diverse information and market efficiency in a monetary model of the exchange rate tests of informational efficiency of a given market involve testing two hypotheses simultaneously the first is the hypothesis about the structure determining equilibrium prices or returns and the second is the hypothesis about the information used in formulating expectations and the ability of agents to set current prices to conform with their expected values we examine this issue in the context of the foreign exchange market by setting up a simple model of exchange rate determination and using equilibrium properties of the model to examine market efficiency the model of exchange rate determination involves monetary equilibrium and rational expectations by virtue of the latter equilibrium prices by definition fully reflect available information yet we show that conventional tests of market efficiency would fail when confronted by data generated by such a model we then proceed to define more restrictive and more appropriate concepts of informational efficiency we also illustrate and clarify a fundamental misconception with current rational expectations models we believe that the current models employing the rational expectations hypothesis overemphasize the distinction between monetary and real shocks and underemphasize the distinction between permanent and transitory distinctions for expectations formation the conventional efficiency tests it is the latter distinction that is the essential one this abstract was borrowed from another version of this item

digging for golden carrots an analysis of research tournaments contracting for research is often infeasible because research inputs are unobservable and research outcomes cannot be verified by a court sponsoring a research tournament can resolve these problems a model is presented in which contestants compete to find the innovation of highest value to the tournament sponsor the winner receives a prespecified prize the tournament game has a unique subgame perfect equilibrium free entry is not optimal because equilibrium effort by each researcher decreases in the number of contestants an optimally designed research tournament balances the probability of overshooting the first best quality level against the probability of falling short copyright 1995 by american economic association

bidding behavior in a symmetric chinese auction abstract this paper purposes a symmetric all pay auction where the bidders compete neither for an object nor the object itself but for a lottery on receive that lottery is determined endogenously through the bids this auction is known as chance auction or more popularly as chinese auction the model considers the possibility that for some bidders the optimal strategy is to bid zero and to rely on luck it showed that bidders become less aggressive when the lottery satisfies a variational condition it was also shown that luck factor is decisive to determine if the expected payoff in chinese auction is bigger or smaller than expected payoff in standard all pay auction

rent seeking with asymmetric valuations addition or deletion of a player we consider an extension of tullock s 1980 n player contest under which prize valuations may vary across players we show that the pure strategy equilibrium of this contest is unique we also establish the following results rent dissipation increases individual winning probabilities decrease and individual spending either increases or decreases with the addition of a player

detecting earnings management a new approach this paper provides a new approach to test for accrual based earnings management our approach exploits the inherent property of accrual accounting that any accrual based earnings management in one period must reverse in another period if the researcher has priors concerning the timing of the reversal incorporating these priors can significantly improve the power and specification of tests for earnings management our results indicate that tests incorporating reversals increase test power by around 40 and provide a robust solution for mitigating model misspecification arising from correlated omitted variables

auctions with a stochastic number of bidders abstract auction theory is generalized by allowing the number of bidders to be stochastic in a first price sealed bid auction with bidders having constant absolute risk aversion the expected selling price is higher when the bidders do not know how many other bidders there are than when they do know this thus the seller should conceal the number of bidders if he can moreover a bidder s ex ante expected utility is the same whether or not there is a policy of concealing the number of bidders concealment therefore pareto dominates announcement with risk neutral bidders the optimal auction is the same whether or not the bidders know who their competitors are

performance shocks and misreporting we propose a parsimonious stochastic model of reported earnings that links misreporting to performance shocks our main analytical prediction is that misreporting leads to a negative second order autocorrelation in the residuals from a regression of current earnings on lagged earnings we also propose a stylized dynamic model of earnings manipulation and demonstrate that both earnings smoothing and target beating considerations result in the same predictions of negative second order autocorrelations empirically we find that the distribution of this measure is asymmetric around zero with 27 of the firms having significantly negative estimates using this measure we specify a methodology to estimate the intensity of misreporting and to create estimates of unmanipulated earnings our estimates of unmanipulated earnings are more correlated with contemporaneous returns and have higher volatility than reported earnings with respect to economic magnitude we find that in absolute terms median misreporting is 0 7 of total assets moreover firms in our sample subject to sec aaers have significantly higher estimates of manipulation intensity

