Optimal constrained strategies for factor-based investing in the Brazilian stock market

ID: 78468

Authors: Marcelo Lewin, Carlos Heitor Campani.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: dynamic asset allocation , leverage and portfolio constraints , regime-switching models , risk factors , stochastic differential recursive utility

Document type: Article (Portuguese) Show Abstract

The paper examines investment strategies for factor-based portfolios formed by integrating a regime-switching model with a stochastic recursive utility function. Drawing from the seminal works of Fama and French (1993) and Carhart (1997), the authors identify four risk factors within the Brazilian stock market. Subsequently, employing the CGL model proposed by Campani et al. (2021), the study develops investment strategies to diversify across portfolios formed with these risk factors. The CGL model provides the framework to apply the stochastic recursive utility function to estimate the strategies based on regimes, from which the authors implement dynamic constraints to optimally control the portfolio weights. They then conduct a performance analysis through an out-of-sample exercise to compare the regime-switching strategies with benchmarks formed by single-state passive and active strategies. The empirical findings demonstrate the outperformance of regime-switching strategies, as evidenced by superior Sharpe ratios across both the complete sample and shorter subsamples within the exercise. The results also reveal that the unleveraged regime-switching strategy consistently exhibits the lowest volatility within each sample subset. In addition, the analysis of certainty equivalent returns confirms the statistical significance of the outperformance of regime-switching strategies over the benchmarks. The investigation focused on the Brazilian stock market to examine the potential benefits and efficacy of applying such a strategy in an emerging market context. Ultimately, the findings underscore that factor-based strategies formulated through a regime-switching model using a stochastic recursive utility function have the potential to outperform traditional benchmarks in terms of risk-adjusted returns within the Brazilian stock market, offering actionable insights for investors navigating the Brazilian landscape.

Financial constraints in the Brazilian capital market: A natural experiment of CVM Instruction 476

ID: 78467

Authors: Wilson Tarantin Junior, Lucas A. B. de C. Barros.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: capital market , financial constraints , financing , issuance costs , legal constraints

Document type: Article (Portuguese) Show Abstract

The study analyzes the impacts of Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários [CVM]) Instruction n. 476, January 16th, 2009 on the financing of Brazilian companies. This regulatory change may have reduced financial constraints by lowering the costs of issuing debentures in the domestic capital market, increasing the speed of access to capital, and removing a regulatory barrier for private corporations, which were previously prevented from issuing debentures in the domestic capital market. There are few studies that. analyze specific frictions in the domestic capital market, and none that focus on this particular regulatory change and its differential impact on private corporations. The introduction of CVM 476 is treated as a natural experiment capable of provoking an exogenous shock to reduce the financial constraints faced by Brazilian corporations. Difference-in-differences models are used to identify the causal effects of interest, using limited liability companies as a control group and examining the differential effects between public and private firms. There is a growing academic and social interest in the effects of market frictions on firm decisions and performance. In this context, it is particularly relevant to assess the impact of regulatory changes such as the one focused on in this research. The results are relevant for regulators and other capital market agents interested in understanding the relevance of market frictions for access to external financing and how they can be mitigated through regulatory change, potentially contributing to the optimization of firms’ capital structure. The results indicate that CVM 476 was able to increase the total leverage and especially the long-term leverage of corporations, with the effect being greater for private corporations, which is unprecedented in the literature.

Transition between firm life cycle stages and earnings management strategies

ID: 78466

Authors: João Paulo Machado Ribeiro, Edilson Paulo, Cristian Baú Dal Magro.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: discretionary accruals , earnings quality , firm life cycle , learnings management

Document type: Article (Portuguese) Show Abstract

This study analyzed the effects of firm life cycle stages (LCS) and their changes on the level of adoption of earnings management strategies. Gaps were identified regarding the effects of the transition between various life cycle stages and the propensity for accrual-based earnings management (AEM) and real activities earnings management (REM), as well as the impacts on the trade-off or complementarity relationship between them. The findings reinforce the need for auditors, financial analysts, investors, and regulators to consider company context and specific characteristics, such as firm cycle stage, when analyzing earnings management. The results suggest a greater propensity for all earnings management strategies, in order to hide financial difficulties, at the beginning of the decline stage. A total of 185 companies listed on the Brazilian capital market were analyzed for the period from 2011 to 2022, with data collected from Refinitiv®. Park and Chen’s (2006) model has been adopted to classify firm life cycle stages, and the models were estimated by the system generalized method of moments (system GMM). Growth stage firms use overproduction and avoid discretionary expense cuts as REM strategies. However, when transitioning from the growth stage to the mature stage, they are more likely to cut discretionary expenses as an REM strategy. The use of AEM is more prevalent in the decline stage, when compared to mature stage companies. The findings add evidence to the literature that the trade-off or complementarity relationship between AEM and REM is influenced by firm LCS and their transitions.

