Area of Expertise
- Accounting - Auditing
- Accounting - Financial
- Accounting - Management
- Behavioral Finance
- Corporate Governance
- Cross-Cultural Management
- Executive Compensation
- Financial Services
- Incentive Plans
- Information Economics
- International Business
- International Governance
Giri has previously served as the Program Director for Master of Management at the Schulich School of Business. Before joining York University in 2013, Giri was a Professor of Accounting and Financial Management Services and Associate Dean (Academic) at the DeGroote School of Business, McMaster University. He has also been a visiting professor at Nanyang Technological University, HEC Paris and Erasmus University. At Schulich, Giri has taught courses in the PhD, MBA, IMBA, India MBA, MAcc, MMgt and BBA programs.
Giri’s primary research focus is on financial institutions, in particular bank stability, excessive risk-taking, and financial reporting transparency, as well as corporate governance issues, including CEO compensation, audit quality and tax avoidance.
He has published more than sixty research papers in many academic journals in Accounting, Economics, Finance and International Business, including The Accounting Review, Review of Accounting Studies, Journal of Financial and Quantitative Analysis, Contemporary Accounting Research, Journal of International Business Studies, Journal of Economic Behavior and Organization, Journal of Economic Psychology, European Accounting Review, Journal of Banking and Finance, Auditing: A Journal of Practice & Theory, Journal of Business Ethics, Journal of Accounting and Public Policy, Journal of Accounting, Auditing, & Finance, Journal of Business Finance & Accounting, Journal of Financial Stability, Managerial Decision Economics and Journal of Business Research.
2021-2026 Ron Binns Chair in Financial Reporting, Banking and Governance
2016/2017, 2018/2019, 2020/2021 Schulich Research Fellowship
2017 Nominated for the Schulich Dean’s Research Impact Award
2014 Vernon Zimmerman Best Paper Award at the 26th Asian-Pacific Conference on International Accounting Issues, Taipei
1998/99 and 1999/00 University Teaching Fellow appointed to this compensated position by the Graduate School at Syracuse University
1994-1996 Fulbright Junior Fellowship, Purdue University
1992 E.O.E. Pereira Gold Medal, awarded to the top graduating student at the Faculty of Engineering, University of Peradeniya
1992 University of Peradeniya Golden Jubilee Scholarship, awarded to the best all-round student at the University
1992 University Scholarship, University of Peradeniya, Sri Lanka, awarded for the best performance in the Faculty of Engineering final examinations
Jia, X., K. Kanagaretnam, C.Y. Lim and G.J. Lobo. (Forthcoming), "Financial Literacy and IPO Underpricing", Journal of Financial and Quantitative Analysis .
Dal Maso, L., K. Kanagaretnam, G.J. Lobo and F. Mazzi (Forthcoming), "Does Disaster Risk Relate to Loan Loss Provisions", European Accounting Review.
We examine the relation between disaster risk and banks’ loan loss provisions (LLP). We propose a disaster risk measure based on the natural disasters declared as major disasters by the Federal Emergency Management Agency over a 15-year span. We theoretically support and empirically validate our measure using three different approaches, including the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard exposure, vulnerability and capacity, and hazard characteristics. Using more than 445,000 bank-quarter observations, we document that banks located in U.S. counties with higher disaster risk recognize larger LLP after controlling for other bank-level factors related to LLP. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation and matched samples. In additional analysis, we explore the characteristics that better enable banks to recognize disaster risk in their LLP, and investigate the consequences of managing disaster risk through LLP. Our results are important, especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to proactively manage the resulting credit risk through LLP.
Gong, S., N. Ho, J. Jin, and K. Kanagaretnam (2022), "Audit Quality and COVID-19 Restrictions", Managerial Auditing Journal, 37(8). 1017-1037.
This study aims to examine declines in audit quality after the COVID-19 travel restrictions/stay-at-home orders were issued in the USA in early 2020.
Taking advantage of variation in the dates of stay-at-home orders issued by different US states, this study identifies engagements that were significantly affected by the lock down orders.
The results suggest that engagements affected by the restrictions produced lower audit quality, as measured through restatements and discretionary accruals, relative to those completed before COVID-19 travel restrictions/stay-at-home orders. Further analysis reveals that this decrease in audit quality was attributable to firms with high inventory relative to assets, high R&D expenses relative to assets and non-Big 4 auditors.
This study finds that the restrictions on physical and on-site interaction caused auditors to universally struggle with resource/judgment-intensive accounts such as inventory and R&D expenditures. The results suggest that while Big 4 auditors managed to maintain their status quo level of audit quality following COVID-19 restrictions, non-Big 4 auditors were unable to overcome the challenges of an online work environment and their audit quality declined.
To the best of the authors’ knowledge, this paper is the first to empirically examine changes in audit quality as a response to a substantial change in auditors’ working environment due to the global health crisis. As work-from-home becomes more prevalent in audit firms, the results suggest that, on average, this move does diminish audit quality.
Kanagaretnam, K., G.J. Lobo and L. Zhang. (2022), "Relationship between Climate Risk and Physical and Organizational Capital", Management International Review, 62, 245–283.
We investigate the relationship between climate risk and corporate investment in physical and organizational capital using an international sample of firms from 39 countries. Our main findings show that climate risk is positively associated with physical capital but is negatively related to organizational capital. We also explore the effects of climate vulnerability on these relationships and find that the positive relationship between climate risk and physical capital is mainly driven by climate-nonvulnerable industries, while the negative relationship between climate risk and organizational capital is principally driven by climate-vulnerable industries. Overall, our findings have significant implications for both domestic and multinational enterprises that engage in long-term investments against the background of climate change.