truthfulness in accounting how to discriminate accounting manipulators from non manipulators accountants preparing information are in a position to manipulate the view of economic reality presented in such information to interested parties these manipulations can be regarded as morally reprehensible because they are not fair to users they involve in an unjust exercise of power and they tend to weaken the authority of accounting regulators this paper develops a model for detecting earnings manipulators using financial statements ratios in a sample of spanish listed companies our results provide evidence that accounting data can be extremely useful in detecting manipulators this approach can be used by a large category of users of accounting information among which we can cite stock exchange supervisors or investing professionals

accrual reversals earnings and stock returns we show that accruals consist of at least two distinct underlying processes one with positive serial correlation and the other with negative serial correlation we also find that the accrual reversals characterizing the negatively serially correlated process are predominantly good accruals that correctly anticipate fluctuations in working capital accrual estimation error is the least persistent component of earnings while accruals relating to firm growth are less persistent than cash flows finally the mispricing of accruals appears to be driven by a combination of accrual estimation error and firm growth

an analysis of glass ceiling perceptions in the accounting profession access to a deep pool of talent is essential to the success of every professional services firm the supply of that talent is contingent upon the available rewards for the exercise of that talent and both the existence of the potential rewards and the beliefs that individuals hold about the existence of the rewards affect the decision to remain in the field one structural factor that may affect the judgment about whether to remain in a profession concerns promotions based on the gender of the employee i e the glass ceiling in this study we examine the glass ceiling within the context of the accounting profession while advances have been made within the accounting profession to address the glass ceiling the continued existence and perceptions about the continued existence of the issue exert adverse effects upon the available talent pool and may create long term problems for the profession in this study we investigate glass ceiling perceptions among a large sample of female accounting professionals employed in accounting the sample includes both public accountants and those employed in industry accounting our study yields the finding of beliefs in bias driven effects e g a bias against female promotions to the top level structural effects e g a lack of mentoring opportunities networking opportunities and high profile job assignments and cultural effects e g a lack of social support from the male leaders within the organization among these accounting professionals glass ceiling perceptions are also influenced by several demographic factors furthermore accounting professionals employed by industry are more likely to report a glass ceiling within their firms than accounting professionals employed by public accounting firms the findings are of interest to researchers who explore gender related issues in professional service firms such as the field of accounting and to senior members of practice who are tasked with ensuring the integrity and quality of the talent pool and the equitable distribution of rewards to employees

foreign earnings management of us multinational companies the role of decision rights us multinational corporations mncs need to allocate decision rights between parent companies and subsidiaries to manage global operations this article examines how the allocation of decision rights affects foreign earnings management of mncs i find that the extent of foreign earnings management increases when parents retain centralized decision rights but internal cross border frictions between parents and their foreign subsidiaries and the external local legal environment in which foreign subsidiaries operate can mitigate foreign earnings management despite parents having centralized decision rights this study provides evidence on how the decision structures of mncs affect where earnings are managed

earnings quality in uk private firms comparative loss recognition timeliness abstract uk private and public companies face substantially equivalent regulation on auditing accounting standards and taxes we hypothesize that private company financial reporting nevertheless is of lower quality due to different market demand regulation notwithstanding a large uk sample supports this hypothesis quality is operationalized using basu s 1997 time series measure of timely loss recognition and a new accruals based method the result is not affected by controls for size leverage industry membership and auditor size or by allowing endogenous listing choice the result enhances understanding of private companies which are predominant in the economy it also provides insight into the economics of accounting standards

economic contests comparative reward schemes contests are situations in which an individual s reward depends on his performance relative to others students are graded on a curve the candidate with the most votes gets the political office the underling who performs best is promoted to the executive position contests are useful in dealing with indivisible rewards reducing monitoring costs and minimizing risks from common uncertainties they are employed to sort potential participants and once they have entered to induce appropriate effort from them with monitoring precision and prize spreads as potential choice variables optimal contest structures are derived for fair and unfair contests among equal and unequal participants the converse problems of climbing low ability individuals enter the contest designed for high ability candidates and slumming are shown to be manageable

