investigation in the manufacturing sector. Journal of International Accounting Research, 10(2), 1-22.

Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of accounting and economics, 31(1), 405-440.

Linsley, P. M., & Shrives, P. J. (2005). Transparency and the disclosure of risk information in the banking sector. Journal of Financial Regulation and Compliance, 13(3), 205-214.

Linsley, P. M., & Shrives, P. J. (2006). Risk reporting: A study of risk disclosures in the annual reports of UK companies. The British Accounting Review, 38(4), 387-404.

Miihkinen, A. (2012). What Drives Quality of Firm Risk Disclosure?: The Impact of a National Disclosure Standard and Reporting Incentives under IFRS. International Journal Of Accounting, 47(4), 437-468.

[HWU Assignment] CRITICALLY APPRAISE GRAY'S THEORETICAL FRAMEWORK OF ACCOUNTING VALUES

Introduction

There are more than 7 billion people in the world, increasing as speaking, and if taking the view that each individual is his/her universe, the cluster is enormously huge. Basically, these people scatter around the globe, geographically separated into many different groups and thus developed different life styles and histories. The literature calls these differences 'culture'. Efforts have been made to explain how these differences would affect people's thoughts, eventually actions. Throughout the long-term continuously searching for answers, there are two researchers' (Hofstede and Gray, respectively) works that are mostly discussed and criticised, i.e. their works stimulate more ideas. Both Hofstede and Gray devoted into this particular area, attempting to transform the intangible values to written standards, and the former even provided stand ground for the later. In order to analyse and criticise Gray’s theory, this article starts with examining Hofstede’s theory because Gray’s work is based on Hofstede’s assumptions. If the premise is false, the conclusion followed by will be certainly misleading.

This article is organised as follow. In section 2, the very specific two researchers’ works are briefly summarised. Criticisms about Hofstede’s and Gray’s works, whether separately or jointly, are outlined and analysed in section 3. Further suggestions for improving the model are abstracted in section 4. Finally, the conclusion wraps up the discussions.

The formation Hofstede-Gray's theory

What is Hofstede's theory?

As an organisational psychologist, Hofstede (1984, 1991) tried to identify the scopes of culture and separated them into different levels (symbols, heroes, rituals and values) of culture. Culture, in his definition, is the collective programming of the mind which distinguishes the members of one human group from another (Hofstede, 1984, 1991). He was definitely not the first one who tried to explicate the definition of culture and certainly not the first one who provided a framework of it. By surveying the large cross-country organisation, he then developed four cultural dimensions of values, the core of culture, and used these dimensions to categorised 50 countries and three geographic clusters of countries. Over the years, accounting research is one of the numerous disciplines which utilize Hofstede's classification and quantification of cultural differences (Baskerville, 2003, pp. 1).

What is Gray's theory?

Gray’s theory is considered an extension of Hofstede’s theory, identifying the four subcultural dimensions (professionalism, uniformity, conservatism and secrecy) or accounting values. Gray (1988) tried to tie Hofstede’s four dimensions of social values to accounting values by defining these factors with positive or negative relationship, e.g. positive relationship meaning that the higher the individualism, the higher the professionalism; negative relationship meaning that the lower the power distance, the higher the professionalism. In addition, Gray took further step to build on the link between his accounting values and real world accounting systems based on his previous hypothesis. He assumed that professionalism and uniformity affected the authority and enforcement, that conservatism influenced measurement practices, and that secrecy impacted information disclosure.

Disagreement about Hofstede-Gray's theory

Criticisms against Hofstede's theory

Hofstede (1984) built his theory through case study among IBM employees over the period 1968-1972 at which the US culture gaining its influence globally. The survey process generated 117,000 responses from 88,000 employees over 66 countries (Baskerville, 2003, pp. 1). Credits must be given for digesting and interpreting such large amount of data. However, the results and conclusions may be biased if the assumption was misleading at beginning. Validity is also an issue of Hofstede's theory. McSweeney (2002) criticised Hofstede's measure methodology as 'allegedly illustrative stories' because Hofstede claimed that national institutions, events and artefacts were consequences of national cultures, the causal relation which didn't exist. If the aim is to uncover the mystery behind national culture, perhaps both internal and external factors should be included as the researchers set up variables for testing perspectives of individuals, organisations, societies and nations.

Baskerville (2003) challenges the foundations of Hofstede's theoretical assumptions by indicating the obviously biased preferences over particular scholars' point of view, i.e. the generalisation of the theory based on very doubtful ground. According to Baskerville's argument (2003, p.6), Hofstede did not adequately address two important problems prompted by Goodenough (1964, p. 8): classification and definitions; and the problem of sampling and the units of comparison, the problems any study of cross-cultural comparisons has to address. Nevertheless, Hofstede replied this argument in his later paper in 2003 (Hofstede, 2003, p. 813) that he only saw his work as 'exploratory research, not as a finished theory', suggesting the irrelevance of Baskerville's arguments to cross-cultural accounting research. In fact, Hofstede did carry on extending his research in cultural dimensions and make some implements later as emerging markets arising.