Kanagaretnam, K., J. Lee, C.Y. Lim and G.J. Lobo. (2022), "Trusting the Stock Market: Further Evidence from IPOs around the World", Journal of Banking and Finance, 142.
Using an international sample of IPO firms from 36 countries and a country-level index for societal trust, we find strong evidence that societal trust is negatively associated with the degree of IPO underpricing. In cross-sectional analyses, we find that the effect of societal trust in reducing IPO underpricing is more pronounced when the information environment is less transparent, when the stock market environment is less robust, and when legal institutions are weaker, settings where the effect of trust is likely to be more salient. Our study contributes to and extends the literature by providing strong evidence that an informal institution such as societal trust has an important and consistent influence on international IPO underpricing.
Kanagaretnam, K. and A. Thevaranjan (2021), "The Value of Trust and Fairness in Alliances: An Economic Perspective", Theoretical Economics Letters, 11, 166-185.
In this paper, we develop an analytical model to illustrate the role of trust and fairness in alliances and quantify their economic value to alliance partners. We show that alliance profits and the individual firms’ profits are greatest when partners trust and deal fairly with each other. Moreover, trusting and fair dealing partners benefit the most from the synergies of joint production. We also show that when partners do not trust each other, the alliance profits are reduced by a large amount. The alliance potential is further destroyed if partners do not deal fairly with each other in addition to not trusting each other. The lack of trust and fair play causes firms to fight for control. The fight may result in conflict between the two partners or the emergence of a dominant partner. In the dominant partner case, we show that only alliances with high levels of synergy will be formed. But even then, the dominant partner will realize only a small portion of the benefits from synergy.
Gomaa, M., K. Kanagaretnam, S. Mestleman and M. Shehata (2021), "Test-Bedding the New Reporting Standards for Loan Loss Reserves", Journal of Economic Behavior and Organization, 187, 225–245.Keywords
We test-bed the differences in properties of the Expected Credit Loss (ECL) and Current Expected Credit Loss (CECL) models in a bank loan setting with respect to their impacts on the adequacy, comparability, and predictability of loan-loss reserves and the volatility of reported profit. To do so, we develop a stylized bank-loan setting in a controlled laboratory environment with a series of eight different secured personalloan portfolios. Fifty-six senior university accounting students take the role of loan managers responsible for making annual loan-loss reserve decisions. We find that the laboratory ECL and CECL reserves are greater than the baseline reserves for the Incurred Credit Loss (ICL) model (which was in place before the introduction of ECL and CECL models), but both regimes lead to lower reserves in the laboratory setting than we find for our risk-neutral baselines. In the laboratory, CECL displays fewer uncovered reserves and greater excessive reserves than ECL. The comparability of reserves deteriorates under the two new regimes relative to ICL, and CECL shows relatively more comparable reserves than ECL. While the laboratory ECL exhibits a modest increase in predictability over ICL, CECL shows a significant decline. Finally, profit volatility falls significantly under both ECL and CECL relative to the ICL baseline, and the laboratory results show less volatility than the risk-neutral baseline values.
Jin, J.Y., K. Kanagaretnam, Y. Liu and M. Cheng (2021), "Does Citizens’ Financial Literacy Relate to Bank Financial Reporting Transparency?", European Accounting Review , 30, 887-912.
In this study, we examine the relationship between financial literacy and bank financial reporting transparency for a sample of banks from the U.S. Following prior literature, we employ discretionary loan loss provisions (DLLP) as our primary measure of bank reporting transparency. We argue that the financial literacy of their customers can influence bank managers’ behaviors with respect to both the mechanics of the loan loss provisioning and their opportunistic actions. Financially literate customers represent more stable sources of funding and have more predictable loan loss provisioning that contributes to more persistent earnings. Financial literacy could also enhance customers’ ability to indirectly follow and monitor bank performance and risk-taking. Therefore, bank managers will be less likely to engage in opportunistic earnings manipulation. Following these arguments, we predict that citizens’ financial literacy is positively associated with bank financial reporting transparency. Consistent with our prediction, we find that the magnitude of bank DLLP is negatively related to state-level financial literacy. Moreover, the association between financial literacy and DLLP is higher for banks with more retail deposits and larger consumer loans, the two channels through which financial literacy could influence bank transparency.
Kanagaretnam, K., Jin, J.Y. and Wang, W. (2020), "Societal Trust and Banks’ Funding Structure", Journal of Behavioral and Experimental Finance, 27.
Based on a large sample of U.S. public and private banks from 2000 to 2017, this paper investigates the implications of the county-level societal trust for banks’ funding structure. By using social capital as the proxy for societal trust, we find a significantly positive relationship between societal trust and the core deposits. This finding supports the argument that banks have greater access to retail deposits when they are located in regions with higher levels of societal trust. In an additional analysis, we find that the significant effects of societal trust hold only for smaller private banks.
Del Maso, L., Kanagaretnam, K., Lobo, G.J. and Mazzi, F. (2020), "Is Accounting Enforcement Related to Risk-taking in the Banking Industry?", Journal of Financial Stability, 49.