backward and forward solutions for economies with rational expectations in models where anticipations of future endogenous variables influence current behavior there exists an infinity of solutions under the assumption of rational expectations this problem has been dealt with in the study of macro economic models by the implicit or explicit use of one of three additional requirements optimality consistency with alleged economic behavior or conformity of the endogenous variables to an imposed stationarity condition these requirements have coincided in existing models leading to the choice of a unique solution a forward solution the purpose of this paper is to review the problem characterize the solutions and examine whether these requirements are acceptable section i presents a simple model and derives the set of solutions the model makes no claim to generality but has the major advantage that the issues are easily understood in this simple case section ii discusses the requirement of consistency with economic behavior section iii discusses the requirement of stationarity and section iv provides some conclusions

implications of power when the ceo can pressure the cfo to bias reports abstract building on archival anecdotal and survey evidence on managers roles in accounting manipulations i develop an agency model to examine the effects of a ceo s power to pressure a cfo to bias a performance measure like earnings this power has implications for incentive compensation reporting quality firm value and information rents predictions from the model provide potential explanations for the differing results from recent empirical studies on the impact of regulatory interventions like sox and the extent to which the ceo s or cfo s incentives significantly impact on earnings management the model also identifies conditions under which either a powerful or a non powerful ceo can extract rents which can help explain mixed empirical results on the association between ceo power and excessive compensation

implications for gaap from an analysis of positive research in accounting based on extant literature we review the positive theory of gaap the theory predicts that gaap s principal focus is on control performance measurement and stewardship and that verifiability and conservatism are critical features of a gaap shaped by market forces we recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally we conclude that rather than converging u s gaap with ifrs competition between the fasb and the iasb would allow gaap to better respond to market forces

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

two sided learning and the ratchet principle i study a class of continuous time games of learning and imperfect monitoring a long run player and a market share a common prior about the initial value of a gaussian hidden state and learn about its subsequent values by observing a noisy public signal the long run player can nevertheless control the evolution of this signal and thus affect the market s belief the public signal has an additive structure and noise is brownian i derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long run player s actions depend on the history of the game only through the market s correct belief using these conditions i demonstrate the existence of pure strategy equilibria in markov strategies for settings in which the long run player s flow utility is nonlinear the central finding is a learning driven ratchet principle affecting incentives i illustrate the economic implications of this principle in applications to monetary policy earnings management and career concerns

on the optimal relation between the properties of managerial and financial reporting systems we develop a theoretical model of the firm that links properties stewardship vs valuation focus of financial reporting regimes with the informational properties of optimal managerial accounting systems we show that contrary to the standard textbook proposition properties of management and financial accounting systems are not independent significantly we provide an explicit connection between exogenous and observable properties of a firm s financial reporting system and the quality of the managerial accounting system on which manager s base real economic decisions as the quality of those economic decisions can also be inferred from publicly available data our theory generates new opportunities for empirical managerial accounting research on large nonproprietary samples further by being able to identify enhanced performance due to improved managerial accounting information our theory provides opportunities to gain a better understanding of the link between particular managerial accounting practices and the quality of the information produced

an analysis of the war of attrition and the all pay auction we study the war of attrition and the all pay auction when players signals are affiliated and symmetrically distributed we a find sufficient conditions for the existence of symmetric monotonic equilibrium bidding strategies and b examine the performance of these auction forms in terms of the expected revenue accruing to the seller under our conditions the war of attrition raises greater expected revenue than all other known sealed bid auction forms journal of economic literature classification numbers d44 d82 1997 academic press

earnings volatility and earnings predictability abstract survey evidence indicates widely held managerial beliefs that earnings volatility is negatively related to earnings predictability in addition existing research suggests that earnings volatility is determined by economic and accounting factors and both of these factors reduce earnings predictability we find that the consideration of earnings volatility brings substantial improvements in the prediction of both short and long term earnings conditioning on volatility information also allows one to identify systematic errors in analyst forecasts which implies that analysts do not fully understand the implications of earnings volatility for earnings predictability