One of the criticisms to Hofstede's study argued that the sample case was out of date and needed to reconstruct an updated one. It is disputable that the case study has over forty years history now, getting older as mentions, and some conditions had changed significantly over these years. However, certain underlying norms with good-old-merit characteristics might not change with time. One way of testing the theory is to carry out a whole scale survey again with similar scope of corporations, filtering the unchanged parts and scanning for the new parts. The long-term research might also take quite some time and manpower to interpret and analyse, which is not very economical. Baydoun and Willett (1995) suggested that it was better use Hofstede's theory as an implied definition, adjusting along the situations necessarily.  

Despite the criticisms, Hofstede’s work has been used in many empirical studies not only in accounting but also across the whole range of social science discipline, for his work providing quantitative measurement for other researchers as input in their statistical analysis and testing (Roberts, Weetman and Gordon, 2008). Since it's very difficult to numerate quality related characteristics, Hofstede's work really allows more ideas and thoughts to proceed and to prosper.  For a literature with such a broad area of definition, the researchers might continue wandering and exploring for a while before they reach the core of the issue. Hofstede's work inspired another researcher in accounting field, Sidney J. Gray, to develop his accounting values and broaden the relations connected to accounting practices, the link that demanded initial agreement of cultural dimensions derived from Hofstede's proposition.

Criticisms against Gray's theory

According to Gray's (1988) paper, the hypotheses he made were constructed in an inductive approach, like a proposal, without presenting empirical evidence. Criticism about the lack of evidence was later complemented by further studies done by some researchers who intended to prove or disprove Gray's theory.

Salter and Niswander (1995) used Gray's hypothesis and tested them with a sample of 29 countries, building up measurement indicators for accounting values, so the relationship between social values and accounting values could be recognised. The results of the study showed that there was 'significant relationship between Gray's accounting values and Hofstede's cultural constructs' (Salter and Niswander, 1995, pp. 391), which wasn't surprising at all because there must be predetermined relationship between culture as a whole and its subcultures. However, if looking into each independent cultural component, these cultural variables were not tightly related as Gray presumed. This finding suggests either Gray had overlooked some key indicator quality or he just looked at the wrong direction.

One of the criticisms is the false assumption that Gray’s theory proposed. Some researchers claimed that Gray’s theory didn’t prove the correlation between societal values and accounting values, let along the connection between accounting values and accounting systems. Baydoun and Willett (1995) demonstrated a case study using Hofstede-Gray’s theory as implied definition, examining cultural relevance in the accounting systems in Lebanon and France, respectively. In their examination (Baydoun and Willett, 1995) with the accounting system of France, according to Hofstede-Gray's framework, certain cultural characteristics leading to the assumptions of accounting values and accounting systems didn’t fit with the observation in reality, indicating that either incorrect question asked or fallacious theory used.

However, Chanchani and Willett (2004) found that with certain level of adaption and reinterpretation the results from accounting values survey done in New Zealand and India showed support of Gray's accounting values, and they proposed that further quantitative accounting values survey should be conducted. This paper showed that the literature attempted to optimise and measure the accounting values, and carried the questionnaire through a more theoretical basis rather than empirical one, for testing the validity of Gray’s theory.

Followed up, Doupnik (2008) applied the cultural dimensions to examine whether there is a connection between cultural differences and earnings management; the results supported the connection, but Gray's accounting values dimensions failed to explain the cultural determined measure practices, proposing the insufficiency of Gray's classifications of accounting values. The unexplained part of the result (Doupnik, 2008) hints that there's fifth accounting value 'stability', differences among countries presenting accounting information that is stable over time. Explicitly, there's blind spot of Gray's theory that demands more aspects reckoned.  

Without a doubt that Gray's hypotheses did spark a lot of attention, Heidhues and Patel (2011) stated that Gray's theory was undoubted accepted and applied to international accounting research by subsequent researchers, leading to increased authority and popularity, the employment which required more discretion when utilising.

Salter and Lewis (2011) tested Gray’s theory by using actual reported data extracted from the SEC Form 20-F and found that the cultural variable relate to differences in accounting measurement practices. This study filled the gap between real figures form regulatory and quantified questionnaires led by academy since there was no such type of examination ever made use of actual figures. Indeed, if more aspects considered, the following researchers might be able to amend or enhance previous assumptions, and form a more thorough and fit-for-all theory.

