the effect of preferred stock rating changes on preferred and common stock prices abstract daily returns are used to investigate the effect of preferred stock rating change announcements on preferred and common stock prices announcements that are free of confounding events clean announcements significantly affect preferred stock prices however the effect occurs after the day of announcement mostly on event day 1 conversely there is no evidence clean announcements affect common stock prices larger preferred stock abnormal returns are associated with announcements that are contaminated by confounding events but the abnormal returns appear to be the result of the confounding events more than the rating change

european schemes for promoting renewables in liberalised markets abstract the paper describes possibilities and problems for penetration of supply systems based on renewable energy sources in liberalised markets the analysis is based on recent development in eu with different models for support of installations based on renewable energy these include feed in models with guaranteed minimum tariffs tender models for different bands of technologies and green certificates trading models with obligatory consumer quota the paper describes the market situation in selected european countries including germany the uk holland and denmark an eu directive from september 2001 has postponed the decision on a possible harmonisation of promotional models until at least 2005 in order to obtain more practical experience with the different support schemes a critical evaluation is given in this paper of the different models with proposals for a balanced development between environmental and trading concerns it is argued that too much emphasis is presently given to the side of free trade at the expense of long range planning for a sustainable energy development

the frequency and magnitude of earnings management in china earnings management is an indicator of the corporate governance quality and investor protection standard we study the frequencies and magnitudes of earnings management under two different thresholds zero earnings and prior earnings in the chinese market from 1997 to 2004 we model earnings as a mixed normal distribution and obtain parameter estimators that measure the frequency and magnitude of earnings management we show that the practice of earnings management has gone up both in frequency and magnitude during the post 2000 period we also find that the frequency and magnitude of earnings management are higher when firms try to avoid negative earnings than when firms try to report earnings increase our findings reflect the current economic environment in china and caution investors on the low disclosure quality in the chinese stock market

changes in the probability of bankruptcy and equity value abstract work in finance suggests that changes in the probability of bankruptcy likely affect firm value by affecting perceptions of the cost of transacting with the firm in this paper accounting information from the balance sheet as well as the income statement is used in conjunction with ohlson s 1980 bankruptcy prediction model to calculate unexpected changes in the probability of bankruptcy for a sample of firms with a large estimated probability of bankruptcy sometime during the ten year study period unexpected changes in the probability of bankruptcy are useful in explaining security returns even after controlling for unexpected earnings

green electricity policies in the united states case study while there has been interest in promoting the use of renewable energy in electricity production for a number of years in the united states the market share of non hydro renewable energy sources in electricity production has remained at about 2 percent over the past decade the paper reviews the principal energy resources used for electricity production considers the changing regulatory environment for the electricity industry and describes government policies that have been used to promote green electricity in the united states with an emphasis on measures adopted by state governments factors influencing the development of green power markets are also discussed including underlying economic issues public policy measures the regulatory environment external costs and subsidies without significant increases in fossil fuel prices much more stringent environmental regulations or significant changes in electricity customer preferences green electricity markets are likely to develop slowly in the united states

extent and types of small scale wind policies in the u s states adoption and effectiveness abstract renewable energy sources including wind are increasingly promoted by u s state governments using state level data and survey responses from energy officials in 44 states this study catalogs the extent and types of small wind policies adopted by states it examines the factors correlated with policy adoption and perceptions about which policy tools are most effective results indicate that 84 of the states participating in the survey have adopted at least one policy to promote small wind technologies and most have adopted several policies the most frequent policy is net metering and this policy tool was also perceived to be one of the most effective at encouraging businesses and consumers to install small wind technologies however several other policy tools perceived to be most effective at promoting small wind installations have been adopted by relatively few states this identified gap suggests opportunities for improving policy effectiveness in explaining factors associated with adoption of policy tools we find support for variables comprising both the policy diffusion and internal determinants models of policy adoption including state commitment to environmental protection and policy innovations citizen ideology per capita wealth energy policy network communications and desire to be viewed as an environmental leader

common stock returns and rating changes a methodological comparison this paper examines the adjustments in a firm s common stock price during the eleven months before and during the month of announcement of a bond rating change based on several different measures of abnormal security return the findings are consistent with the proposition that bond downgradings convey information to common stockholders for bond upgradings the price adjustments were statistically insignificant in the month of announcement although in the eleven preceding months upgraded firms exhibited positive abnormal returns while the results do not fully support earlier research we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications several recent studies have investigated the effects of changes in company debt classifications by the major bond rating agencies 1 these include four studies of the impact of a rating change on bond prices katz 19 hettenhouse and sartoris 14 grier and katz 12 and weinstein 25 and one study of the impact on common stock prices pinches and singleton 22 the findings of the bond price studies differ widely thus while katz and grier and katz suggest that trading rules based on the announced downgradings of industrial bonds may be moderately profitable hettenhouse and sartoris and weinstein analyzing bond yields and returns respectively find that there is no apparent opportunity to profit abnormally subsequent to the announcement of the change weinstein attributes these differences in results largely to issues of methodology and proceeds to investigate the effects of rating changes on bond prices using more refined risk adjustment techniques and portfolio estimation procedures

dynamic incentives and retirement abstract this paper examines multi period compensation contracts when retirement is anticipated short term contracts in long term employment relationships are equivalent to a long term renegotiation proof contract the dynamic of incentive rates is determined by i how and in which periods managerial effort affects the contractible performance measures and by ii the time series correlation of error terms in performance reports the model explains why long term investments can decrease while incentive rates increase as managers approach retirement earnings persistence is negatively associated to earnings based incentive rates but towards retirement high earnings persistence implies increasing earnings based incentive rates