Using a sample of banks from 36 countries, we document that accounting enforcement is negatively related to bank risk-taking. We also provide evidence that accounting enforcement enhances bank stability during the crisis. In addition, we show that banks assume less risk through more conservative lending decisions and a reduction in complexity in jurisdictions with higher accounting enforcement. Our results show that formal institutions such as accounting enforcement are associated with bank financial decisions and risk-taking behavior.
Kanagaretnam, K., Mawani, A., Shi, G. and Zhou, Z. (2020), "Impact of Social Capital on Tone Ambiguity in Banks’ 10-K Filings", Journal of Behavioral and Experimental Finance, 28.
We examine whether the social capital index of the county where the bank is headquartered is associated with the ambiguity of tone measures constructed from the textual analysis of banks’ 10-K filings. We hypothesize and find that banks located in high social capital areas exhibit lower ambiguous tone in their 10-K filings. Furthermore, the impact of social capital on management’s 10-K disclosure for banks located in high social capital areas is not mitigated during recessionary periods when management may have more unfavorable news to report. Unlike other studies that suggest that social norms can be forsaken when motive and opportunity exist, our results suggest that social capital is reasonably entrenched in banks’ reporting. In contrast, we find that banks located in low social capital areas report more ambiguously during recessionary periods when management may have to report unfavorable news.
Kanagaretnam, K., Kong, X. and Tsang, A. (2020), "Home and Host Country IFRS Adoption and Cross-delisting", Journal of International Business Studies, 51, 1008–1033.
This study examines whether and how the mandatory adoption of international financial reporting standards (IFRS) affects a firm’s cross-delisting decision. Using a comprehensive sample of international cross-delistings, we show that mandatory IFRS adoption in the cross-listing host countries of multinational enterprises (MNEs) increases the delisting propensity of non-IFRS-reporting firms. In contrast, mandatory IFRS adoption in both home and host countries of cross-listing firms decreases the delisting propensity of MNEs in the post-IFRS period. The results of cross-sectional tests further suggest that the increased cross-delisting propensity for domestic GAAP-reporting firms post-IFRS adoption in foreign host countries is more pronounced for firms with a greater difference between domestic GAAP and IFRS. Overall, our results show the differential effects of IFRS adoption in home/host countries of MNEs on their cross-delisting decisions.
Deng, C., Kanagaretnam, K. and Zhou, Z. (2020), "Do Locally Based Independent Directors Reduce Corporate Misconduct? Evidence from Chinese Listed Firms", Journal of International Accounting Research, 19(3), 61-90.
We explore the influence of the localness of independent directors on Chinese listed firms’ fraudulent and non-compliant practices. We are motivated by the dynamics between monitoring and favoritism—the moving parts driving the association between geographic proximity and monitoring outcomes. In our analysis of A-share listed firms in China between 2007 and 2013, we find that local independent directors at both the provincial and the city-levels reduce the frequency and magnitude of the misconduct by listed firms. Furthermore, the monitoring effect is stronger for independent directors who are in the same province/different city than those in the same province/same city, which suggests that while the monitoring effect of localness remains constant, the favoritism effect is stronger for independent directors who reside in the same city. We also find that political connections negatively moderate the effect of local independent directors’ monitoring function, especially with non-state-owned firms.
Gomaa, M., Kanagaretnam, K., Mestleman, S. and Shehata, M. (2019), "Testing the Efficacy of Replacing the Incurred Credit Loss Model with the Expected Credit Loss Model", European Accounting Review, 28(2), 309-334.
We use a controlled laboratory environment to provide evidence on the potential efficacy of the replacement of the Incurred Credit Loss (ICL) Model of International Accounting Standard (IAS 39) by the Expected Credit Loss (ECL) model of IFRS 9 to account for credit impairment losses. We focus on the simplified version of the ECL model using an uncertain production environment as the context. We induce incentives consistent with the existing rigid rule-based ICL model and the proposed forward-looking principle-based ECL model. Our primary finding is that the combined effects of eliminating the minimum ‘probable’ threshold condition together with allowing managers to incorporate forward-looking information increase both the amount and adequacy of periodic reserve decisions. In addition, we analyze the effects of increased flexibility under the new credit-loss model on earnings management using three different compensation schemes. We find that while the replacement of the ICL model with the ECL model facilitates higher reserves, the resulting increased earnings management varies across compensation schemes, is less than predicted, and does not offset the potential of the ECL model’s positive effects. The results provide ex ante evidence on the likely intended and unintended consequences of implementing the ECL model.
Kanagaretnam, K,. Jin, J.Y., Liu, Y. and Lobo, J. (2019), "Economic Policy Uncertainty and Bank Earnings Opacity", Journal of Accounting and Public Policy, 38, 199- 218.
Using a sample of U.S. banks and an index for economic policy uncertainty developed by Baker et al. (2016), we investigate whether economic policy uncertainty is systematically related to bank earnings opacity. When economic policy is relatively uncertain, it is easier for bank managers to distort financial information, as unpredictable economic policy changes make assessing the existence and impact of hidden “adverse news” more difficult for investors and creditors. Economic policy uncertainty also increases the fluctuation in banks’ earnings and cash flows, thus providing additional incentives and opportunities for bank managers to engage in earnings management. Our results show that uncertainty in economic policy is positively related to earnings opacity, proxied by the magnitude of discretionary loan loss provisions and the likelihood of just meeting or beating the prior year’s earnings, and negatively related to the level of accounting conservatism (i.e., the timeliness of recognition of bad news relative to good news). Collectively, our results suggest that economic policy uncertainty leads to greater earnings opacity. We also find that the impact of economic policy uncertainty on financial reporting distortion is less pronounced for stronger banks (i.e., banks with high capital ratios).