how has the financial crisis affected earnings management a european study the article aims to investigate whether and how in the european union eu the burst of the 2008 financial crisis affected misrepresentation of financial information due to earnings management by analysing a sample of 11 844 firm year observations listed in the eu over the period 2006 2012 an event study methodology allows us to calculate and compare country by country abnormal accruals over the estimation period and over the event period our findings validate our research hypothesis and suggest a decrease of misrepresentation in the large majority of the european countries after the burst of the financial crisis the results take part in the debate in the accounting literature about the change of earnings management over a financial crisis and have several implications for standard setters and regulators that could learn how the common incentives of entities to attract potential investors during a crisis could lead them to provide a high quality financial reporting

post listing performance and private sector regulation the experience of london s alternative investment market abstract we investigate the experience of companies listing and raising capital on the aim which is privately regulated and relies on nominated advisors who compete for listings and provide regulatory oversight aim firms underperform newly listed firms on traditionally regulated exchanges based on post listing returns and failure rates comparable to firms listing on the unregulated us pink sheets and exhibit abnormally high pre listing accruals and post listing reversals high quality auditors and nomads partially mitigate underperformance suggesting that aim firms have limited ability to bond through more stringent oversight underperformance is particularly pronounced for firms with higher proportions of retail investors

debt covenant violation and manipulation of accruals abstract this paper examines the abnormal accruals of a sample of 94 firms that reported debt covenant violations in annual reports we expect debt covenant restrictions to influence accounting choices in the year preceding and the year of violation time series and cross sectional models are used to estimate normal accruals in the year prior to violation both models indicate that abnormal total and working capital accruals are significantly positive in the year of violation there is evidence of positive abnormal working capital accruals after controlling for management changes and auditor going concern qualifications

rational expectations in stationary linear models linear time series models have come to dominate the macroeconomic literature on rational expectations and equilibrium business cycle theory but the explicit solution of such models has generally required strong restrictions upon the exogenous process of stochastic shocks e g temporal independence as well as upon the values of various demand and supply elasticities this paper exhibits a solution technique the method of z transforms which does not require one to impose such restrictions the value of this method is illustrated by applying it to completely characterize the symmetric stationary rational expectations equilibria of a naive linear model of land speculation this approach also permits systematic study of the informationally asymmetric equilibria of the model this paper develops a method for analyzing rational expectations re equilibria in linear economic models the methods i shall discuss usually enable one to determine whether or not a given model has a re equilibrium and if one exists to exhibit an explicit expression for the stochastic process of equilibrium prices the techniques apply to linear models driven by stationary processes of exogenous random shocks

debt covenant violations and managers accounting responses abstract this paper examines accounting changes costs of default and accounting based covenants violated by 130 firms reporting violations in annual reports i find that managers of firms approaching default respond with income increasing accounting changes and that the default costs imposed by lenders and the accounting flexibility available to managers are important determinants of managers accounting responses i also document that private lending agreements are the first violated that net worth and working capital restrictions are the most frequently violated restrictions and that in 52 percent of the cases lenders require concessions from borrowers to resolve default

why do accruals predict earnings abstract higher accruals are associated with lower subsequent earnings we show this phenomenon can be explained by the way sales profits and working capital respond to changes in a firm s product markets empirically high accruals predict high subsequent sales growth but a long lasting drop in both profits and profitability accruals also predict an increase in future competition suggesting that accruals are correlated with abnormally high and in equilibrium transitory true profitability that attracts new entrants to the industry overall the predictive power of accruals is better explained by product market effects than by measurement error in accruals or diminishing returns from investment

the relevance of the value relevance literature for financial accounting standard setting another view this paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors and provides insights into questions of interest to standard setters a primary focus of financial statements is equity investment other uses of financial statement information such as contracting do not diminish the importance of value relevance research value relevance questions can be addressed using extant valuation models value relevance studies address econometric issues that otherwise could limit inferences and can accommodate and be used to study the implications of accounting conservatism r 2001 elsevier science b v all rights reserved jel classification m41 m44 g12