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

an empirical examination of the relation between debt contracts and management incentives abstract prior research on the factors influencing the use of debt covenants restricting dividends and additional borrowing is extended by considering management incentives when alternative incentive variables are considered separately we find covenants have a significant negative relation to ceo cash compensation an insignificant relation to the value of ceo equity held and significant positive relations to both the ratio of the value of ceo equity holdings to cash compensation and the fraction of equity held by the ceo in two stage simultaneous equations models only the latter is significant when jointly considered with each of the other incentive variables

ceo characteristics and firm r d spending over the past fifteen years a number of studies have examined the determinants of firm r d spending these studies however almost invariably focus on the role of firm or external ownership characteristics in predicting r d spending while overlooking the attributes of the top managers involved in allocating corporate resources in this study we change that focus by empirically examining how r d spending as compared to industry competitors varies at firms based on the characteristics of their ceos using a sample of publicly traded firms we find that ceo characteristics explain a significant proportion of the sample variance in firm r d spending even when corporate strategy ownership structure and other firm level attributes are controlled in terms of individual ceo characteristics we find that r d spending is greater at firms where ceos are younger have greater wealth invested in firm stock and signifacant career experience in marketing and or engineering r d in contrast to existing theory we find that the amount of a ceo s formal education had no significant association with r d spending once a ceo has attained a college degree however significant r d spending increases are found at firms where ceos have advanced science related degrees from subgroup analyses we further find that ceo effects on relative r d spending increase with longer ceo tenure implying that ceos over time may mold r d spending to suit their own preferences from these results we make implications for both research on determinants of r d spending and managerial practice

the effect of bond rating changes on common stock prices abstract the evidence in this paper suggests that downgrades by both moody s and standard and poor s are associated with negative abnormal stock returns in the two day window beginning the day of the press release by the rating agency significant negative abnormal performance can still be detected after eliminating observations containing obvious concurrent potentially contaminating news releases there is little evidence of abnormal performance on announcement of an upgrade significant abnormal returns are associated with announcements of additions to the standard and poor s credit watch list if either a potential downgrade or a potential upgrade is indicated

the use of accounting flexibility to reduce labor renegotiation costs and manage earnings abstract we investigate the determinants of discretionary sfas 106 choices of non regulated firms we find that more unionized firms are more likely to use immediate recognition consistent with incentives to reduce labor renegotiation costs immediate recognition is more prevalent among post adoption plan modifiers particularly if their transition obligation is large consistent with incentives to increase future reported earnings immediate recognition together with post adoption benefit plan reduction frees future income from the transition obligation amortization expense and adds a positive component as negative prior service costs are amortized immediate recognition is less prevalent among firms with higher potential debt contracting costs

value creation and corporate diversification the case of sears roebuck co abstract we provide clinical evidence of corporate restructuring at sears roebuck co beginning with the firm s 1981 diversification into financial services by acquiring coldwell banker co and dean witter reynolds inc the initial purchases resulted in a wealth gain to shareholders of approximately 400 million anticipated synergies did not materialize however and sears retail performance deteriorated coincident with pressure from institutional investor activists in 1992 sears announced the divestiture of financial services and a refocusing on retail operations this led to a 1 113 billion gain for shareholders despite more than 1 5 billion in gains over the entire diversification divestiture period sears shareholders suffered a significant opportunity loss when compared with a portfolio of focused firms

enforceability of non compete covenants discretionary investments and financial reporting practices evidence from a natural experiment abstract non compete covenants are widely used in employment contracts to promote employee stability using legal amendments of non compete enforceability as a natural experiment we find that as non compete enforceability increases firms display an increased likelihood of meeting short term earnings benchmarks lower discretionary expenditures and declining future performance these effects are more pronounced when ceos have lower ability or shorter tenures and when firms have more growth opportunities or operate in localized industries our results suggest that managers actively adapt investment and financial reporting practices to the changing environment that affects their contractual relations with firms

employment horizon and the choice of performance measures empirical evidence from annual bonus plans of loss making entities we examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans we argue that managers of loss making firms are likely to voluntarily or forcibly depart in the near future and consequently have a shorter employment horizon loss making firms then need to increase the emphasis on forward looking nonfinancial performance measures to motivate long term effort of their managers thus we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings we find consistent support for our hypothesis using different archival survey and field data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures

industry product market competition and managerial incentives abstract while some studies suggest that industry product market competition can substitute for managerial incentives other studies suggest a complementary relation the underlying assumption behind these studies is that competition can be uni dimensionally proxied for by industry concentration however recent studies suggest that competition can reflect several dimensions product substitutability market size and entry costs given the level of industry concentration using these determinants of competition this study contributes to the literature by showing that a firms provide stronger incentives when industry competition is greater b competition is multi dimensional in its relation to incentives and c industry characteristics play a major role in influencing incentives

the relation between earnings based measures in firm debt contracts and ceo pay sensitivity to earnings abstract i investigate how implicit incentives provided by earnings based debt covenants affect the structure of ceo compensation contracts this provides a new and unique view of how the ceo s incentives are shaped by not only his compensation contract but also debt contracts i find when debt contracts contain an earnings based covenant the ceo s pay sensitivity to earnings is muted additionally i find some evidence that pay sensitivity to earnings varies with earnings based covenant slack this study provides evidence consistent with shareholders rebalancing the ceo s earnings incentives in the presence of earnings based covenants thereby tilting incentives away from earnings performance

wind power implementation the nature of public attitudes equity and fairness instead of backyard motives abstract public attitudes anywhere in europe show moderate to strong support for the implementation of renewable energy nevertheless planning wind power developments appears to be a complicated matter in most countries the problems that have to be dealt with during decision making processes on the siting of wind turbines are usually referred to as mere communication problems however public attitudes towards wind power are fundamentally different from attitudes towards wind farms this gap causes misunderstandings about the nature of public support for renewables in particular where planners easily assume support for renewables can be generated by information campaigns emphasising the environmental benefits whereas opposition to renewable energy schemes can be explained by a selfish not in my backyard attitude both explanations used by planners authorities and unfortunately by many scholars are falsified furthermore policies that still take this common knowledge for granted can have negative consequences for the implementation rates of renewables visual evaluation of the impact of wind power on landscape values is by far the dominant factor in explaining why some are opposed to wind power and others are supporting it moreover feelings about equity and fairness appear the determinants of backyard motives instead of selfishness