Suggestions for the Hofstede-Gray's theory

There are some researchers trying to make improvement of the Hofstede-Gray's theory. According to the paper of Doupnik & Tsakumis (2004), the authors made suggestion that future research should focus on individual accountants’ behaviour with respect to application of financial reporting rules using Gray’s framework. This opinion suggests that the term ‘culture’ may be seen as one big cluster of individual behaviour within the group, still been affected by each individual who constitutes it. To further analyse the causal relations inside any organisations, the researchers must start with the basic units of organisations, i.e., accountants who work in the organisation. The status of mind decides the actions carried out, and thus merges into a big cluster: culture.

Suggestions made by Chanchani and Willett (2004) urging for practical angles were followed up. Other researchers (Heidhues and Patel, 2011) recommend that accounting research should focus on critically examining the contextual environments of countries rather than measurements, quantification, simplification, and categorisation.

Conclusion

The literature has been trying to find out what causes differences between accounting systems among different countries for a long time. One obvious explanation is the cultural factor. The term 'culture' has a very broad meaning and thus very difficult to set a boundary for. Many efforts have been devoted to explore this area by researchers, standardising the immeasurable characteristics and generalising the observations. Among those research papers, the most discussed one was carried out by Geert Hofstede, an organisational psychologist, who conducted his research by surveying employees within one large international corporation and constructed a theory based on the findings. Hofstede's work has provided a standing ground for following researchers because his attempt to quantify quality-related traits enabled other researchers use as input of data or statistical analysis. However, where there is compliment, there is complaint. Many scholars argued that Hofstede's theory was invalid, fallacious-assumed and ill-constructed, and out of date. With such a controversial situation discussed, fully accepted and followed by Gray's work, built on Hofstede's cultural value dimensions, Gray tried to connect the cultural values with accounting values, from general to specific, and in the end link accounting values to accounting systems. If Hofstede's theory proved to be invalid, Gray's theory would definitely be invalid because the former work was the underpinning of the later. Even if Hofstede's theory wasn't overruled, debates still went on for Gray's theory lacking empirical evidence, misleading assumptions, and overlooking key factors. On the other hand, credits must be given to these two researchers who opened a new page in international accounting research. Along with criticisms, other researchers also made some suggestions to revise their theory and advise discretion for further research or application.

Reference list

Baskerville, R. (2003) 'Hofstede never studied culture', Accounting Organizations And Society, Vol. 28, No. 1, pp. 1-14.

Baydoun, N. and Willett, R. (1995) ‘Cultural Relevance of Western Accounting Systems to Developing Countries’, ABACUS, Vol. 31, No. 1, pp. 67-92.

Chanchani, S. and Willett, R. (2004) 'An empirical assessment of Gray's accounting value constructs', International Journal Of Accounting, Vol. 39, No. 2, pp. 125-154.

Doupnik, T. S. (2008) 'Influence of Culture on Earnings Management: A Note', Abacus, Vol. 44, No. 3, pp. 317-340.

Doupnik, T, & Tsakumis, G (2004) 'A CRITICAL REVIEW OF TESTS OF GRAY'S THEORY OF CULTURAL RELEVANCE AND SUGGESTIONS FOR FUTURE RESEARCH', Journal Of Accounting Literature, Vol. 23, pp. 1-48.

Goodenough, W. H. (1964) Explorations in cultural anthropology—essays in honor of George Peter Murdock, New York: McGraw-Hill Book Company.

Gray, S. J. (1988) ‘Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally’, ABACUS, Vol. 24, No. 1, pp. 1-15.

Heidhues, E. and Patel, C. (2011) 'A critique of Gray's framework on accounting values using Germany as a case study', Critical Perspectives On Accounting, Vol.  22, pp. 273-287.

Hofstede, G. (1984) Culture's consequences: international differences in work-related values, Beverly Hills u.a.: Sage

Hofstede, G. (1991) Cultures and organizations: software of the mind, McGraw-Hill

Hofstede, G. (2003) 'What is culture? A reply to Baskerville', Accounting, Organizations And Society, Vol. 28, pp. 811-813

McSweeney, B. (2002) ‘Hofstede's model of national cultural differences and their consequences: A triumph of faith - a failure of analysis’, Human Relations, Vol. 55, No. 1, pp. 89-118.

Roberts, C. B., Weetman, P., and Gordon, P. (2008) International corporate reporting: A comparative approach, 4th ed, Pearson Education.

Salter, S. B. and Lewis, P. A. (2011) ‘Shades of Gray: An empirical examination of Gray's model of culture and income measurement practices using 20-F data’, Advances In Accounting, Incorporating Advances In International Accounting, Vol. 27, pp. 132-142.