Kanagaretnam, K., Lobo, G.J., Wang, C. and Whalen, D. (2019), "Cross-Country Evidence on the Relation Between Societal Trust and Risk-Taking by Banks", Journal of Financial and Quantitative Analysis, 54(1), 275-301.
We study the relationship between societal trust and risk-taking in the banking industry. Prior literature has found that societal trust is positively related to both financial reporting conservatism and financial reporting transparency, which reduce bank managers’ ability to take excessive risk. Additionally, bank managers in high-trust countries are more likely to exhibit higher pro-social behavior and, therefore, less likely to take excessive risk for personal benefit. Consistent with these arguments, we document that banks in countries with higher societal trust exhibit lower risk-taking and that these banks also experienced less financial trouble and fewer failures during the 2007–2009 financial crisis.
Kanagaretnam, K., Jin, J.Y., Liu, N. and Liu, Y. (2019), "Banks’ Loan Growth, Loan Quality, and Social Capital", Journal of Behavioral and Experimental Finance, 21, 83-102.
Using a sample of public and private banks in the U.S. and two measures of social capital, we study how social capital relates to banks’ loan expansion strategies and loan quality. A higher loan growth rate in the banking industry usually implies lower loan standards and a higher percentage of future nonperforming loans. We find that social capital is negatively associated with banks’ loan expansion strategy (proxied by banks’ loan growth). We also document that social capital is negatively associated with growth in risky loans (proxied by real estate loans, construction loans, and commercial and industrial loans). Finally, we find that social capital is negatively associated with bank loan loss provisions, change in loan loss allowance, and change in nonperforming loans. These findings are consistent with the notion that social capital is associated with higher loan quality.
Dal Maso, L., Kanagaretnam, K., Lobo, G.J. and Terzani, S. (2018), "The Influence of Accounting Enforcement on Earnings Quality of Banks: Implications of Bank Regulation and the Global Financial Crisis", Journal of Accounting and Public Policy, 37(5), 402-419.Keywords
We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the postcrisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Overall, our results indicate that accounting enforcement reduces opportunistic earnings management.
Kanagaretnam, K., Lee, J., Lim, C.Y. and Lobo, G.J. (2018), "Societal Trust and Corporate Tax Avoidance", Review of Accounting Studies, 23(4), 1588-1628.
Using an international sample of firms from 25 countries and a country-level index for societal trust, we document that societal trust is negatively associated with tax avoidance, even after controlling for other institutional determinants, such as home country legal institutions and tax system characteristics. We explore the effects of two country-level institutional characteristics— strength of legal institutions and capital market pressure—on the relation between societal trust and tax avoidance. We find that the relation between trust and tax avoidance is less pronounced when the legal institutions in a country are stronger and is more pronounced when the capital market pressure is stronger. Finally, we examine the relation between societal trust and tax evasion, an extreme and illegal form of tax avoidance. We show that societal trust is negatively related to tax evasion and the negative relation is less pronounced when legal institutions are stronger.
Kanagaretnam, K., Khokar, R. and Mawani, A. (2018), "Linking Societal Trust and CEO Compensation", Journal of Business Ethics, 151(12), 295-317.
We examine the association between societal trust and the levels of CEO compensation and the proportion of equity-based compensation of 897 firm-years from 18 countries over the 2007–2013 period. We find both the levels of CEO compensation as well as the proportion of equity-based compensation to be lower in countries with higher levels of societal trust. This suggests that costly regulations on CEO compensation may not be as necessary in jurisdictions with higher levels of societal trust. We also examine the association between pay disparity and societal trust. Consistent with our finding of lower pay at the CEO rank, we find pay disparities are lower in countries with higher levels of societal trust.
Kanagaretnam, K., Jin, J.Y. and Lobo, G.J. (2018), "Discretion in Bank Loan Loss Allowance, Risk Taking and Earnings Management", Accounting & Finance, 58(1), 171-193.
We study whether bank managers’ use their discretion in estimating the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We do so by examining whether the use of this discretion relates to bank stability and bank risk taking, or whether it relates to earnings management to meet or beat earnings benchmarks. We find that banks that had higher abnormal ALL during the period prior to the 2007-2009 financial crisis engaged in less risk taking during the pre-crisis period and had a lower probability of failure during the crisis period. In tests related to earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period’s loss avoidance and just meeting or beating the prior year’s earnings. Our results suggest that bank managers use their discretion over ALL for efficiency and not for opportunistic purposes. They inform policy makers and accounting standard setters on banks’ use of accounting discretion as a means to build a cushion against future credit losses as they transition from the incurred loss model to the expected loss model for loan loss accounting.
Kanagaretnam, K., Lee, J., Lim, C.Y. and Lobo, G.J. (2018), "Cross-Country Evidence on the Role of Independent Media in Constraining Corporate Tax Aggressiveness", Journal of Business Ethics, 150(3), 879-902 .
Using an international sample of firms from 32 countries, we study the relation between media independence and corporate tax aggressiveness. We measure media independence by the extent of private ownership and competition in the media industry. Using an indicator variable for tax aggressiveness when the firm’s corporate tax avoidance measure is within the top quartile of each country-industry combination, we find strong evidence that media independence is associated with a lower likelihood of tax aggressiveness, after controlling for other institutional determinants, including home-country tax system characteristics. We also find that the effect of media independence is more pronounced when the legal environment is weaker, and when the information environment is less transparent.