Effects of company life cycle on matching and accrual quality

ID: 78465

Authors: Ana Mariella Bandeira, José Elias Feres de Almeida.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: accrual quality , life cycle stages , matching

Document type: Article (Portuguese) Show Abstract

This study examines the effects of life cycle stages on the quality of revenue-expense matching and accruals of Brazilian public listed companies, and how matching affects accrual quality. Studies on the effects of firm life cycle stages on revenue-expense matching are still incipient. Furthermore, there is no prior study interconnecting the two conceptual and empirical models in a joint perspective. The study brings evidence that firm life cycle is a relevant factor in the analysis of the association between revenues and expenses and accruals with operating cash flows. This association, if properly carried out by firms, can benefit investors, analysts, and creditors. Evidence suggests that firms with more resources available due to their life cycle, such as maturity, have a better matching quality and, consequently, also have higher accrual quality. This allows for a better understanding of firm performance and cash inflows and outflows. This study is descriptive and quantitative, and the effects of life cycle stages on matching and accrual quality were verified by multiple linear regressions using ordinary least squares, controlling for industry and year fixed effects. Our sample consists of 399 public companies listed on the B3 between 2010 and 2021 using the models of Dechow and Dichev (2002) and Dichev and Tang (2008). The results show that life cycles affect revenue-expense matching and accrual quality differently in the Brazilian environment. Also, our findings expand prior literature by identifying that firms with better matching quality are associated with better accrual quality.

Regulatory impacts on investments by Pension Funds in Brazil

ID: 78464

Authors: Leonardo Cardoso, João Vinícius de França Carvalho, Alexandre Teixeira Damasceno.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: asset management , Assets and Liabilities Management , defined benefit plans , Pension Funds

Document type: Article (Portuguese) Show Abstract

This article compares the efficient investment frontiers in light of the new standard of allocative thresholds allowed for assets guaranteeing provisions established by Resolutions of the National Monetary Council (Conselho Monetário Nacional [CMN]) Nos. 4661/2018 and 4994/2022, verifying the probability of achieving returns that cover actuarial liabilities requiring a guarantee of minimum performance. This study innovates by assessing regulatory impacts on efficient Pension Fund (Entidades Fechadas de Previdência Complementar [EFPCs]) frontiers, comparing the results of risks and viable returns obtained by the new standards, using Conditional Value-at-Risk as a coherent risk measurement, as it meets the axiom of subadditivity. Furthermore, we provide measurements of the probability of achieving specific actuarial targets and of the portfolio generating a negative result. The national supplementary pension system recently went through a crisis, related to fraud and corruption schemes in the State-owned EFPCs triggered in 2016 through Operation Greenfield. As the main response to the current context, brought by the new normative acts, risk management processes were adopted and implemented and more refined Corporate Governance mechanisms were defined in the decision-making processes related to the investment policies adopted by an EFPC. Including the flexibilization of allocative thresholds. An impact of this research is to provide theoretical support for the pension sector, in light of macroeconomic contexts possibly marked by lower interest rates, in addition to assessing the practical implications of changes proposed in the new normative resolutions. Especially because EFPCs have systemically relevant actuarial liabilities. The methodology involved conditional optimization of portfolios using Asset-Only Assets and Liabilities Management (ALM) models. Despite the flexibility of new standards, there are no differences in the returns potentially obtained, given the overlapping of efficient frontiers of models in each standard. It was found that the unrestricted model showed higher returns with substantially lower volatility when compared to restricted models, pointing out that portfolios with fewer legal constraints can generate less exposure to EFPC net worth, something extremely important for defined benefit plans.

