the changing time series properties of earnings cash flows and accruals has financial reporting become more conservative abstract this paper documents changes in the patterns of earnings cash flows and accruals over the last four decades in the absence of a generally accepted definition of conservatism a number of measures of reporting conservatism are identified and examined these measures rely on the accumulation of nonoperating accruals the timeliness of earnings with respect to bad and good news characteristics of the earnings distribution and the market to book ratio the patterns are consistent with an increase in conservative financial reporting over time the findings have implications for accounting standard setting regulation of financial information and financial statement analysis

competition cooperation and innovation organizational arrangements for regimes of rapid technological progress abstract discussions of the link between firm size and innovation are outmoded because the boundaries of the firm have become fuzzy in recent decades strategic alliances constellations of bilateral agreements among firms are increasingly necessary to support innovative activities such alliances can facilitate complex coordination beyond what the price system can accomplish while avoiding the dysfunctional properties sometimes associated with hierarchy antitrust law and competition policy need to recognize that these new organizational forms are often the functional antithesis of cartels though they may have certain structural similarities a more complete understanding of bilateral contracts and agreements ought to reveal when and how cooperation can support rather than impede innovation and competition

the information content of security prices a second look abstract beaver lambert and morse 1980 employ a regression of percentage change in prices on percentage change in earnings in which data are grouped by the dependent variable reverse regression offers a more intuitive and direct way to assess the information content of security prices the objective of beaver et al while grouping is asymptotically equivalent reverse regression is a more efficient way of examining the incremental explanatory power of lagged values of percentage change in price with respect to accounting earnings

information in prices about future earnings abstract stock return over a period reflects the market s revision in expectation of future earnings accounting earnings over the same period however have limited ability to reflect such revised expectations therefore returns anticipate earnings changes and the earnings response coefficient from a regression of returns on contemporaneous earnings changes is biased toward zero we reduce this bias by including leading period returns in price earnings regressions the resulting estimated earnings response coefficient magnitudes suggest that the capital market on average views earnings changes to be largely permanent this is consistent with the random walk time series property of annual earnings

down with mne centric theories market entry and expansion as the bundling of mne and local assets both anderson and gatignon and the uppsala internationalization model see the initial mode of foreign market entry and subsequent modes of operation as unilaterally determined by multinational enterprises mnes arbitraging control and risk and increasing their commitment as they gain experience in the target market oli and internalization models do recognize that foreign market entry requires the bundling of mne and complementary local assets which they call location or country specific advantages but implicitly assume that those assets are freely accessible to mnes in contrast to both of these mne centric views i explicitly consider the transactional characteristics of complementary local assets and model foreign market entry as the optimal assignment of equity between their owners and mnes by looking at the relative efficiency of the different markets in which mne and complementary local assets are traded and at how these two categories of assets match i am able to predict whether equity will be held by mnes or by local firms or shared between them and whether mnes will enter through greenfields brownfields or acquisitions the bundling model i propose has interesting implications for the evolution of the mne footprint in host countries and for the reasons behind the emergence of dragon mnes

earnings restatements and differential timeliness of accounting conservatism abstract we examine whether basu s 1997 differential timeliness metric and the related c score metric are effective in detecting predictable differences in conservatism surrounding corrections of overstated earnings cross sectional and time series analyses employing 2132 firms making restatements during 1999 2005 suggest basu based metrics capture variation in conservatism further we find that increases in conservatism following restatements are contingent on improvements in corporate governance collectively these results provide evidence of the usefulness of the basu based metrics in the restatement setting

repeated partnership games with imperfect monitoring and no discounting in a partnership game each player s utility depends on the other players actions through a commonly observed consequence e g output profit price which is itself a function of the players actions and an exogenous stochastic environment if a partnership game is repeated infinitely and each player s payoff in the infinite game supergame is the long run average of his expected one period utilities then efficient combinations of one period actions can be sustained as nash equilibria of the supergame even if the players cannot observe other players actions or information but can only observe the resulting consequences

applying and advancing internalization theory the multinational enterprise in the twenty first century internalization theory has provided a resilient analytical framework that explicitly or implicitly underlines much of international business scholarship internalization theory is not a monolithic body of knowledge instead it has devolved into several streams each of which focuses on the interests of particular epistemic communities while also acting as a more generic organizing framework for those more broadly interested in its application to real world challenges following a review of the various streams we trace the frontiers of current research of the broader internalization framework and identify emerging themes raised by the papers in the special issue these include transaction cost considerations in the bundling and recombination of assets across diverse contexts the growing relevance of quasi internalization the theoretical challenges of bounded rationality for internalization theory and the increasing disconnect between ownership control and responsibility these developments point to new research frontiers for scholars looking to apply or advance internalization theory