Kanagaretnam, K., Jin, J.Y. and Liu, Y. (2018), "Banks’ Funding Structure and Earnings Quality", International Review of Financial Analysis, 59, 163-178.Keywords
Using a sample of U.S. public and private banks, we examine the implications of banks’ funding strategies for banks’ earnings quality. We find that the ratio of core deposits to total liabilities (CDL), our proxy for bank reliance on retail deposits over wholesale funds, is negatively and significantly associated with the magnitude of earnings management through discretionary loan loss provisions (DLLP). This finding is consistent with the arguments that retail deposits are relatively more stable and information-insensitive, reflect a more conservative business model, and attract more intensive monitoring from the Federal Deposit Insurance Corporation (FDIC) than wholesale funds. We find that the inverse relationship between retail funding and earnings management holds for both incomeincreasing and income-decreasing DLLP. Besides, reliance on retail funding decreases the likelihood of meeting-or-beating earnings benchmark, and the extent of income smoothing through loan loss provisions (LLP). In an additional analysis, we find that banks with higher CDL are exposed to lower asset deterioration risk, proxied by large non-performing loans and loan charge-offs during the financial crisis period 2007-2009. Collectively, our results indicate that the banks’ funding strategy that relies more on retail deposits as opposed to wholesale funds increases banks’ earnings quality.
Kanagaretnam, K., Jin, J.Y., Lobo, G.J. and Mathieu, R. (2017), "Social Capital and Bank Stability", Journal of Financial Stability, 32, 99-114.
Using a sample of public and private banks, we study how social capital relates to bank stability. Social capital, which captures the level of cooperative norms in society, is likely to reduce opportunistic behavior (Jha and Chen 2015; Hasan et al. 2016) and, therefore, act as an informal monitoring mechanism. Consistent with our expectations, we find that banks in high social capital regions experienced fewer failures and less financial trouble during the 2007–2010 financial crisis than banks in low social capital regions. In addition, we find that social capital is negatively associated with abnormal risk-taking and positively associated with accounting transparency and accounting conservatism in the pre-crisis period of 2000–2006, indicating that risk-taking, accounting transparency, and accounting conservatism are possible channels through which social capital affected bank stability during the crisis.
Kanagaretnam, K., Lee, J., Lim, C.Y. and Lobo, G.J. (2017), "Effects of Informal Institutions on the Relationship between Accounting Measures of Risk and Bank Distress", Journal of International Accounting Research, 16(2), 37-66.Keywords
We investigate the effects of informal institutions (trust, religiosity and the media) on the relationship between accounting-based risk measures and bank distress. We conduct our analysis in two stages. In the first stage, we extend the prior literature by documenting a link between accounting-based risk measures and bank distress during the 2008-2009 financial crisis. In particular, given the environment characterized by rapid growth in financial innovation and complex financial transactions prior to the crisis, simple accounting-based risk measures continue to predict bank distress during this crisis period. In the second stage, we address our main research question related to the effects of selected informal institutions (societal trust, religiosity, and the media) in enhancing the predictive ability of accounting-based risk measures. As hypothesized, we find that these informal institutions enhance the predictive ability of accounting-based risk measures. Our results inform regulators that the focus on strengthening formal institutions should not ignore country-specific informal institutional structures.
Kanagaretnam, K., Lee, J., Lim, C.Y. and Lobo, G.J. (2016), "Relation Between Auditor Quality and Tax Aggressiveness: Implications of Cross-Country Institutional Differences", Auditing: A Journal of Practice and Theory, 35, Auditing: A Journal of Practice and Theory.Keywords
Using an international sample of firms from 31 countries, we study the relation between auditor quality and corporate tax aggressiveness. Using an indicator variable for tax aggressiveness when the firm’s corporate tax avoidance measure is within the top quintile of each country-industry combination, we find strong evidence that auditor quality is negatively associated with the likelihood of tax aggressiveness, even after controlling for other institutional determinants such as home-country tax system characteristics. We also find that the negative relation between auditor quality and the likelihood of tax aggressiveness is more pronounced in countries where investor protection is stronger, auditor litigation risk is higher, the audit environment is better, and capital market pressure is higher.
Kanagaretnam, K., Lobo, G.J., Ma, C. and Zhou, J. (2016), "National Culture and Internal Control Weaknesses around the World", Journal of Accounting, Auditing & Finance, 31, 28-50.Keywords
The scandals surrounding questionable accounting practices and corporate wrongdoing during 2000-2008 have often been attributed to the lack of effective internal controls. We examine the relations between national culture and the incidence and number of reported internal control material weaknesses (ICMWs). We focus on three dimensions of national culture—individualism, uncertainty avoidance, and power distance (as identified by Hofstede)—which we hypothesize are related to ICMW. Consistent with our hypotheses, cross-country analysis indicates that individualism and power distance are positively related, and uncertainty avoidance is negatively related, to the existence of ICMW. We also find a significant positive relation between individualism and the number of ICMWs. These results are robust to a variety of sensitivity tests. In addition, we document that all three dimensions of national culture influence the propensity to remediate previously identified ICMW.
Kanagaretnam, K., Zhang, G. and Zhang, S. (2016), "CDS Pricing and Accounting Disclosures: Evidence from U.S. Bank Holding Corporations during the Recent Credit Crisis", Journal of Financial Stability, 22, 33-44.