Salter, S. B. and Niswander, F. (1995) 'CULTURAL-INFLUENCE ON THE DEVELOPMENT OF ACCOUNTING SYSTEMS INTERNATIONALLY - A TEST OF GRAY [1988] THEORY', Journal Of International Business Studies, Vol. 26, No. 2, pp. 379-397.

Bibliography

Gray, S. J. (1988) ‘Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally’, ABACUS, Vol. 24, No. 1, pp. 1-15.

Hofstede, G. (1984) Culture's consequences: international differences in work-related values, Beverly Hills u.a.: Sage

Hofstede, G. (1991) Cultures and organizations: software of the mind, McGraw-Hill

[HWU Assignment] The rise of strategic management accounting: The unity and criteria beneath different case companies among different countries

Introduction

As the economics of the world become more developed, the competition of business gets more intense. To survive in such battle, the corporation must evolve and apply at least some certain degree of survival strategy. Management accounting first appeared to serve users’ need of such information. Sooner or later, those who run the business started to feel that something seemed to be missing. The academics kicked in searching for answer and numerous discussions began to prosper. In between these discussions, strategic management accounting (SMA) came forth as the solution of the problem with many scholars guaranteed. Nevertheless, the terminology is not clearly defined in the academic world let along the business world. It didn't stop the trend of developing and applying of SMA techniques within firms. Although several limitations occurred due to the nature of case research, the researchers confirmed that trend through many case studies. As the world gets to understand SMA better, there is a greater possibility to elaborate advanced SMA techniques that adapt the situations more properly.

The rest of article is arranged as follow: in section 2, the definition of strategic management accounting (SMA) is discussed; in section 3, the development of SMA is briefly mentioned; in section 4, the results, criteria and tendency of case studies papers are summarized and analysed; the last section is conclusion.

What is strategic management accounting

Breaking down piece-by-piece, the term ‘accounting’ has many and various descriptions; however, in general it means conveying information for those who need it. If the title in front of accounting changed, the essential of information also shifted its focus. For example, financial accounting provides information of the firm's economic activities, for a certain period of time or at the exact point of time. With ‘management’ in front of accounting, information especially concentrates on managing purposes, more specifically, decision-making. Management accounting (MA) focuses on delivering internal information of the entity to users, in this situation, mostly managers. This internal information sometimes can be confidential and case sensitive against competitors. By using such type of information to carry out the organization goals, managers of the entity draw the route map or correct the direction accordingly. This process of making decision and responding to competition is thought to be strategic management accounting (SMA).

However, there is no concrete definition about what constitutes SMA (Tomkins and Carr, 1996; Roslender and Hart, 2003). Several researchers have tried to conclude a proper expression with different yet similar terms, such as accounting for strategic position (Simmonds, 1986) and strategic cost management (SCM) (Shank, 1989, 1996). Some researchers would tend to be more specific about the idea they carry on later in the research. Bromwich and Bhimani (1994) describe that SMA concentrates more on the customer value and also help to monitor the company's market performance. Haider et al. (2011) explain that SMA improves the traditional management accounting by expanding the scope and combining with other fields such as strategy and marketing. The summary review of SMA development states 'SMA entails taking a strategic orientation to the generation, interpretation and analysis of management accounting information, and competitors’ activities' (Langfield-Smith, 2008, pp. 206).

Furthermore, Langfield-Smith (2008) notes that there are many techniques included 'under the umbrella of SMA' and some commentators define SMA in terms of its techniques, such as target costing, life-cycle costing, strategic cost analysis, competitor cost analysis, activity-based costing, activity-based management, attribute costing, strategic performance measurement systems. All these mentioned techniques are perceived to be more strategy-oriented or strategy-concentrated. In a simple way of telling, it is basically management accounting applied with strategic dimension.

The development of SMA

As previously mentioned above, the MA practice mainly emphasizes internal information delivery; therefore, some criticisms arise. Chapman (2005) points out that putting special attention to the internal affairs of the business might lose sight of external opportunities and possible threats. To answer such critics and also improve the methodology, various attempts have been made, including SMA. The SMA terminology started to pop out in recent decades as a new and effective cure for organization coping with all the difficult situations. This concept inspires plenty responses and further discussion are made by numerous researchers (Simmonds, 1986; Shank, 1989, 1996; Bromwich and Bhimani, 1994; Chapman, 2005; Langfield-Smith, 2008; Carmen and Corina, 2009; Haider et al., 2011; Nixon and Burns, 2012). Through these efforts put into shaping and structuring the context of SMA, the researchers try to uncover more extended linkages with other disciplines. If the accountants wish to develop a more advanced accounting system, it is best to know the logic and rationale behind every strategy applied by sense-making and how it is used during the process (Tillmann and Goddard, 2008). Nixon and Burns (2012) suggest that SMA should be integrated with strategic management (SM) because SM gives broader boundary and also stimulates more ideas.