a measurement approach to conservatism and earnings management this paper formalizes a two step representation of accounting measurement and uses it to formalize a general rationale for conservatism as a measurement principle a transaction s economic substance manifests itself in characteristics of the transaction and an accounting rule is a mapping from transaction characteristics to an accounting report managers who have stakes in the accounting report are able to influence transaction characteristics such earnings management is ex post rational for managers but ex ante inefficient to safeguard against such ex post opportunism the optimal ex ante accounting rule is conservative in the sense that it requires more verification of the transaction characteristics favorable to managers thus this rationale for conservatism is as general as the managers ability and incentive to inflate transaction characteristics by opening the black box of accounting measurement the two step representation also formalizes some classic accounting concepts such as relevance reliability verifiability verification and accounting motivated transactions

chief executive officer equity incentives and accounting irregularities this study examines whether chief executive officer ceo equity based holdings and compensation provide incentives to manipulate accounting reports while several prior studies have examined this important question the empirical evidence is mixed and the existence of a link between ceo equity incentives and accounting irregularities remains an open question because inferences from prior studies may be confounded by assumptions inherent in research design choices we use propensity score matching and assess hidden omitted variable bias within a broader sample in contrast to most prior research we do not find evidence of a positive association between ceo equity incentives and accounting irregularities after matching ceos on the observable characteristics of their contracting environments instead we find some evidence that accounting irregularities occur less frequently at firms where ceos have relatively higher levels of equity incentives

empirical tests of budget ratcheting and its effect on managers discretionary accrual choices abstract in this paper we investigate whether budgets ratchet using business unit data from a large multinational corporation we find evidence consistent with ratcheting where favorable budget variances result in performance budget increases that are larger than decreases associated with unfavorable variances of the same magnitude we argue that under ratcheting the cost of reporting positive transitory earnings surprises outweigh the short term benefits of the current period bonus consequently we hypothesize that managers make income decreasing discretionary accruals to offset transitory earnings surprises beyond the level expected under fixed budgets using a proxy for transitory earnings surprise we find evidence consistent with this hypothesis

corporate earnings facts and fiction investors cone dence in the quality and integrity of corporate e nancial reports has been seriously shaken of late the ever increasing procession of headlines about fraudulent earnings ine ated asset values and understated liabilities reported by erstwhile leading companies the likes of enron tyco worldcom xerox and a host of lesser household names all audited by major accounting e rms suggests systematic dee ciencies in the accounting standards and governance systems that generate e nancial information of public companies not to mention in the regulatory systems overseeing them both aggregate data and cross sectional research cone rm the anecdotal evidence that the correspondence to reality of reported earnings deteriorated throughout the 1990s for example the gap between aggregate earnings and taxable corporate income which abstracts according to internal revenue service rules from most estimates and provisions often used to manipulate earnings has been continuously widening throughout the 1990s desai 2002 also increasing during the 1990s was the gap between earnings and the corporate proe ts reported in the national income and product accounts which are based on e rms taxable income adjusted for current values of inventory and depreciation while part of the difference between earnings and taxable income is probably due to increasing corporate sophistication of tax management manipulation of earnings played a major role in the widening gap lev and nissim 2002a firm specie c data corroborate the increasing vulnerability of earnings to manipulation the number of earnings restatements by public companies often in the wake of admitted reporting improprieties has skyrocketed in the last three to four years wu 2002 also the frequency of e rms beating analysts forecasts of

earnings quality research advances challenges and future research abstract this discussion makes several observations regarding the earnings quality research reviewed in dechow ge and schrand 2010 dgs i discuss some of the factors that led to the large growth in the earnings quality literature over the past two decades and note a few of the important contributions from this literature i also present what i view as several major challenges the literature faces as well as some avenues for future research in addition i discuss the difficulties in evaluating such a diverse body of literature and comment on dgs s major conclusions

american policy conflict in the greenhouse divergent trends in federal regional state and local green energy and climate change policy climate change threatens significant impacts on global ecosystems and human populations to address this challenge industrialized nations have ratified the kyoto protocol and undertaken commitments to reduce emissions of greenhouse gases the primary agents linked to anthropogenic alteration of earth s climate by contrast the us government led by the bush administration has rejected mandatory targets for curbing emissions under the protocol and has instead pursued voluntary mitigation measures amid a larger push for clean coal and next generation nuclear technologies these actions in total have fueled global perceptions that the us is not acting in substantial ways to address climate change nevertheless action within the us is indeed moving forward with states cities and regional partnerships filling the federal leadership vacuum this paper reviews the diverse policies strategies and cooperative frameworks that have emerged at regional state and local levels to guide climate protection and identifies the environmental and economic benefits linked to such programs the paper also attempts to explain the existing federal impasse on climate policy with attention given to how sub national efforts may ultimately obviate national governmental inaction r 2007 elsevier ltd all rights reserved

the investment opportunity set and accounting procedure choice abstract this paper provides evidence on the cross sectional relation between firms investment opportunities their debt and compensation contracts their size and financial leverage and their accounting procedure choices this evidence is important because previous studies hypothesize that the link between firms investment opportunities and their accounting choices helps explain extant results on the size debt equity and bonus plan hypotheses however while i find that firms investment opportunities do affect the nature of their contracts i also find that the traditional explanations for accounting choice are important after controlling for the effects of the investment opportunity set

the relation between sovereign credit rating revisions and economic growth abstract a country s economic growth exhibits a significant response to sovereign rating changes a one notch upgrade downgrade causes an increase decline of about 0 6 0 3 in re rated countries five year average annual growth rates the results hold after accounting for other determinants of economic growth and potential endogeneity problems and are robust to the use of quarterly data changes in country rating affect economic growth via the interest rate and capital flow channels narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades which stimulate re rated countries economic performance and the converse holds for downgrades