Auditor-provided tax services and tax accrual quality in Brazil

ID: 78463

Authors: Luis Paulo Guimarães dos Santos, Sheizi Calheira de Freitas.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: auditor , audit quality , corporate income tax , knowledge spillover , tax accrual

Document type: Article (Portuguese) Show Abstract

This research aimed to analyze the temporal association between auditor-provided tax services (APTS) and corporate income tax accrual quality in the Brazilian context. Studies analyzing the influence of APTS on tax accrual quality are scarce and have only been carried out in the United States of America (USA), so that this relationship is not yet clearly understood due to lack of evidence in other institutional contexts. Research results expand international evidence on the theme and enrich empirical literature on auditing and taxation. Also, these results have implications for regulators, companies that contract tax services from their auditors, auditing firms that provide such services, and academic researchers, because they contradict the knowledge spillover argument and reinforce the idea that APTS can compromise auditor independence in the case of institutional configurations such as the Brazilian one. The research adapted the empirical model of Choudhary et al. (2021) and estimated the relationship between the variables of interest using panel data with robust standard errors and a variety of econometric models that address issues related to unobserved heterogeneity between firms, endogeneity, selection bias, outliers, and specification error. We document new evidence of the negative and statistically significant association between APTS and income tax accrual quality, contributing to the ongoing debate about imposing limitations on auditor provision of non-audit services and the role of tax services in accounting information quality

Audit quality and sentiment biases in going-concern opinions

ID: 78462

Authors: Carlos André Marinho Vieira, Márcio André Veras Machado.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: audit quality , going-concern opinion , sentiment

Document type: Article (Portuguese) Show Abstract

This research analyzed whether audit quality reduces sentiment biases existing in an auditor’s opinion. Considering that measures based on data from opinion surveys have limitations regarding interpretation, and that aggregate measures using market data vary only in time series and not in cross-section, the results observed in this study bridge a major gap, by showing not only that sentiment influences an auditor’s opinion, but also that a proxy for sentiment at the firm level is more appropriate than aggregate measures. Sentiment can influence an independent auditor’s opinion on the operational continuity of the client company and audit quality can reduce sentiment biases existing in an auditor’s opinion. In optimistic times, auditors subject to sentiment may be less likely to issue negative opinions on the operational continuity of audited companies undergoing financial difficulties. Considering audit quality as a characteristic of audit firms established a priori and based on the premises that higher audit quality is linked to greater auditor’s expertise, experience, and independence, it was expected that higher quality would be able to reduce sentiment biases existing in an auditor’s opinion. To test this hypothesis, 251 non-financial companies listed on the B3 were analyzed by using logistic regression within the period from 2010 to 2018. Firm-level sentiment showed a negative association with the probability of issuing going-concern opinions, indicating that auditors issue fewer negative opinions on the operational continuity of audited companies when firm sentiment is optimistic. Thus, evidence suggests that the research hypothesis is not rejected, considering that more independent auditors are able to mitigate the bias of this type of sentiment on their opinion regarding company operational continuity.

Professional skepticism of internal auditors and perception of risks in internal controls

ID: 78461

Authors: Emilly Stein, Paulo Roberto da Cunha.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: internal audit , professional skepticism , risks in internal controls

Document type: Article (Portuguese) Show Abstract

This article analyzes the relationship between professional skepticism of internal auditors and perception of risks in internal controls. Internal auditors know the company’s functioning and environment, so their premise lies on the prevention and identification of signs of errors, fraud, risks, and weaknesses in internal control systems. Even though the literature does not emphasize the theme in internal auditing, the internal auditor must exercise professional skepticism in audit work, especially in an environment that exhibits reduced independence. Given the relevance of professional skepticism in audit work, internal auditors must also take a skeptical attitude, helping to prevent and identify signs of fraud, risks, and weaknesses in internal control systems. Research relating the auditor’s skeptical trait to the ability to perceive risks in internal controls makes a major contribution to organizations, as companies can suffer significant losses as a result of fraud or inefficiency of internal processes. This is a research with a deductive perspective, a positivist methodological approach and a survey data collection method. The professional skepticism of internal auditors was measured by using the Hurtt (2010) questionnaire. For the variable risk perception, 10 scenarios were created by having research by Deloitte (2015), Ge and McVay (2005), and KPMG (2000) as a basis. The professional skepticism level has a positive relationship with perception of risks in internal controls. These findings help organizations to strengthen these characteristics in internal auditors, since perception of risks in internal controls can prevent the risk from materializing and constituting a deficiency in internal controls or fraud. The theoretical contribution is highlighted with the presentation of scenarios as a measure of perception of risks in internal controls