We investigate what accounting information is important for explaining the credit risk for U.S. bank holding corporations (BHCs) during the recent crisis and find that several CAMELS variables are significantly associated with credit default swap (CDS) spreads. Consistent with industry experience, BHCs with more real estate loans do have higher credit risk as measured by CDS spread. With the newly available finer disclosures for the securities account, we find a positive association between risky assets-backed securities (ABS) and CDS spreads. Our results confirm real estate risk as a major risk for U.S. BHCs during the recent financial crisis. Moreover, our study highlights the importance of distinguishing loans/securities investments by type in understanding the relationship between accounting information and bank credit risk. In addition, we do not find significant association between several accounting-based risk measures and the CDS spread, a forward-looking market-based risk measure.
Kanagaretnam, K., Lobo, G.J., Wang, C. and Whalen, D.J. (2015), "Religiosity and Risk-taking in International Banking", Journal of Behavioral and Experimental Finance, 7, 42-59.
We examine the relationship between religiosity and risk-taking in the international banking sector. Previous research indicates that individuals who are more religious have greater risk aversion. Additionally, prior literature documents a positive relation between religiosity and both financial accounting transparency and timely recognition of bad news. Given timely recognition of future loan losses, religiosity could constrain excessive risk-taking through enhanced internal and external monitoring. We hypothesize and find that banks located in more religious countries exhibit lower levels of risk in their decision-making. We also demonstrate that banks in more religious countries were less likely to encounter financial difficulty or fail during the 2007–2009 financial crisis.
Kanagaretnam, K., Lobo, G.J. and Wang, C. (2015), "Religiosity and Earnings Management: International Evidence from the Banking Industry", Journal of Business Ethics, 132(2), 277-296.
Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss-avoidance and just-meeting-or-beating prior year’s earnings. We also find that religiosity reduces income-increasing earnings management through abnormal loan loss provisions. In additional tests, we document that religiosity increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis (i.e., 2007–2009), our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance.
Gomaa, M., Kanagaretnam, K., Mestelman, S. and Shehata, M. (2015), "Exercising Empowerment in an Investment Environment", Journal of Behavioral and Experimental Finance, 7, 33-41.
Using data from a laboratory-controlled environment we analyze the decisions of principals to veto the allocations of grossed-up investments proposed by their agents in a modified trust game. Using probit analysis, we find that the trust displayed by the principal and the trustworthiness of the agent are statistically significant variables in estimating the likelihood that a principal will exercise a veto and that the notion of fairness is important in explaining veto decisions. We also analyze the surpluses before and after the exercise of vetoes and find that potential surpluses rise with the introduction of empowerment. However, actual gains are not different from those realized in environments in which principals are not empowered. This result is qualified by the recognition that the number of decision rounds that are played by the participants in this experiment may not be sufficient for the full effect of empowerment to be realized.
Kanagaretnam, K., Mestelman, S., Nainar, S.M.K. and Shehata, M. (2014), "Transparency and Empowerment in an Investment Environment", Journal of Business Research, 67(9), 2030-2038.
In a laboratory-controlled environment we provide experimental evidence on the effects of transparency (complete over incomplete information) and empowerment on trust and trustworthiness. We implement a simple version of the standard two-person investment game in a repeated game context with multiple treatments under two information environments. We find that when principals are empowered by being able to penalize agents who may not act in a way the principal believes is in the principal’s best interest, the level of trust and investment increases over that which is realized in the absence of empowerment regardless of the degree of transparency. In transparent environments the effect of empowerment is about the same regardless of whether empowerment is introduced or removed. However, in opaque environments, the loss of empowerment has a substantially greater negative effect on trust than the positive effect associated with the introduction of empowerment.
Kanagaretnam, K., Lim, C.Y. and Lobo, G.J. (2014), "Influence of National Culture on Accounting Conservatism and Risk-Taking in the Banking Industry", The Accounting Review, 89(3), 1115-1149.
Using an international sample of banks and country-level indices for individualism and uncertainty avoidance as proxies for national culture, we study how differences in culture across countries affect accounting conservatism and bank risk taking. Consistent with expectations, our cross-country analysis indicates that individualism is negatively (positively) related to conservatism (risk taking) and uncertainty avoidance is positively (negatively) related to conservatism (risk taking). We also find that cultures that encourage higher risk taking experienced more bank failures and bank troubles during the recent financial crisis.
Kanagaretnam, K., Lim, C.Y. and Lobo, G.J. (2014), "Effects of International Institutional Factors on Earnings Quality of Banks", Journal of Banking and Finance, 39, 87-106.
We examine the relation between legal, extra-legal and political institutional factors and earnings quality of banks across countries. We predict that earnings quality is higher in countries with legal, extra-legal and political systems that reduce the consumption of private control benefits by insiders and afford outside investors greater protection. Using a sample of banks from 35 countries during the pre-crisis period from 1993 to 2006, we find that all five measures of earnings quality studied are higher in countries with stronger legal, extra-legal and political institutional structures. We also find that banks in countries with stronger institutions are less likely to report losses, have lower loan loss provisions, and higher balance sheet strength during the 2007–2009 crisis period. Our findings highlight the implications of country level institutional factors for financial reporting quality and are relevant to bank regulators who are considering additional regulations on bank financial reporting.
Kanagaretnam, K., Lobo, G. and Whalen, D. (2013), "Relationship Between Board Independence and Firm Performance Post-Sarbanes Oxley", Corporate Ownership and Control, 11, 65-73.