Case study for SMA

Despite the theoretical supports and prospering researches related to SMA, the empirical evidences somehow are scarce. One of the critics for SMA is about the lack of real practices and actual usage applied in business. The research finding implies that the use of the term SMA is not very general among management accountants. Many who actually use the techniques don't recognise them as SMA implying the uncertainty about the phrase. However, the observation from the UK sample in this research provides a cue that SMA had more appreciation because the term was first cited and originated in UK, implying cultural and historical factors involved in the choice of words, not entirely related to lack of practices in other countries. Some studies put more weigh on building profound knowledge by inspecting the vertical relation within one organisation rather than horizontal. Either ways of pursuing and exploring helps construct a thorough comprehension. 

Practices in different countries

Guilding et al. (2000) survey 12 SMA practices usages in hundreds of the largest public and private companies, in terms of turnover, among United Kingdom (UK), United States (US) and New Zealand (NZ). It appears that NZ companies have special preferences for three out of the 12 SMA practices questionnaire ('value chain costing', 'competitive position monitoring' and 'competitor performance appraisal based on published financial statements') while US companies have totally different point of view. The researchers also point out that the observation conclusion may be due to a) a fast-developing and highly-competitive business environment in NZ, or b) those NZ companies selected from samples are part of multinational operations. To conclude, there are four major findings according to this paper: firstly, competitor accounting and strategic pricing seem to be widely applied; secondly, despite most of the low usage rate of SMA practices, the underlying potential shouldn't be overlooked because the expected advantages are higher than the usage rate; thirdly, the company size affects the adoption of SMA when restricting matched sub-sample level; lastly, the phrase SMA seems not broadly appreciated in corporations.

Following up, Tillmann and Goddard (2008) examine the context of SMA based on a case study of one large multinational company in Germany. The authors define the core phenomenon of SMA process as sense-making which employed as a vehicle to better understand situations encountered and make sure no spots missed, in other words, understandability and transparency. This paper tends to provide insights into SMA and serve as cornerstone for other possible future SMA systems design because one SMA technique could not fit with all situations well. The finding also highlights the ability of management accountant has to cover more knowledge, not just accounting related, but other know-how. As a main information translator in organizations, management accountants nowadays are required to be full-aspect prepared.

Furthermore, Ma and Tayles (2009) inspect the adoption of SMA practices from one department within a global medical technology company in England. In the case company, the researchers discover that some SMA techniques are adopted because those methods fit with the company’s strategic goals, suggesting that usage of certain SMA techniques due to the level of relevance. In addition, the trigger behind the adoption of SMA techniques was changed market situation and thus increased competition pressure. In such manner, the case company strived to survive, and hence the accounting information remodeling procedures were made.

Moreover, Cadez and Guilding (2012) investigate how prototypes of new SMA techniques facilitate performances in Slovenian manufacturing companies. The result indicates that approximate level of performance can be reached by different strategies portfolios.

Tagging along, the process of exploring and broadening SMA gradually goes from surface to core. The above case studies provide a stand ground for coming up researches. The research started with a simple question: is there any similarity among practices preferences among different continents? Although the researchers chose English-speaking countries to begin with, the result indicates the existence of preferences and implied cultural geographical characteristics. Among these case firms in different countries, there might be certain cultural differences but the ultimate goal is the same: pursue the best performance.

Criteria

There are several criteria for selecting the sample for analyzing and interpreting strategies behind applications. In the survey research, the scope of practices must be considered, for such work could be very experimental and exploratory. The research carried out at organizational level varies from the one at sub-department level, for higher management with more strategy concerned and direction guidance, and middle management with more field practice and real perception of strategy execution.

One problem is that the unclear definition of SMA, more specifically, what constitutes SMA. Considering future possible innovating techniques, the boundary of SMA would be presumably vague and conceptual. The need of SMA conceptual framework is foreseeable increasing.

Standardizing terminology is also considered to be one of the coming problems. Since SMA has a wide range of definition and applied techniques, researchers desperately attempt to establish a boundary for what components constitute SMA. To a basic standing point, the literature must have some level of mutual agreement to what constitutes SMA otherwise further studies would be invalid because it is different subject at the beginning.

The level of economic development would also affect the choosing of case company. In a developing economics, small capital corporations are more common than large capital corporations, and thus jobs and responsibilities are not as diversified as the larger ones. For concept of SMA, it specifically targets at combining two or more different functions of the entity together and thus creates a sharp forward-looking strategy which helps the entity to compete against other market participants. Given the prosperity of economics, there are more objects to choose from, even just doing a thorough investigation of one firm. The complexity and depth of real business practices would not be revealed unless digging deeper underneath, which large capital corporations are more capable to offer. However, there is also a possible explanation that small capital corporations have more flexibility and in-time reaction to sudden change in situations when adopting SMA as a tool to survive.