the economics of fraudulent accounting we argue that earnings management and fraudulent accounting have important economic consequences in a model where the costs of earnings management are endogenous we show that in equilibrium low productivity firms hire and invest too much in order to pool with high productivity firms this behavior distorts the allocation of economic resources in the economy we test the predictions of the model using firmlevel data we show that during periods of suspicious accounting firms hire and invest excessively while managers exercise options when the misreporting is detected firms shed labor and capital and productivity improves our firm level results hold both before and after the market crash of 2000 in the aggregate our model provides a novel explanation for periods of jobless and investment less growth

executive overconfidence and the slippery slope to financial misreporting abstract a detailed analysis of 49 firms subject to aaers suggests that approximately one quarter of the misstatements meet the legal standards of intent in the remaining three quarters the initial misstatement reflects an optimistic bias that is not necessarily intentional because of the bias however in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements evidence from a high tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and aaers

earnings quality evidence from the field abstract we provide insights into earnings quality from a survey of 169 cfos of public companies and in depth interviews of 12 cfos and two standard setters cfos believe that i above all high quality earnings are sustainable and repeatable specific characteristics include consistent reporting choices backing by actual cash flows and absence of one time items and long term estimates ii about 50 of earnings quality is driven by non discretionary factors such as industry and macro economic conditions iii in any given period about 20 of firms manage earnings to misrepresent economic performance and for such firms 10 of eps is typically managed iv earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags in addition cfos disagree with current standard setting on a number of issues including the sheer number of promulgated rules the top down approach to rule making the neglect of the matching principle and the emphasis on fair value accounting they indicate that a rules based culture makes the audit function centralized and mechanical and hinders the development of audit professionals a summary impression from our work is that cfos view earnings quality as more of a single and unconditional characteristic in contrast to current research where measures of earnings quality are strongly conditional on the decision setting this cfo view is related to their idea of one number a single earnings metric that shapes both their interactions with external stakeholders and internal decision making

behind the scenes the corporate governance preferences of institutional investors we survey institutional investors to better understand their role in the corporate governance of firms consistent with a number of theories we document widespread behind the scenes intervention as well as governance motivated exit these governance mechanisms are viewed as complementary devices with intervention typically occurring prior to a potential exit we further find that long term investors and investors that are less concerned about stock liquidity intervene more intensively finally we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

decision making approaches and the propensity to default evidence and implications abstract this paper examines heterogeneity in the responsiveness to default options in a large state retirement plan focusing on individuals decision making approaches as well as their economic and demographic characteristics analyses of a survey of plan participants show that procrastination and the need for cognitive closure are important determinants of the likelihood of default this paper also explores an important implication of defaulting individuals who default are significantly more likely to subsequently express a desire to enroll in a different plan the desire to change plans is also correlated with numerous economic and decision making characteristics including procrastination

a contracting perspective on earnings quality abstract this paper analyzes the impact of signal to noise ratios and the autocorrelation of a performance measure on the principal s welfare in dynamic agencies with renegotiation we consider the impact of changes in the persistent transitory and reversible components of accounting earnings on its usefulness in valuation versus contracting increasing the persistent components and reducing the reversible components are generally desirable for valuation but not for contracting eliminating transitory components of earnings is generally desirable for valuation but not necessarily for contracting we discuss the contracting implications of differences in the autocorrelations of accounting earnings versus stock returns

the relation between earnings and cash flows abstract a model of earnings cash flows and accruals is developed assuming a random walk sales process variable and fixed costs and that the only accruals are accounts receivable and payable and inventory the model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating cash cycle also the model is used to predict serial and cross correlations of each firm s series the implications and predictions are tested on a 1337 firm sample over 1963 1992 both earnings and cash flow forecast implications and correlation predictions are generally consistent with the data

