Variables

Definitions

Variables of interest:

AQ

Accrual quality measure, calculated as the inverse value of the absolute value of residuals from regression specification that relates current accruals to cash flows, augmented with the fundamental variables from the modified Jones model.

PActiveIndep

Director activism measure, calculated as the proportion of independent outside directors who are active in terms of risk-reduction in the board.

Control variables:

Size

Firm size measure, calculated as the natural logarithm of net sales.

Lev

Leverage measure, calculated as the ratio of total liabilities to total assets.

MTB

Growth opportunity measure, calculated as the ratio of market value of equity to book value of equity.

ROA

Performance measure, calculated as the ratio of net income before extraordinary items to total assets.

Dloss

A dummy variable that equals 1 if the firm experiences loss in the year, or 0 otherwise.

Finance

A dummy variable that equals 1 if the firm raises external financing by issuing debt or equity (i.e. common shares outstanding increases 10% or Long-term debt increases 20% from t to t − 1; firms that conduct merger and acquisition are not included), or 0 otherwise.

MA

=

A dummy variable that equals 1 if the firm experiences a merger or acquisition, or 0 otherwise.

Pindep

=

The proportion of independent outside directors on the board.