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

depreciation policy changes tax earnings management and investment opportunity incentives abstract contrary to previous studies we find managers change depreciation policies in predictable ways we identify three dimensions of depreciation policy changes whether it is a method change or an estimate revision whether it is income increasing or decreasing and whether it applies to new assets only or both new and existing assets this disaggregation leads to three findings first a 1981 tax law altered the frequency of estimate revisions and method changes second firms adopting income increasing method changes for all assets experience worse performance than those adopting such changes only for new assets finally non income increasing policy changes are associated with changes in investment opportunities

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

the contracting benefits of accounting conservatism to lenders and borrowers abstract this paper examines the ex post and ex ante benefits of accounting conservatism to lenders and borrowers in the debt contracting process i expect conservatism to benefit lenders ex post through the timely signaling of default risk as manifested by accelerated covenant violations and to benefit borrowers ex ante through lower initial interest rates consistent with these predictions i find that more conservative borrowers are more likely to violate debt covenants following a negative price shock and that lenders offer lower interest rates to more conservative borrowers

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

the economics of joint ventures in less developed countries the paper examines the microeconomic partial equilibrium behavior of joint ventures established between transnational corporations and domestic partners in less developed countries it focuses on issues relating to resource allocation and profit distribution under various institutional scenarios the analysis places special emphasis on the role of bargaining power transfer pricing stock ownership and profit shares of the parties and the responsiveness of joint ventures to national development goals some of the results apply to wholly owned subsidiaries of transnational corporations local firms and licensing arrangements which emerge as special cases

optimum advertising policy over time for subscriber service innovations in the presence of service cost learning and customers disadoption abstract on the theoretical side this paper characterizes qualitatively optimal advertising policy for new subscriber services a monopolistic market is analyzed first for which customers disadoption discounting of future profits streams and a service cost learning curve are allowed after characterizing the optimal policy for a general diffusion model the results pertaining to a specific diffusion model for which advertising affects the coefficient of innovation that incorporates the disadoption rate are reported the results of the theoretical research show that the advertising policy of the service firm in the presence of customers disadoption could be very different from the same when disadoption is ignored on the empirical side four alternative diffusion models are estimated and their predictive powers using a one step ahead forecasting procedure compared the diffusion data analyzed are related to the canadian cable tv industry empirical research findings suggest that the specific diffusion model considered above is not only of theoretical appeal but also of major empirical relevance the analytical findings of the study are documented in six theoretical propositions for which proofs are provided in a separate appendix the results of a related numerical experiment together with the analytical findings pertaining to the competitive role of advertising are included managerial implications of the study together with directions for future research are also discussed

accounting activities security prices and class action lawsuits abstract provisions in the securities acts provide incentives to purchasers of common stocks to initiate class action lawsuits when stock prices decline at and preceding announcements that directly reduce or imply a reduction in previously reported accounting book values reported common stock returns associated with alleged misrepresentations in financial statements are consistent with incentives provided by the law classification of misrepresentations based on hypothesized relations between announcements and security returns results in observed differences in the association between litigated accounting announcements and common stock returns

partner contributions as predictors of equity share in international joint ventures the type of expertise that a company contributes to a joint venture may affect the amount of equity that it owns this research observes the ownership patterns associated with four common combinations of partner expertise in international joint ventures the results rank company assets with respect to the contributor s ability to negotiate majority ownership in the original joint venture contract and that company s tendency to buy up equity from the partner later on

debtholders demand for conservatism evidence from changes in directors fiduciary duties debtholders demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established using a natural experiment setting wherein a delaware court ruled that the fiduciary duties of directors in near insolvent delaware companies extend to creditors we predict and find that firms subject to the ruling significantly increased their accounting conservatism in addition our results suggest that the increase in conservatism is more pronounced in near insolvent delaware firms with stronger boards confirming that the court ruling takes effect through the channel of the board of directors our results are robust to using alternative measures of conservatism and near insolvency status and controlling for potential confounding factors and other stakeholders demand for conservatism overall our study provides empirical evidence to support the causal relation between debtholders demand and accounting conservatism previously suggested in the literature and offers some insights into the role of the board of directors in financial reporting

permanent versus transitory components of annual earnings and estimation error in earnings response coefficients abstract previous research has generally estimated unexpected earnings as the change relative to the previous year assuming that shocks to annual earnings are purely permanent in the presence of transitory components of annual earnings we predict that using earnings changes as a proxy for unexpected earnings causes earnings response coefficients to be understated and the estimation error to be negatively cross sectionally correlated with persistence the negative correlation causes the association between earnings response coefficients and persistence to be overstated we use the ima 1 1 model to capture transitory components of annual earnings and obtain results that are consistent with our predictions