real investment implications of employee stock option exercises this paper examines a real cost of awarding employee stock options based on the observation that managers are extremely concerned about earnings per share dilution in equity related compensation we predict and find that firms experiencing significant employee stock option eso exercises shift resources away from real investments towards the repurchase of their own stocks we further find weak evidence of a decline in subsequent firm performance as measured by return on assets for several years following the cut in discretionary investments as a result of stock option exercises though this result is sensitive to the metric used to measure performance collectively our findings indicate that eso exercises potentially impose a real cost on the firm in terms of foregone investment opportunities

discussion of acquisition profitability and timely loss recognition by j francis and x martin abstract francis and martin 2009 test whether accounting conservatism induces managers to make better acquisition decisions this discussion highlights three main issues first the hypothesized links between conservatism and future investments are potentially incomplete in particular the possibility that conservatism can have dysfunctional outcomes if acquisition decisions are based on anticipated earnings effects is ignored second the evidence is insufficient to infer a causal relation between conservatism and acquisition profitability third the hypothesis development fails to indicate whether timely loss recognition or the asymmetric timeliness of loss versus gain recognition is the more appropriate measure of conservatism given the context

the effect of lender identity on a borrowing firm s equity return previous research demonstrates that a firm s common stock price tends to fall when it issues new public securities by contrast commercial bank loans elicit significantly positive borrower returns this article investigates whether the lender s identity influences the market s reaction to a loan announcement although we find no significant difference between the market s response to bank and nonbank loans we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns this evidence complements earlier findings that an auditor s or investment banker s perceived quality signals valuable information about firm value to uninformed market investors previous studies show that certain types of loan announcements generate significantly positive abnormal returns to the average borrower s equity 1 this finding contrasts with the negative equity returns generally associated with a corporation s issuance of public securities smith 1986 this difference in market reactions indicates that private and public securities are not perfect substitutes for the average firm in this sense lender identity defined as public versus private lender significantly impacts the borrower s abnormal equity return the standard theoretical explanation for this difference is that private lenders either obtain private information about the firm s value or they have the incentive and ability to monitor firm behavior more effectively than other outside monitors can although the empirical literature on private lending has evaluated primarily commercial bank loans and lines of credit these theoretical arguments apply equally to any type of private

moody s and s p ratings are they equivalent conservative ratings and split rated bond yields we examine the relative impact of moody s and s p ratings on bond yields and find that at issuance yields on split rated bonds with superior moody s ratings are about 8 basis points lower than yields on split rated bonds with superior s p ratings this suggests that investors differentiate between the two ratings and assign more weight to the ratings from moody s the more conservative rating agency moody s becomes more conservative after 1998 and the impact of a superior moody s rating becomes stronger furthermore the differential impact of the two ratings is more pronounced for the more opaque rule 144a issues

discussion of the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting abstract ramanna 2007 the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting journal of accounting and economics provides interesting and novel evidence on how firms use contributions from their political action committees pacs to members of congress as a means of lobbying for preferred positions on the two exposure drafts that led to sfas 141 and sfas 142 my discussion raises some concerns about his main conclusion that pooling firms lobbied the fasb to obtain a fair value based impairment rule to facilitate their ability to manipulate financial statements i offer a more benign explanation and make some other observations about how this line of research could proceed in the future

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

the impact of bond rating changes on corporate bond prices new evidence from the over the counter market abstract i study the information content of bond ratings changes using daily corporate bond data from trace abnormal bond returns over a two day event window that includes the downgrade upgrade are negative positive and statistically significant although the reaction to upgrades is economically small monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two day abnormal returns unlike the bond market the stock market reaction to upgrades is statistically insignificant evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies in the cross section the bond market response is stronger for rating changes that appear more surprising rating changes of lower rated firms and upgrades that move the firm from speculative grade to investment grade

adoption of green electricity policies investigating the role of environmental attitudes via big data driven search queries despite the rising influence of public opinion on government energy policy formulation and implementation the roles of pro and or anti environmental attitudes among residents have not been empirically examined to quantify time varying environmental attitudes among local residents we exploit geo specific google search query data derived from internet based big data and verify through ordinary least squares regression outcomes regarding environmental behavior for the purpose of drawing policy implications we revisit decisions by state governments of the united states to adopt three well known green electricity policies renewable energy portfolio net metering rules and public benefit funds as some states have not yet adopted some or any of these policies unlike previous studies we handle the issue by examining right censored data and applying a duration based econometric method called the accelerated failure time model we found state residents environmental attitudes to have statistically significant roles after controlling for other traditional time varying policy adoption factors interestingly the extent to which anti environmental attitudes affect a state s policy adoption differs across green energy policies and knowing this can help a local government formulate better tailored environmental policy in particular researchers can use our method of incorporating citizens environmental attitudes to discuss relevant issues in the field of energy policy

design of an economically efficient feed in tariff structure for renewable energy development abstract evidence suggests albeit tentatively that feed in tariffs fits are more effective than alternative support schemes in promoting renewable energy technologies rets fits provide long term financial stability for investors in rets which at the prevailing market price of electricity are not currently cost efficient enough to compete with traditional fossil fuel technologies on the other hand if not properly designed fits can be economically inefficient as is widely regarded to have been the case under the public utility regulatory policies act of 1978 purpa under purpa too high a guaranteed price led to the creation of so called purpa machines poorly performing generating units that could survive financially only because of heavy subsidies that came at the expense of retail customers similarly because of their adverse impacts on retail electricity rates german fits have been subject to increasing political pressure from utilities and customers in this paper we propose an innovative two part fit consisting of both a capacity payment and a market based energy payment which can be used to meet the renewables policy goals of regulators our two part tariff design draws on the strengths of traditional fits relies on market mechanisms is easy to implement and avoids the problems caused by distorting wholesale energy markets through above market energy payments the approach is modeled on forward capacity market designs that have been recently implemented by several regional transmission organizations in the usa to address needs for new generating capacity to ensure system reliability