Conclusion

This article tends to outline the development of strategic management accounting, an improved management accounting, and analyses the empirical evidence carried out by different researchers. As mentioned above, SMA has quite vague and broad definition, no conceptual framework existing yet. It is also considered to adopt an even broader coverage as strategy management, lightening the image of accounting. However, SMA techniques are useful in the real business world practices, even with mere perception of the term. Through those case studies, the researchers confirm that the adoption of certain type of SMA technique is based on the relevance of performance. There are many possible SMA techniques combinations, validated by case studies, no matter which one combination the firm choose can reach similar level of performance. This result implies that there is no perfect solution but the most suitable one. By acknowledging the criteria those researches encountered, the future researchers can try to improve the research method, and even better, come up with more advantageous SMA techniques.

Reference list

Cadez, S. and Guilding, C. (2012), 'Strategy, strategic management accounting and performance: a configurational analysis', Industrial Management & Data Systems, Vol. 112, No. 3, pp. 484-501.

Carmen, A. A. and Corina, G. (2009) ‘A strategic approach of management accounting’, Annals Of The University Of Oradea: Economic Science, Vol. 3, No. 1, pp. 736-741.

Chapman, C. S. (2005), Controlling Strategy: management, accounting, and performance measurement, Oxford University Press, Oxford.

Guilding, C., Cravens, K.S. and Tayles, M. (2000) ‘An international comparison of strategic management accounting practices’, Management Accounting Research, Vol. 11, pp. 113-135.

Haider, S., Ali, M. and Muhammad Shaukat, M. (2011) 'STRATEGIC MANAGEMENT ACCOUNTING – A MESSIAH FOR MANAGEMENT ACCOUNTING?', Australian Journal Of Business And Management Research, Vol. 1, No. 4, pp. 1-7

Jorgensen, B. and Messner, M. (2010) 'Accounting and strategising: a case study from new product development', Accounting, Organizations and Society, Vol. 35, No. 2, pp. 184–204.

Krumwiede, K. R. and Charles, S. L. (2007) 'Finding the right mix: how to match strategy and management practices to enhance firm performance', Articles of Merit Award Program for Distinguished Contribution to the Roles and Domain of PAIBs, Oct. 2007, pp. 1-8.

Langfield-Smith, K. (2008) 'Strategic management accounting: how far have we come in 25 years?', Accounting, Auditing & Accountability Journal, Vol. 21, No. 2, pp. 204-228.

Ma, Y. and Tayles, M. (2009) ‘On the emergence of strategic management accounting; an institutional perspective’, Accounting and Business Research, Vol. 39, No. 5, pp. 473-495.

Nixon, B. and Burns, J. (2012) 'The paradox of strategic management accounting', Management Accounting Research, Vol. 23, Strategic Management Accounting, pp. 229-244.

Nixon, B., Burns, J. and Jazayeri, M. (2011) 'The role of management accounting in new product design and development decisions', CIMA Research Executive Summary Series, Vol. 9, No. 1, pp. 1-7.

Roslender, R. and Hart, S. J. (2003) 'In search of strategic management accounting: theoretical and field study perspectives', Management Accounting Research, Vol. 14, No. 3, pp. 255-279.

Shank, J. K. (1989) 'Strategic cost management: new wine, or just new bottles?’, Journal of Management Accounting Research, Vol. 1, pp.47-65.

Shank, J. K. (1996) 'Analysing technology investments from NPV to strategic cost management (SCM)', Management Accounting Research, Vol. 7, No. 2, pp. 185-197.

Simmonds, K. (1986) ’The accounting assessment of competitive position', The European Journal of Marketing, Vol. 20, No. 1, pp. 16-31.

Tillmann, K. and Goddard, A. (2008) ‘Strategic management accounting and sense-making in a multinational company’, Management Accounting Research, Vol. 19, pp. 80-102.

Tomkins, C. and Carr, C. (1996) 'Reflections on the papers in this issue and a commentary on the state of Strategic Management Accounting’, Management Accounting Research, Vol. 1, No. 1, pp. 271-280.