We examine the relationship between board independence and firm performance over multiple years, post-Sarbanes Oxley. The enactment of the Sarbanes-Oxley Act (SOX) in July, 2002 coincided with the NYSE/NASDAQ proposals to alter their standards for listed companies. These changes included a requirement that boards be comprised of a majority of independent directors and tightened the criteria for a director to be considered “independent”. We hypothesize and find that the passage of SOX, together with the new NYSE/NASDAQ regulations, result in independent directors who are more effective monitors of management, leading to stronger firm performance. Our results should bolster investor confidence in the financial markets at a time when the NYSE/NASDAQ has strengthened the corporate governance standards for listed companies.
Jin, J., Kanagaretnam, K., Lobo, G. and Mathieu, R. (2013), "Impact of FDICIA Internal Controls on Bank Risk Taking", Journal of Banking and Finance, 37, 614-624.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 was designed, among other things, to introduce risk-based deposit insurance, increase capital requirements, and improve banks’ internal controls. Of particular interest in this study are the requirements for annual audit and reporting of management’s and auditor’s assessment of the effectiveness of internal control for banks with $500 million or more in total assets (raised to $1 billion in 2005). We study the impact of these requirements on banks’ risk-taking behavior prior to the recent financial crisis and the consequent implications for bank failure and financial trouble during the crisis period. Using a sample of 1138 banks, we provide evidence that banks required to comply with the FDICIA internal control requirements have lower risk taking in the pre-crisis period. Specifically, the volatility of net interest margin, the volatility of earnings, and Z score show less risk-taking behavior. Furthermore, these banks are less likely to experience failure and financial trouble during the crisis period.
Jin, J., Kanagaretnam, K. and Lobo, G. (2013), "Unintended Consequences of Increased Asset threshold for FDICIA Internal Controls: Evidence from U.S. Private Banks", Journal of Banking and Finance, 37, 4879-4892.
We examine the unintended consequences of the 2005 increase from $500 million to $1 billion in the asset threshold for the Federal Deposit Insurance Corporation Improvement Act (FDICIA) internal control reporting requirements. We focus on a test sample of banks that increased their total assets from between $100 million and $500 million prior to the change in regulation to between $500 million and $1 billion within two years following the change. These “affected” banks are no longer subject to the internal control requirements but would have been had the regulation not been changed. We hypothesize that these affected banks are likely to make riskier loans, which will increase the likelihood of failure during the crisis period. We find evidence consistent with this hypothesis. Affected banks have higher likelihood of failure during the crisis period than banks from two different control samples. We also find that auditor reputation (i.e., whether the bank is audited by a Big 4 auditor or an industry specialist auditor) has a moderating effect on the likelihood of failure for these affected banks.
Kanagaretnam, K., Lobo, G. and Mathieu, R. (2012), "CEO Stock Options and Analysts’ Forecast Accuracy and Bias", Review of Quantitative Finance & Accounting, 38, 299–322.
This paper investigates the relationship between CEO stock options and analysts’ earnings forecast accuracy and bias. A higher level of stock options may induce managers to undertake riskier projects, to change and/or reallocate their effort, and to possibly engage in gaming (such as opportunistic earnings and disclosure management). These managerial behaviors result in an increase in the complexity of forecasting and hence, less accurate analysts’ forecasts. Analysts’ optimistic forecast bias may also increase as the level of stock options pay increases. Because forecast complexity increases with stock options pay, analysts, needing greater access to management’s information to produce accurate forecasts, have incentives to increase the optimistic bias in their forecasts. Alternatively, a higher level of stock options pay may lead to improved disclosure because it better aligns managers’ and shareholders’ interests. The improved disclosure, in turn, may result in more accurate and less biased analysts’ forecasts. Our empirical evidence indicates that analysts’ earnings forecast accuracy decreases and forecast optimism increases as the level of CEO stock options increases. This evidence suggests that the incentive alignment effects of stock options are more than offset by the investment, effort allocation and gaming incentives induced by stock options grants to CEOs.
Kanagaretnam, K., Mestelman, S., Nainar, S. and Shehata, M. (2012), "The Impact of Empowering Investors on Trust and Trustworthiness", Journal of Economic Psychology, 33, 566–577.
This paper uses a controlled laboratory environment and a two-person investment game in a multi-period setting to examine the impact of empowering investors with the right to veto the investee’s profit distribution on trust and trustworthiness. Two forms of vetoes are tested: the first is costly for the investor to implement and the second is costless. One of the key findings is that the empowerment of investors through both costless and costly vetoes significantly increases trust by over 30% in both cases. To control for a treatment sequence effect, we conducted the experiment in a reverse order. We observe a comparable loss in trust when the power to veto is removed. Further analysis of veto decisions indicates that empowering investors increases both trust and trustworthiness without an undue abuse of the power to veto and that the veto decisions are mainly driven by unfair responses, consistent with the notion that most vetoes are cast by investors whose trust has been betrayed.