does basel ii affect the market valuation of discretionary loan loss provisions we use a sample of banks from 24 european countries to investigate whether the adoption of the basel ii capital accord in 2008 affects the market valuation of discretionary loan loss provisions dllps although basel ii lowers the incentives of internal ratings based irb banks to recognize income increasing dllps in an opportunistic manner it has no such impact on the remaining banks which adopt the standardized methodology we use this setup in a difference in difference did design where standardized banks act as a control group our evidence supports the three hypotheses that for irb relative to standardized banks basel ii is associated with i less income increasing dllps and ii less income smoothing via dllps which enhances the informational content of dllps about future loan losses and leads to iii higher market valuation of dllps our findings are timely and have policy implications for future regulatory developments in the banking industry

predicting accounting misconduct the role of firm level investor optimism motivated by a large literature on how firm specific resources such as leadership and management skills strategies organizational capabilities and intellectual properties drive firm performance we propose and find that heterogeneity in investor optimism regarding firm specific attributes plays a very important role in influencing the managerial propensity to manipulate financial statements when firm level investor optimism is moderate the incidence of accounting misconduct increases but it decreases when investors are highly optimistic further market reaction to the announcement of financial restatements is more negative when investors held more optimistic firm specific beliefs at the time of initial misstatement these findings are robust to alternative firm specific optimism measures linked to analysts general investors and unsophisticated individual investors controls for market wide consumer sentiment unexplained by macroeconomic factors economy wide and industry level optimism potential selection bias and reverse causality our analysis highlights the importance of firm level investor optimism in predicting preventing and detecting accounting misconduct

the role of accounting quality in the m a market we examine the role of target firms accounting quality in the merger and acquisition process we predict that target firm accounting quality will be positively associated with 1 the likelihood that the deal will be structured as a negotiation rather than as an auction 2 the speed with which the deal reaches final resolution and 3 the likelihood that the proposed deal is ultimately completed our empirical evidence is consistent with these predictions these results complement and extend existing findings on target firm accounting quality and provide new evidence that financial accounting quality relates positively to the efficient allocation of the economy s capital resources this paper was accepted by mary barth accounting

managerial optimism and earnings smoothing abstract this paper empirically examines how ceo optimism affects earnings smoothing and earnings surprises the main finding is that optimistic managers smooth earnings more than rational managers and are associated with smaller in absolute value earnings surprises a possible theoretical explanation is offered for these results based on a combination of the torpedo effect the innate behavior of optimists and the risk of litigation prosecution for over reporting earnings

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

earnings management the shapes of the frequency distributions of earnings metrics are not evidence ipso facto we provide evidence that the shapes particularly around zero of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by 1 deflation using for example price or market capitalization 2 sample selection criteria that lead to differential inclusion exclusion of observations to the left of zero versus observations to the right of zero implicit in studies focusing on firms followed by i b e s and explicit in studies partitioning on a variable differing between loss observations and profit observations 3 differences between the characteristics of observations to the left of zero and observations to the right of zero such as market pricing and analyst optimism pessimism or 4 a combination of these factors since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects we conclude that the shapes cannot be used as ipso facto evidence of earnings management

do analysts sacrifice forecast accuracy for informativeness analysts deviate from management guidance to correct for perceived earnings management although the deviations reduce forecast accuracy they improve forecast informativeness bringing the forecasts closer to the unmanaged earnings and reducing accruals mispricing an implicit assumption in the literature is that more accurate analyst forecasts i e estimates that are closer to the reported earnings are better for investors and that analysts objective is to forecast the reported managed earnings accurately our analysis suggests that this is not necessarily the case and that an inaccurate forecast can actually be more informative than an accurate one prior studies on analysts deviations from management guidance focus on analysts incentives to issue estimates that managers can beat these studies implicitly assume that analysts side with management against the interests of their clients our analysis indicates that analysts could also deviate from management guidance to provide useful valuation

does managerial sentiment affect accrual estimates evidence from the banking industry abstract we examine whether managerial sentiment is associated with errors in accrual estimates using public banks we find 1 managerial sentiment is negatively associated with loan loss provision estimates 2 future charge offs per dollar of provision are positively associated with sentiment when the provision is estimated and 3 the effects of sentiment are greater for firms with more uncertain charge offs results are similar for private banks suggesting accrual manipulation related to capital market incentives is unlikely to explain the results although economic fundamentals explain most of the variation in the provision we find sentiment has an incremental and economically meaningful effect