[HWU Assignment] Dividend Yield Strategy, Investment Strategies and Market Efficiency

Introduction

The world is continuously changing, so is the market. Take stock market for example, numerous specialists, analysts and fund managers try their best to beat the market. The methods they used can be classified into two categories, technical analysis and fundamental analysis. Based on the market situation, in terms of the form of efficiency, different methods apply to different markets. However there are some unexplainable phenomena happened in the markets, such as January and October effects. No one has provided a logical reason behind these effects, yet. For such ever-changing markets, a question pops out: how do ordinary investors make profit from these markets? An analyst offered a thought for general public on Wall Street Journal: Dow-Dog strategy. The idea of Dow-Dog strategy is that the highest ten dividend yield companies would outperform the index, the benchmark of market. A simple and easy-achieved alternative fit for all investors. To know whether Dow-Dog strategy works in real world markets, researchers applied performance-measuring techniques to assess outcomes of the top ten portfolios and the index. By calculating compound returns, Sharpe ratio and Treynor ratio, investors can have a clear image on how well the two subjects perform. Unfortunately, this strategy is not fit for all stock markets. According to the research, Dow-Dog sometimes worked, sometimes didn’t. However, the time period of the research is a bit out of date. So our group decides to create our own Dog strategies with three different portfolios: equally weighted portfolio, minimum-variance portfolio and efficient portfolio, instead of just using equally weighted portfolio as former researchers did. For the time period of 3 January 2012 to 31 October 2012 (211 days), we have found that these three portfolios outperformed FTSE 100, with efficient portfolio even achieved 41% excess return. Overall, we could tell that different stock markets and time period might have certain influences on success of Dow-Dog strategy.

Market Efficiency

Before go through market efficiency, there are two types of analysis to find out the real price of a company, technical analysis and fundamental analysis, must be introduced first. Technical analysis is by scrutinized trading volume and value to predict the best buying or selling time entry. The tricky point is to predict the momentums of stock prices and therefore claim highest profit through timing forecast. This way of analysis is also known as chart-reading technique because analysts study stock price pattern and respond accordingly. Fundamental analysis is using company’s annual report figures as base judgment and combining with macroeconomics observation, industrial study and current events to determine the value of a company. By digging into the past earnings of a company, analysts thus could better predict the future earnings performance. Either way of analysis aims to figure out the accurate price of a company and then compares with the market price to see whether the price is over- or under-value. For over-value stock, traders short sell it; for under-value stock, traders buy it. The profit opportunity comes from detecting inaccurate pricing stock quicker than other investors. Otherwise the market would respond to the inaccurate price and the price would eventually reach its fair value.

Fama (1970) introduced three forms of efficient markets: strong-form market efficiency, semi-strong form market efficiency and weak form market efficiency. According to Fama’s theory, investors should first figure out what kind of market efficiency they are dealing with and react properly respectively. For weak form market efficiency, the stock price has already responded to all the past information. It is meaningless for investors to analyse the past stock price and trading volume. In the weak form efficiency market fundamental analysis works well. At this point, all future information is considered randomly dispersed and since no one can tell the future so technical analysis has a hard time predicting future ups and downs. For semi-strong form market efficiency, the stock price has responded to all public information. Under this situation, neither technical analysis nor fundamental analysis could be applied as an effective tool predicting future stock price. To profit from this form of market, investors must have access to inside information that others do not have. The inside information is limited to only few investors, generally speaking, people who run this company. For strong form market efficiency, all public and non-public information is reflected in stock price, which means that even insiders couldn’t benefit from internal information because all the information, whether internal or external, is open and free to public. Obviously, investors need some new ideas to profit in this form of market.

Is Market Efficient?

This question is often asked by researchers and still remained not answered. A stock market must have a certain degree of efficiency but sometimes it’s difficult to tell which scenario fits. Clearly not all stock markets fit for strong form efficiency because confidential information is not free to the public. Although the market might react in time, there is still a tiny time gap for insiders to cut in and benefit from it. If the markets react very slowly, in other word: inefficient, the profit gap might exist longer, loss gap as well. Active portfolio managers didn’t outperform the market. This is really a situation depends.

Investment Strategies

There are many investment strategies, for example, buy and hold, market timing, and liability-driven strategy, etc., for different preferences. In the end, the ultimate goal is to make highest profit. Through market efficiency hypothesis, investors implement different analyses to better interpret price movement. However, there are some unexplained effects in the stock market. The stock price usually goes up in January, known as January effect. This phenomenon was initially recognized in stock market of United States, and later confirmed with evidence from other stock markets of different countries. Opposite to January effect, there is October effect, which stock price tends to fall. The effect is even more explicit when separate capital by the size. For small capital businesses, the effects are very clear because the high and low of returns are more fluctuating than big capital businesses.

To profit from buying stocks is not just through capital appreciation. Dividend paid by a company is also a factor to take into account because that is the other way of compensation made by that company for their overall stable stock price. From the investors’ view of investment retrieve, there are two kinds of stocks, value stock and growth stock. Value stock usually pays high dividend and has low price-equity and price-book ratios. Growth stock normally keeps dividend as reinvestment from shareholders and has high price-equity and price-book ratios. One characteristic of growth stock is that it possesses high return on equity, for average 15%. Investors buy growth stock for its future potential in price growing, not in dividend paid.