agency costs and innovation abstract stylized facts indicate that small firms are responsible for a disproportionate share of innovative research there are many possible explanations for this fact the paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations it is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes mixing hard to measure activities innovation with easy to measure activities routine is particularly costly since it will either lead to misallocation of attention across tasks or to misallocation of risk larger firms are at a comparative disadvantage in conducting highly innovative research because of the costs associated with managing a heterogeneous set of tasks it is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets both of which are hostile to innovation

horizon problem and firm innovation the influence of ceo career horizon exploitation and exploration on breakthrough innovations abstract building on labor market evaluations and legacy conservation motivation perspectives we propose a mechanism to explain the relationship between ceo career horizons and breakthrough innovations using 10 year panel data from 681 u s firms we find that firms that have a ceo with a short career horizon tend to produce fewer breakthrough innovations we also find that the relationship between ceo career horizon and breakthrough innovation is partially mediated by r d spending and also moderated by organizational learning behavior exploration vs exploitation this study highlights how a ceo s motivation to protect success in the short term affects the firm s innovativeness

on cross sectional analysis in accounting research abstract this paper examines cross sectional analysis procedures common to many market based accounting research papers both the economic and econometric properties of levels and returns studies are discussed topics covered include the relations between the accounting studies and cash flow valuation models the role of expectations of accounting variables deflators spurious inference risk adjustment and its relation to growth size and leverage residual dependence dependence among explanatory variables and the effect of scale differences across firms major conclusions are that market value is the correct deflator in returns studies and that levels and returns studies are economically but not econometrically equivalent

the consequences of the fasb s 1998 proposal on accounting for stock option repricing abstract we examine repricing activity surrounding the fasb s 1998 announcement regarding accounting for repriced options we find that repricing increases during and decreases after the 12 day window between the announcement and proposed effective dates consistent with firms timing repricings to avoid recording an expense we find that firms experiencing increasing earnings patterns firms with earnings around zero and growth firms are more likely to reprice in the window but having repriced recently decreases the likelihood of doing so the evidence suggests that firms trade off financial reporting benefits against reputation costs in decisions to time repricings to get favorable accounting treatment

inflation and relative prices a decomposition analysis abstract the variability of relative prices is decomposed into a component due to real effects technical change real income growth and so on and a component due to inflation using quarterly australian data inflation is shown to account for 24 percent of the total relative price variability

how ethical are managers goodwill impairment decisions in spanish listed firms this article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the international financial reporting standard ifrs 3 on business combinations replacing the systematic amortization of goodwill with the impairment only approach has been a highly controversial step although the aim of ifrs 3 was to provide users with more value relevant information regarding the underlying economics of the business it has been criticized for the potential earnings management inherent in impairment testing this study is based on a sample of spanish listed companies between 2005 and 2011 a period that embraces the economic crisis after controlling for the underlying economic factors of the firms the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses and big bath and smoothing strategies are influencing the decisions whether or not to impair goodwill and about the magnitude of the impairment firm size is an attribute that appears significant in the analysis suggesting that the cost and complexity of running the impairment test affect managers decisions additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors

policies and market factors driving wind power development in the united states abstract in the united states there has been substantial recent growth in wind energy generating capacity with growth averaging 24 percent annually during the past five years about 1700 mw of wind energy capacity was installed in 2001 while another 410 mw became operational in 2002 during 2003 development activity has remained strong with an estimated 1600 mw of capacity installed with this growth an increasing number of states are experiencing investment in wind energy projects currently about half of all states host at least one wind power project this paper explores the key factors at play in the 12 states in which a substantial amount of wind energy capacity has been developed or planned some of the factors that are examined include policy drivers such as renewable portfolio standards rps federal and state financial incentives as well as market drivers such as consumer demand for green power natural gas price volatility and wholesale market rules

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

what affects innovation more policy or policy uncertainty motivated by a theoretical model we examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more innovation activities measured by patent based proxies are not on average affected by which policy is in place innovation activities however drop significantly during times of policy uncertainty measured by national elections the drop is greater for more influential innovations citations in the right tail exploratory rather than exploitative innovations and for innovation intensive industries we use close presidential elections and ethnic fractionalization to address endogeneity concerns we uncover the mechanism underlying the main result by showing that the number of patenting inventors decreases with policy uncertainty political compromise we conclude encourages innovation

costly information transmission in continuous time with implications for credit rating announcements abstract this paper formulates a continuous time information transmission model in which an altruistic sender privately observes a stochastic state variable and incurs a communication cost when she broadcasts a message we characterize the sender s optimal announcement strategy using an ordinary differential equation we prove the optimality of the sender s strategies using a martingale verification argument and show that the sender s optimal strategy involves sending discrete messages furthermore we apply the model to the timing decision of credit rating announcements and provide a framework to study various aspects of rating announcements such as the probability of rating reversals and the expected time before a rating change

the effect of owner versus management control on the choice of accounting methods abstract this paper examines the relationship between the ownership control status of firms and the accounting methods they adopt the arguments of watts and zimmerman s positive theory are integrated with those of managerial economists to generate the prediction that management controlled firms are more likely than owner controlled firms to adopt accounting methods which increase reported earnings this prediction is inconsistent with fama s hypothesis that the market for managerial talent will prevent management controlled firms from acting differently than owner controlled firms this paper compares the depreciation methods used by a sample of management and owner controlled firms for financial reporting purposes the comparison considers and controls for the factors of firm size leverage and the depreciation method used for tax reporting purposes the comparison reveals that there is a significant difference in the depreciation methods adopted by management controlled and owner controlled firms for financial reporting purposes

