Book Value of Equity Valuation Samples—Ohlson Test

The BVE samples consist of US firms from 2001 to 2014. Three different samples are used—Tax Sample Portfolio, Wage Sample Portfolio and Philanthropy Sample Portfolio—to reflect three different corporate citizenship measures. Table 3 describes the sampling method for BVE samples in detail. To create these three sample portfolios, the readily available matched US firm years between Compustat and Audit Analytics are used as the initial sample, and the samples are built according to the financial variable required, as prescribed in the Ohlson Model (Equation Model [9]).24 _{Most of the financial variables} required by the Ohlson Model, such as earnings, BVE and share prices at the end of the fiscal period, are available from the Compustat file.

The initial data exclusions in the Tax Sample are similar to the initial data-cleaning procedures conducted for the Tax Sample for the audit fees test, in which the sample is also restricted to non-zero total assets and non-missing GISC industry code. However, in contrast with the audit fees samples procedure, the BVE sample includes all industry sectors. It excludes firms with negative BVE, negative three-year ROE average, ROE larger than 0.5 and missing data on required variables as shown in Equation Model (9). It is common practice in the valuation literature to exclude firms with negative BVE for meaningful financial implications (Frankel and Lee 1998; Gregory, Saleh and Tucker 2005). It is also unusual for public-listed firms to yield a return of more than 50 per cent; therefore, these firms are excluded. From the remaining sample, the firms are ranked using five levels of quantiles based on their performance in tax fairness. The firms at the 75th quantile represent the Top 25 performers in tax fairness, and those at the bottom 25th quantile represent the Low 25 performers in tax fairness. The Top 25 quantile in the Tax Sample Portfolio has 10,028 firm-year observations, and the Low 25 quantile in the Wage Sample Portfolio has 10,249 firm-year observations.

24 _{The samples for the book value of equity valuation (BVE) test are the sub-samples from Wage Samples} used in Audit Fees Test (hypotheses 1 (b)) prior to a merger with philanthropy data, in which the data required to develop the third and final corporate citizenship measures. The factors that lead to small sample size for the wage sample portfolios, including the concerns on generalisability and possible solutions have been discussed in detail in previous section – Section 4.2.1 Audit Fees Samples.

To develop the Wage Sample Portfolio, this study uses the merged sample between Compustat, Audit Analytics, Execucomp and BoardEx, which was prepared for audit fees tests. It then repeats similar exclusion procedures used in the Tax Sample Portfolio, thereby excluding those with negative BVE, negative three-year ROE average, ROE larger than 0.5 and missing data on required variables, as shown in Equation Model (9). The remaining sample is divided into five quantiles, with 25 per cent in each of four of the quantiles. Those that are equal to, or higher than, the 75th quantile represent firms with high wage unfairness, and those that are equal to, or lower than, the 75th quantile represent firms with low wage unfairness. The Top 25 quantile in the Wage Sample Portfolio has 848 firm-year observations, and the Low 25 quantile has 849 firm-year observations. Given that wage unfairness has inverse implications for wage fairness, the Top 25 quantile also represents firms with poor performance in wage fairness, and the Low 25 quantile represents firms with good performance in wage fairness.

The Philanthropy Sample Portfolio is a result of matched US firm-year between Compustat, Audit Analytics, Execucomp, BoardEx and MSCI–KLD. A similar sampling procedure is repeated as the one used for the Tax Sample Portfolio and the Wage Sample Portfolio. Table 2 describes the sampling procedure using one-year domestic donation performance, US_DON1YR, t. Given that the philanthropy data are provided in binary scores between 1 and 0, the Philanthropy Sample Portfolio is reduced to whether a firm is a donor or a non-donor. The final Philanthropy Sample produces an asymmetric sample for the donor and non-donor portfolio. Domestic donors have 25 firm-year observations and non-domestic donors have 10,547 firm-year observations.

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Table 3: Sample Selection Method for BVE Test (Ohlson Test)

1) Tax Sample Portfolio N N

Number of matched US firm years between Compustat and Audit Analytics (2000–2014) 91,263

Less:

Number of firm years with zero total assets 369

Number of firm years with missing GISC 292

Number of firm years with negative BVE 8,683

Number of firm years with negative ROE 26,774

Number of firm years with missing three-year average of ROE 7,451

Number of firm years with ROE larger than 0.5 1,907

Number of firm years with missing required variables 9,293

36,494 Less:

Number of firm years smaller than 75th quantile of tax fairness 26,246

Number of firm years in Top 25 quantile (2002–2014) 10,248

Number of firm years larger than 25th quantile of tax fairness 26,245

Number of firm years in Low 25 quantile (2002–2014) 10,249

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Table 3(continued)

2) Wage Sample Portfolio N N

Number of matched US firm years between Compustat and Audit Analytics (2000–2014) 91,263

Less:

Number of firm years with zero total assets 369

Number of firm years with missing GISC 292

Number of unmatched firm years with Execucomp and BoardEx 38,239

Number of firm years with negative BVE 597

Number of firm years with negative ROE 15,196

Number of firm years with missing three-year average of ROE 1,907

Number of firm years with missing CEOs’ pay data 15,463

Number of firm years with missing employees’ pay data 15,894

Number of firm years with ROE larger than 0.5ᵉ 110

Number of firm years with missing required variables 2,092

1,104 Less:

Number of firm years smaller than 75th quantile of wage unfairness 256

Number of firm years in Top 25 quantile (2002–2014) 848

Number of firm years larger than 25th quantile of wage unfairness 255

Number of firm years in Low 25 quantile (2002–2014) 849

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Table 3(continued)

3) Philanthropy Sample Portfolio N N

Number of matched US firm years between Compustat and Audit Analytics (2000–2014) 91,263

Less:

Number of firm years with zero total assets 369

Number of firm years with missing GISC 292

Number of unmatched firm years with Execucomp and BoardEx 38,239

Number of unmatched firm years from MSCI–KLD 25,765

Number of firm years with ROE larger than 0.5ᵉ 417

Number of firm years with missing required variablesᵈ 12,414

13,767 Less:

Number of firm years smaller than 75th quantile of domestic philanthropy 13,511

Number of firm years in Top 25 quantile (2002–2014) 256

Number of firm years larger than 25th quantile of domestic philanthropy 3,220

Number of firm years in Low 25 quantile (2002–2014) 10,547