PhD - Advanced Topics in Capital Markets Research
PhD - Empirical Methods in Accounting Research
MBA/MAcc - Financial Reporting and Analysis
IMBA- Global Management Accounting
MBA - Management Accounting
MMgt - Management Accounting
Project Title Role Award Amount Year Awarded Granting Agency Project TitleFinTech and Discrimination in Lending RolePrincipal Investigator Award Amount$55,500.00 Year Awarded2022-2025 Granting AgencySocial Sciences and Humanities Research Council - Insight Development Grant Project TitleClimate Risk, Information Environment and Cost of Equity Capital RolePrincipal Investigator Award Amount$50,000.00 Year Awarded2020-2022 Granting AgencySocial Sciences and Humanities Research Council - Insight Development Grant Project TitleRelative Importance of Country-Level Institutions for Financial Decisions RolePrincipal Investigator Award Amount$98,000.00 Year Awarded2019-2023 Granting AgencySocial Sciences and Humanities Research Council - Insight Grant Project TitleInterest Rates, Monetary and Economic Policy Uncertainty, and Banks’ Financial Reporting Quality RoleCo-Principal investigator Award Amount$40,000.00 Year Awarded2018-2019 Granting AgencyCanadian Securities Institute (CSI) Research Foundation Project TitleTest-bedding a New Credit Loss Model: Searching for the Consequences of a Rule Change in a Controlled Laboratory Environment RoleCo-Investigator Award Amount$44,787.00 Year Awarded2016-2018 Granting AgencySocial Sciences and Humanities Research Council - Insight Development Grant Project TitleThe Effects of Economic Policy and Monetary Policy Uncertainty on Bank Financial Reporting RoleCo-Investigator Award Amount$52,000.00 Year Awarded2016-2019 Granting AgencySocial Sciences and Humanities Research Council - Insight Grant Project Title RolePrincipal Investigator Award Amount$12,000.00 Year Awarded2015-2016 Granting AgencyCPA Schulich Alliance Project Title RoleCo-Investigator Award Amount$10,000.00 Year Awarded2015-2016 Granting AgencyCA/DeGroote Centre Project TitleEffects of National Level Trust on Bank Risk Taking, Performance and Financial Reporting RolePrincipal Investigator Award Amount$92,000.00 Year Awarded2014-2019 Granting AgencySocial Sciences and Humanities Research Council - Insight Grant Project TitleEffects of Governance on Bank Accounting Transparency RoleCo-Investigator Award Amount$57,000.00 Year Awarded2014-2017 Granting AgencySocial Sciences and Humanities Research Council - Insight Development Grant Project Title RoleCo-Investigator Award Amount$10,000.00 Year Awarded2013-2015 Granting AgencyCA/DeGroote Centre Project TitleThe Impact of Internal Control Regulations on Bank Risk Taking, with Justin Jin (McMaster University) RoleCo-Investigator Award Amount$32,000.00 Year Awarded2012-2015 Granting AgencySocial Sciences and Humanities Research Council - Insight Development Grant Project Title RolePrincipal Investigator Award Amount$7,500.00 Year Awarded2012-2013 Granting AgencyCA/DeGroote Centre - Research Grant Project Title RolePrincipal Investigator Award Amount$9,000.00 Year Awarded2011-2013 Granting AgencyCMA Ontario - Research Grant Project TitleAccounting, Audit and Institutional Properties of Troubled Banks, with Justin Jin (McMaster University) and Gerry Lobo (University of Houston) RolePrincipal Investigator Award Amount$50,000.00 Year Awarded2010-2014 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project Title RolePrincipal Investigator Award Amount$10,000.00 Year Awarded2010-2013 Granting AgencyCMA Ontario - Research Grant Project Title RolePrincipal Investigator Award Amount$10,000.00 Year Awarded2009-2012 Granting AgencyCMA Ontario - Research Grant Project TitleEffective Tax Rates and Optimal Leverage Ratios under a Convex Tax Schedule, with Sudipto Sarkar (McMaster University) RoleCo-Investigator Award Amount$79,000.00 Year Awarded2008-2012 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project TitleRole of Internal and External Monitoring and Compensation Incentives in Earnings Management in Banks, with Robert Mathieu (Wilfrid Laurier University) and Gerry Lobo (University of Houston) RoleCo-Investigator Award Amount$65,000.00 Year Awarded2007-2011 Granting AgencySocial Sciences and Humanities Research Council - Standard Research Grant Project Title RolePrincipal Investigator Award Amount$10,000.00 Year Awarded2006-2009 Granting AgencyCMA Ontario - Research Grant Project TitleExecutive Compensation, Firm Performance and the Quality of Earnings, with Robert Mathieu (Wilfrid Laurier University) RolePrincipal Investigator Award Amount$72,500.00 Year Awarded2003-2007 Granting AgencySocial Sciences and Humanities Research Council - INE Standard Research Grant Project TitleImpact of Internet on Productivity and Work Habits, with Mohamed Shehata and Khalid Nainarr. This Grant Proposal was ranked first out of thirteen INE applications submitted to this SSHRC Selection Committee. RoleCo-Investigator Award Amount$74,662.00 Year Awarded2002-2006 Granting AgencySocial Sciences and Humanities Research Council - INE Standard Research Grant Project TitleMarket risk and Firm Valuation in the New Economy, with Madhu Kalimipalli (Wilfrid Laurier University) RoleCo-Investigator Award Amount$72,585.00 Year Awarded2002 Granting AgencyCanada Foundation for Innovation - New Opportunities Grant Project TitleStock Option Overhang, Firm Performance and Corporate Governance, with H.S.B. Herath (University of Northern British Columbia), and Robert Mathieu (Wilfrid Laurier University) RoleCo-Investigator Award Amount$10,000.00 Year Awarded2002 Granting AgencyCanadian Academic Accounting Association - Research Grant