how common are intentional gaap violations estimates from a dynamic model this paper uses data on detected misstatements earnings restatements and a dynamic model to estimate the extent of undetected misstatements that violate gaap the model features a ceo who can manipulate his firm s stock price by misstating earnings i find the ceo s expected cost of misleading investors is low the probability of detection over a five year horizon is 13 91 and the average misstatement if detected results in an 8 53 loss in the ceo s retirement wealth the low expected cost implies a high fraction of ceos who misstate earnings at least once at 60 with 2 22 of ceos starting to misstate earnings in each year 2003 2010 inflation in stock prices across ceos who misstate earnings at 2 02 and inflation in stock prices across all ceos at 0 77 wealthier ceos manipulate less and the average misstatement is larger in smaller firms this article is protected by copyright all rights reserved

the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting abstract i study the evolution of sfas 142 which uses unverifiable fair value estimates to account for acquired goodwill i find evidence consistent with the fasb issuing sfas 142 in response to political pressure over its proposal to abolish pooling accounting the result is interesting given this proposal was due in part to sec concerns over pooling misuse i also find evidence consistent with lobbying support for sfas 142 increasing in firms discretion under the standard agency theory predicts such unverifiable discretion can be used opportunistically

the informational role of bond analysts this study uses a large sample of sell side bond analysts reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities first we document that the distribution of bond analysts buy hold and sell recommendations is skewed positively but less so than the distribution of equity analysts recommendations the positive skewness in bond analysts recommendations is greater for

the effect of a rating downgrade on outstanding commercial paper diamond 1991 argues that a firm s reputation determines whether it borrows directly or through an intermediary we test the diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade from 1986 to 1991 cumulative abnormal declines averaged 6 69 percent in the first two weeks after the downgrade and 11 05 percent in the subsequent 12 weeks in contrast to commercial paper issued by bank holding companies large cds issued by affiliated banks did not change significantly in the period around a downgrade suggesting that deposit insurance may have removed market discipline from the cd market the objective of this study is to test diamond s 1991 theory of corporate capital structure in which a firm s reputation determines whether it borrows directly or through an intermediary in diamond s model a firm without an established reputation will borrow through and be monitored by an intermediary by building a good reputation a firm may gain access to the nonintermediated markets such as the commercial paper market and consequently avoid the cost of monitoring in the process of maintaining its reputation a firm may eliminate the conflict of interest between borrowers and lenders about the choice of risk in investment decisions such firms have an incentive to maintain their reputation because the reputation itself has become a valuable asset that reduces borrowing costs in the model a firm that loses its reputation will find the cost of placing debt directly prohibitively expensive using event study methodology we test the diamond model by examining the quantity response of commercial paper cp to a rating downgrade of the issuing company we focus on ratings because firms that borrow in the cp market usually have high ratings in part these ratings reflect the firms reputation for selecting safe investments in the diamond framework if credit ratings proxy for reputation then a rating downgrade may be associated with a decline in the amount of outstanding cp this change in capital structure may occur relatively rapidly because outstanding cp typically has a

industry wide corporate fraud the truth behind the volkswagen scandal corporate fraud committed under climate mitigation pressures is becoming more frequently observed in line with the ever increasing environmental standards and relevant regulation enforcements one example is the volkswagen emission gate scandal using firm level panel data of major automobile manufacturers from 2000 to 2015 this study empirically identifies the motives behind the corporate deception scandal we develop a conceptual model summarising the factors affecting decision making and the firms environmentally responsible investments eris including the truthfulness of related public communications our findings identify legal and regulatory pressures the firm s existing level of eris competency and expertise pressures from emission regulation market competitors consumers owners or shareholders as the key factors inducing the scandal the empirical findings show that firms are more likely to experience corporate fraud if their senior managers are paid with substantial variable components that may lead them to engage in riskier business behaviour and to be more short term focused thereby supporting the well established contract theory to avoid corporate fraud and engage in legitimate business competitiveness we suggest that firms should focus on technological innovation as well as improving corporate governance and leverage ratios to effectively control and monitor management in addition policy makers should be more realistic about practical and commercial limitations in the policy setting process and take on a more supporting role in achieving technological innovations and effective corporate governance in summary we argue that cleaner production is not only the result of technologically progress and research but importantly it also involves issues associated with corporate governance and business ethics

economic consequences of firms depreciation method choice evidence from capital investments abstract this study identifies several interrelated reasons why firms depreciation method choice is likely to influence managers capital investment decisions we find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight line depreciation further we find that there has been a migration away from accelerated depreciation to straight line depreciation over the past two decades firms that make such accounting changes make smaller capital investments in the post change periods than in the pre change periods these results suggest that a choice made for external financial reporting purposes influences managers capital investment decisions

r d and ceo departure date do financial incentives make ceos more opportunistic the purpose of this article is to examine whether research and development r d expenditure is biased downward because of self serving behavior of highly incentivized managers this offers an insight into the general relationship between incentives and opportunism using instrumental variables and panel data methods for a sample of high r d spenders in the uk we examine whether r d is reduced in cases of imminent departure of the ceo results show evidence for this but only for the sample above the median in intensity of stock and options in the compensation package this suggests that opportunism is enhanced by inappropriately strong incentives the main results are robust to the inclusion of a number of corporate governance variables jel classification g30 o30

are small firms less vulnerable to overpriced stock offers we show an inverted u relation between targetiveness probability of being targeted and firm size however this pattern describes stock offers and is more pronounced during hot markets characterized by higher stock valuations for cash offers we find a negative and monotonic relation these contrasting patterns suggest that small firms in the bottom nyse size quartile are less vulnerable to overpriced stock offers in addition we find that the stock acquirers of small targets are less overvalued than those of large targets and that the announcement returns are less negative for stock acquirers of small targets than for those of large targets