Dividend Yield Strategy

To start with Dow-Dog strategy, dividend yield must be explained in advance. Dividend yield is calculated by putting one company’s dividends of this year as numerator and its market price as denominator. Dow-Dog strategy is to pick out the ten highest dividend yield companies within the index, e.g. DJIA 30, investing equally. After one year, investors recalculate dividend yield for that year and rearrange the top ten dividend-yield portfolio. To investors, there must be certain level of connection between stock price and dividend. By applying this strategy, investors can easily spot winners of market and therefore bet on the right side.

There were research results from three different countries’ stock markets:

1.    For US stock market, Dow-Dog strategy statistically outperformed the index, DJIA 30, during 1946 to 1995 (McQueen, 1997). However, after putting taxes (dividend paid), transaction costs (yearly rebalance) and risks (diversified or not diversified) into consideration, Dow-Dog strategy underperformed DJIA 30.

2.    For British stock market, Dow-Dog strategy didn’t take down the index, FSTE 100, statistically and economically during 1984 to 1994 (Filbeck & Visscher, 1997). Statistically, in terms of compound returns, FSTE 100 outperformed Dow-Dog strategy in near six years out of ten-year period in single year holding situation, and five times out of seven in multiple year holding situations. After considering risks, taxes and transaction costs, the results were pretty much the same. Filbeck & Visscher (1997) gave two possible explanations: (i) FTSE 100 contained more industries than DJIA 30 with utilities, transportations and financial institutions during that period; (ii) FTSE 100 is a value-weighted index while DJIA 30 is a price-weighted index.

3.    For Canadian stock market, Dow-Dog strategy totally swiped the index, Toronto 35, statistically and economically during 1987 to 1997 (Visscher & Filbeck, 2003). The returns of Dow-Dog strategy were enough covering for taxes and transaction costs.

Practical Example

To better understand Dow-Dog strategy, our group decided to take this year, 2012, as our test field. First, we calculated dividend yield of each stock in FTSE 100 based on 1 November, 2012 and pick top ten highest dividend yield stocks for portfolio. Secondly, we evaluated portfolio performance from 3 January 2012 to 31 October 2012 (211 days) on daily basis. Along with equally weighted portfolio former research used, we readjusted for minimum risks for risk-averse investors as minimum variance portfolio and maximum returns with higher risks for risk seeking investors as efficient portfolio. From the results of these portfolios in 211 days, efficient portfolio achieved almost 42% return; minimum variance portfolio got 7% return; equally weighted portfolio had merely 2% return, but still outperformed FTSE 100. All three portfolios performed better than FTSE 100 during 211 days. According to our results, the choice of time period and different weighted portfolio might be related to returns. Former research calculated compound returns monthly for ten-year period and used equally weighted portfolio.

Dividend Puzzle

A dividend puzzle is that a financial manager could have borrowed money to pay dividend but would never do that, even doing so for tax shield. One saying is that borrowing money to pay dividend would send wrong message to investors: the company is unable to pay dividend. Paying dividend without borrowing means a financial manager must secure cash assets at certain level by the end of the year for annual report and make sure those cash could cover dividend paid per share. Otherwise investors and shareholders would spot this inability to pay as bad sign of company operation. So a company would actually save some cash on its statement of financial position if it planned a big dividend dispersed next year. In reality, no one knows what happened after the closed door except for insiders. If company A just ran out of cash accidentally before dividend paying date, the financial manager of company A would definitely borrow some money. Investors still get their dividend and remain unaware until something goes wrong. Maybe logically investors know everything and react responsively, in practice they don’t.

References

Berry, MA 1995, 'Overreaction, Underreaction, and the Low-P/E Effect', Financial Analysts Journal, 4, p. 21

Fama, Eugene (1965), ‘The Behavior of Stock Market Prices’, Journal of Business 38: 34-105, doi: 10.1086/294743

Fama, Eugene (1970), ‘Efficient Capital Markets: A Review of Theory and Empirical Work’, Journal of Finance 25 (2): 383-417

Filbeck, G, & Visscher, S 1997, 'Dividend yield strategies in the British stock market', European Journal of Finance, 3, 4, pp. 277-289

Grossman, S 1976, 'ON THE EFFICIENCY OF COMPETITIVE STOCK MARKETS WHERE TRADES HAVE DIVERSE INFORMATION', Journal of Finance, 31, 2, pp. 573-585

McQueen, G 1997, 'Does the 'Dow-10 Investment Strategy' Beat the Dow Statistically and Economically?', Financial Analysts Journal, 4, p. 66

Visscher, S, & Filbeck, G 2003, 'Dividend-Yield Strategies in the Canadian Stock Market', Financial Analysts Journal, 59, 1, pp. 99-106