Personal insurance and open supplementary pension in Brazil: A study on mortality differentials by education level

ID: 78460

Authors: Ana Carolina Soares Bertho, Natália da Silva Fernandes, Thais Cristina Oliveira da Fonseca, Bruno Alexandre Soares da Costa, Rodrigo Lima Peregrino.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: education level , insurance market , life tables , mortality

Document type: Article (Portuguese) Show Abstract

This study aims to verify whether the inequalities by education level found in the population as a whole are also confirmed among those who subscribed to personal insurance and/or open private pension plans in Brazil between 2012 and 2017. This study is a trailblazer in estimating mortality differentials by education level in populations with personal insurance and open private pensions in Brazil. The research contributes to the understanding of socioeconomic factors related to living conditions and, consequently, mortality. The results show that, even in a population that records lower mortality rates and higher life expectancies when compared to the Brazilian population as a whole, education level plays a major role as a protective factor. Population and death data were provided by 23 insurance groups. Through an agreement with the Ministry of Labor and Social Security, the Applied Mathematics Laboratory of the Federal University of Rio de Janeiro (LabMA/UFRJ) provided the list of insured people to this ministry, data was cross-referenced with government information and returned to the LabMA/UFRJ with identification of education level, when available, as well as indication of deceased, completing company records. Mortality tables were then drawn up for the insured population by education level. To obtain smoothed tables, Heligman and Pollard’s law was applied using a Bayesian approach, via Markov Chain Monte Carlo (MCMC) simulation. In the period from 2012 to 2017, among Brazilians who took advantage of personal insurance and open supplementary pensions, men with a high education level had, at the age of 60, a life expectancy of 5.6 and 6.6 years greater than those with a lower education level, in mortality and survival coverage, respectively. In the case of women, the comparison between the most educated and the least educated shows a difference of 2.7 years in mortality coverage and 5.4 years in survival coverage.

Disclosure of socio-environmental scandals and corporate reputation

ID: 78459

Authors: William Augusto Sousa de Oliveira, Reiner Alves Botinha.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Keyword: corporate reputation , neutralization techniques , socio-environmental disclosure , socio-environmental scandals

Document type: Article (Portuguese) Show Abstract

This research aimed to investigate the use of neutralization of disclosure of socio-environmental scandals and its relationship with corporate reputation. No studies were found observing the strategies and motivations of socio-environmental disclosure from a theoretical lens like the literature on neutralization techniques. This study sought its relevance by investigating the disclosure and reputation maintenance strategies used by companies involved in national socio-environmental scandals, identifying various paths for information neutralization, guided by the origin of each case and business motivations, in addition to highlighting empirical findings that stimulate the advance in research on neutralization techniques in corporate reports. The aim is to assist students and researchers by providing new evidence for corporate processes that involve socio-environmental disclosure strategies and reputational management. As well as contribute to ensuring that stakeholders see voluntary socio-environmental information better and in a well-founded manner, seeking to qualify decision-making. Corporations involved in the main national socioenvironmental scandals between 2014 and 2021 were analyzed. This is an exploratory and quali-quantitative study, with content analysis and statistical tests to investigate socio-environmental scandals. Neutralization techniques were identified in information from voluntary corporate reports by companies involved in socio-environmental scandals. In addition to finding a positive correlation between neutralized disclosure and the reputation of these companies in the year the scandal took place and in the year after, there was also an increased use of techniques after the event. We hope to contribute to the literature by proposing the insertion of neutralization techniques in the investigation of strategies involving voluntary disclosure and corporate reputation. With a practical approach, we seek to build a rather critical view regarding voluntary reports and business mechanisms that may disqualify the information contained in them.

Complexidades emergentes em contabilidade e orçamento público: reflexões para uma agenda de pesquisa

ID: 78458

Authors: Ricardo Rocha de Azevedo, Patrícia Siqueira Varela, Janilson Antonio da Silva Suzart.

Source: Revista Contabilidade & Finanças, v. 35, n. 96, p. 0-0, September-December, 2024. 1 page(s).

Document type: Editorial (Portuguese)