relative price variability in the united states abstract following the clements nguyen methodology relative price variability in the united states is decomposed into the components due to real factors inflation and their interaction overall inflation accounts for about half of relative price variability but its share is the largest during 1973 1980 and the smallest during 1981 1986 cross commodity distribution of relative price variability shows rather dramatic changes

relation between inflation and relative price variability in the united states evidence from data for the 1980s abstract monthly cpi data for 1967 1986 in respect of 10 major categories are utilized the most significant result is a strongly negative association between relative price variability and inflation as well as its expected and unexpected components during the 1980s variations in the estimated coefficients for the three subperiods studied also seem interesting

inflation and relative prices a system wide approach abstract the paper introduces a system wide model for the analysis of the effects of inflation on relative prices this enables the identification of those commodities whose relative prices are distorted by inflation the model provides measures of the natural rate of relative price variability which is associated with zero inflation and the inflation rate which minimizes relative price variability an illustrative application with australian data is provided

earnings management through transaction structuring contingent convertible debt and diluted earnings per share in this article we examine whether firms structure their convertible bond transactions to manage diluted earnings per share eps we find that the likelihood of firms issuing contingent convertible bonds cocos which are often excluded from diluted eps calculations under statement of financial accounting standard sfas 128 is significantly associated with the reduction that would occur in diluted eps if the bonds were traditionally structured we also document that firms use of eps based compensation contracts significantly affects the likelihood of coco issuance and find weak evidence that reputation costs measured using earnings restatement data play a role in the structuring decision these results are robust to controlling for alternative motivations for issuing cocos including tax and dilution arguments in addition an examination of announcement returns reveals that investors view the net benefits and costs of cocos as offsetting one another our results contribute to the literature on earnings management diluted eps financial reporting costs and financial innovation

the information content of municipal bond rating changes a note municipal bond rating changes have positive social value if they signal previously unavailable information on changes in municipal financial soundness weinstein 11 has found that rating changes for corporate bonds do not appear to contain relevant new information his finding is consistent with that of pinches and singleton 7 that stock price adjustments occurred several months prior to a corporate bond rating change rating agencies apparently respond to changes in corporate financial and operating conditions several months after the information is impounded in bond and stock prices 1 however as a result of institutional differences between corporate and municipal bond markets it is possible that rating changes for municipal bonds do convey new information this note examines the information content of municipal bond rating changes by evaluating municipal bond price adjustments during the period surrounding a rating change the joint hypothesis tested is that municipal bond rating changes convey information to investors which is relevant for assessing equilibrium values of the securities and that the municipal bond market is efficient so that valuation changes occur simultaneously with rating changes the following section examines the institutional setting of the municipal bond market in order to specify why information content of bond rating changes might be anticipated remaining sections of the paper describe sample selection derivation of test data findings and discussion

full stock payment marginalization in merger and acquisition transactions the number of merger and acquisition m a transactions paid fully in stock in the u s market declined sharply after 2001 when pooling and goodwill amortization were abolished by the financial accounting standards board did this accounting rule change really have such far reaching implications using a difference in differences test and canada as a counterfactual this study reveals that it did we also report several other results confirming the role of pooling abolishment including i that the decrease in full stock payment relates to ceo incentives and ii that previously documented determinants of the m a mode of payment cannot explain the post pooling abolishment pattern these results are also robust to controls for various factors such as the internet bubble the exclusion of cross border deals the presence of canadian cross listed firms the use of a constant sample of acquirers across the pooling and post pooling abolishment periods the use of europe as an alternative counterfactual and

proactive r d management and firm growth a punctuated equilibrium model the external environment is characterized by periods of relative stability interspersed with periods of extreme change implying that high performing firms must practice exploration and exploitation in order to survive and thrive in this paper we posit that r d expenditure volatility indicates the presence of proactive r d management and is evidence of a firm moving from exploitation to exploration over time this is consistent with a punctuated equilibrium model of r d investment where shocks are induced by reactions to external turbulence using an unbalanced panel of almost 11 000 firm years from 1997 to 2006 we show that greater fluctuations in the firm s r d expenditure over time are associated with higher firm growth developing a contextual view of the relationship between r d expenditure volatility and firm growth we find that this relationship is weaker among firms with higher levels of corporate diversification and negative among smaller firms and those in slow clockspeed industries

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

corporate bond ratings changes and economic instability evidence from the korean financial crisis abstract this study presents the first empirical analysis of the impact of bond ratings changes during periods of significant economic instability using the korean financial crisis as the experimental stimulus the study documents that changes in korean bond ratings during the financial crisis resulted in dramatically stronger changes in stock prices than ratings changes of identical magnitude announced either before or after the crisis

dynamic agency with renegotiation and managerial tenure this paper proves the renegotiation proofness principle for a dynamic len linear contracts exponential utility normal distributions model and examines the impact of repeated renegotiation on incentives and managerial tenure when performance information is serially correlated in addition to providing a general solution to a multiperiod agency problem with serially correlated performance measures this paper characterizes optimal managerial tenure turnover policies as a function of the time series properties of performance measures with negatively correlated performance measures the principal prefers longer managerial tenure and no turnover is optimal with positively correlated performance measures absent a switching cost turnover every period is optimal in the presence of a fixed switching cost interior optimal turnover policies exist if the performance measures are positively correlated switching costs are necessary but not sufficient for interior optimal tenure the optimal turnover policies present an alternative to theories of performance driven managerial turnover and are consistent with evidence that a majority of managerial turnovers are age related normal retirements

how do nonprofit hospitals manage earnings abstract we hypothesize that unlike for profit firms nonprofit hospitals have incentives to manage earnings to a range just above zero we consider two ways managers can achieve this they can adjust discretionary spending hoerger t j 1991 profit variability in for profit and not for profit hospitals journal of health economics 10 259 289 and or they can adjust accounting accruals using the flexibility inherent in generally accepted accounting principles gaap to test our hypothesis we use regressions as well as tests of the distribution of earnings by burgstahler and dichev burgstahler d dichev i 1997 earnings management to avoid earnings decreases and losses journal of accounting and economics 24 99 126 on a sample of 1 204 hospitals and 8 179 hospital year observations our tests support the use of discretionary spending and accounting accrual management like hoerger 1991 we find evidence that nonprofit hospitals adjust discretionary spending to manage earnings however we also find significant use of discretionary accruals e g adjustments to the third party allowance and allowance for doubtful accounts to meet earnings objectives these findings have two important implications first the previous evidence by hoerger that nonprofit hospitals show less variation in income may at least partly be explained by an accounting phenomenon second our findings provide guidance to users of these financial statements in predicting the direction of likely bias in reported earnings

output spillovers from changes in sovereign credit ratings this research examines how a sovereign rating revision of one country influences the economic growth rates of other countries rating revisions have significant output spillover effects a one notch upgrade downgrade prompts on average a significant downward revision of about 0 03 0 07 in the consensus forecast of annual economic growth rates of other countries in the two month period after the event the spillovers are transmitted through direct and indirect trade and financial linkages between event and non event countries the evidence indicates that a predominance of differential common spillovers leads upgrades downgrades to produce adverse output effects for other countries

the effect of accounting procedure changes on ceos cash salary and bonus compensation abstract this paper examines the effect of accounting procedure changes on cash salary and bonus compensation to ceos we estimate whether there is an adjustment to the statistical relation between compensation and corporate earnings following changes that lower earnings fifo to lifo inventory valuation and that raise earnings accelerated to straight line depreciation the results indicate that 1 subsequent to these changes salary and bonus payments are based on reported earnings rather than earnings under the original accounting method and 2 the potential compensation effect of the changes is small compared to the effect of economy or industry wide changes in compensation

information effects in financial distress the case of seabrook station abstract in 1972 a group of electric utilities announced plans to construct seabrook station a nuclear generating facility in 1988 the lead partner in the venture public service company of new hampshire psnh filed for bankruptcy examination of the stock price effects of a variety of financial events preceding the bankruptcy filing shows that information about cash flows paid to psnh security holders affected the common stock prices of psnh and its seabrook partners whereas information about investment and operating cash flows had little or no effect

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

an analysis of value destruction in at t s acquisition of ncr abstract at t s 7 5 billion acquisition of ncr decreased the wealth of at t shareholders by between 3 9 billion and 6 5 billion and resulted in negative synergies of 1 3 to 3 0 billion we find that at t paid a documented 50 million and possibly as much as 500 million to satisfy pooling accounting thus boosting eps by roughly 17 but leaving cash flows unchanged we conclude that at t s decision to acquire ncr in what the market perceived as a value destroying transaction was related at least in part to the 1984 consent decree with the department of justice that led to the break up of at t

fiscal and economic impacts of state incentives for wind energy development in the western united states abstract wind energy production in the united states has seen significant growth over recent years due in large part to the state and federal policies designed to encourage wind energy development this research focuses on measures undertaken at the state level in the western region of the united states several of these states have implemented legislation in the form of financial incentives and renewable portfolio standards to support wind development it is shown that state tax incentives and physical drivers have a significant positive impact on wind energy growth there has been concern however about the fiscal impacts of financial incentives on state tax revenues as a result some states have removed tax incentives a recent example is the removal of sales and use tax rebates for wind producers in idaho however the removal of such incentives results in a net loss of tax revenues as well as negative economic impacts by hindering the development of wind energy projects it is shown that attendant economic benefits from wind development results in significant positive fiscal impacts by increasing tax revenues for state and local governments the increased tax revenues begin with the pre construction and construction phases of such projects and continue to accrue throughout the life of project operations until eventual decommissioning the removal of this incentive in idaho results in a net reduction in tax revenues as well as the loss of significant economic benefits in terms of employment incomes and total output for the state

ratings hardwiring and asset prices this paper discusses the asset pricing implications of ratings hardwiring the latter is defined as the mechanical response of trading decisions to changes in ratings this issue is studied within a noisy rational expectations framework of asset pricing under asymmetric information in which traders specialize in different driving factors of asset payoffs and interact with others who mechanically link their asset supply to ratings we show that ratings hardwiring leads to predictable supply shocks and induces informed traders to overreact to new information thus creating a channel through which shocks are amplified and prices become less informative and more volatile

real effects of accounting rules evidence from multinational firms investment location and profit repatriation decisions we analyze survey responses from nearly 600 tax executives to better understand corporate decisions about real investment location and profit repatriation our evidence indicates that avoiding financial accounting income tax expense is as important as avoiding cash income taxes when corporations decide where to locate operations and whether to repatriate foreign earnings this result is important in light of the recent research about whether financial accounting affects investment and in light of the decades of research on foreign investment that examines the role of cash income taxes but heretofore has not investigated the importance of financial reporting effects our analysis suggests that financial reporting is an important factor to be considered in the policy debates focused on bringing investment to the united states

credit rating and debt crises we develop an equilibrium theory of credit rating in the presence of rollover risk by influencing rational creditors ratings affect sovereigns probability of default which in turn affects ratings our analysis reveals a pro cyclical impact of credit rating in equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low

ceo stock based compensation an empirical analysis of incentive intensity relative mix and economic determinants the use of stock based compensation for u s ceos has increased significantly throughout the 1990s research interest in particular on stock option compensation has similarly increased yet contradictory results create questions about the theoretical underpinnings therefore we revisit the controversy surrounding stock option awards and we further the understanding of restricted stock grants which have escaped similar research focus using a recent data set we obtain convincing empirical support for most theoretical predictions about stock option awards we also find that restricted stock due to its linear payoffs is relatively inefficient in inducing risk averse ceos to accept risky value increasing investment projects copyright 2000 by university of chicago press