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

conditionally conservative fair value measurements abstract firms measure fair values using level 2 or 3 inputs when items do not trade in liquid markets limiting market discipline over the measurements we provide evidence that firms holding higher proportions of financial instruments measured at level 2 and 3 fair values report more conditionally conservative comprehensive income attributable to fair value measurements consistent with firms trying to mitigate investors discounting of the measurements we further predict and find that this conditional conservatism 1 increases with governance mechanisms that increase the strength and persistence of firms incentives to report conservatively and 2 decreases with firms earnings management incentives

corporate capital expenditure decisions and the market value of the firm abstract this paper is an event time study of the common stock prices of a sample of 658 corporations around the dates on which they publicly announced their future capital expenditure plans for industrial firms announcements of increases decreases in planned capital expenditures are associated with significant positive negative excess stock returns for public utility firm neither increases nor decreases in planned capital expenditures are associated with significant excess stock returns we interpret the evidence as being consistent with the hypothesis that managers seek to maximize the market value of the firm in making their corporate capital expenditure decisions

optimal maintenance and production rates for a machine a nonlinear economic control problem abstract this paper derives qualitative properties such as monotonicity and limiting behavior of the optimal policy for a class of nonlinear optimal control problems the problem structure is characteristic of certain economic investment problems where two control instruments influence the rate of deterioration of a capital good an example for this is the problem of determining the optimal production and maintenance rates for a machine when the effectiveness of the maintenance expenditures is subject to decreasing returns to scale and where the marginal deterioration is an increasing function of the production rate a stability analysis in both of the phase planes state costate and state control is carried out and it is shown that the jacobian determinants in both cases are identical also provided is a sensitivity analysis of the equilibrium furthermore other applications of the model in the areas of advertising and pollution control models are proposed

accounting conservatism and managerial risk taking corporate acquisitions abstract watts 2003 and ball and shivakumar 2005 argue that accounting conservatism decreases managerial incentives to make negative net present value investments i develop and test a new hypothesis that accounting conservatism is associated with managers making less risky investments i find that under more conservative accounting managers make less risky acquisitions and that firms with accounting based debt covenants drive this association this result is consistent with conservative firms avoiding risky investments because of the potential for large losses to trigger debt covenants conservatism reducing risk shifting can in part explain debt holders demand for conservative accounting

estimation and empirical properties of a firm year measure of accounting conservatism we estimate a firm year measure of accounting conservatism examine its empirical properties as a metric and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism the results are consistent with the measure c score capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to 3 years ahead cross sectional hypothesis tests suggest firms with longer investment cycles higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty

a generalized theorem for joint ventures and licensing negotiations traditional theory has viewed direct investment licensing and trade mainly as foreign market entry alternatives however a growing number of overseas ventures are being formed as a mix of the 3 methods where a joint venture partner may be compensated by a package involving some return on equity investment plus royalties plus margins on components or finished product traded with the joint venture corporation this paper presents an algebraic model for the negotiations position of each partner in a prospective venture the trade offs between the 3 compensation types are complex as they involve non zero sum games the methodology is extended to enable a host government to calculate for each alternative arrangement the foreign exchange cost tax revenues or other national costs and benefits the model makes some unconventional recommendations for corporate strategy and government policy

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 association between accounting earnings and security returns for large and small firms abstract the differential information hypothesis advanced by atiase 1980 states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size this study examines two corollaries of that hypothesis first security prices of large firms anticipate accounting earnings earlier than security prices of small firms second for a given level of unexpected earnings the cumulative abnormal returns of small firms exceed those of large firms the results are generally consistent with atiase s hypothesis

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

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

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

internal corporate restructuring abstract firms that alter their divisional configurations on average increase shareholder wealth gains appear to come from information about investment opportunities and increases in efficiency performance before the restructurings suggests poorly organized firms are motivated by market pressures to change their organizations change also occurs in healthy firms as part of the growth process restructuring often occurs where there is no evidence of takeover threats while stock prices increase around the restructurings there is a contemporaneous decline in earnings due to increased expenses these findings appear inconsistent with the contention that the market pressures managers into focusing on short run earnings

earnings as an explanatory variable for returns in this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings returns associations the primary model motivating this research relies on the idea that book value owners equity and market value are both stock variables indicating the wealth of the firm s equity holders the related flow variables after adjusting for dividends are respectively earnings divided by price at the beginning of the return period a p 1 and market returns it then follows that earnings divided by beginning of period price should be associated with stock returns although models based on a relation between market value and book value are used occasionally in the accounting research literature see for example landsman 1986 harris and ohlson 1987 and barth

the relation between the return interval and betas abstract the size effect is sensitive to the length of the return interval used in estimating betas beta changes with the return interval because an asset s covariance with the market and the market s variance do not change proportionately as the return interval is changed we document beta sensitivity to the return interval evidence from cross sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer interval betas we provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns

firm size and the information content of prices with respect to earnings abstract beaver lambert and morse 1980 suggest that prices may be useful in forecasting future earnings we explore the information content of prices with respect to earnings by focusing on firm size and its relation to the predictive accuracy of price based earnings forecasts firm size proxies for the amount of information and for the number of traders and professional analysts processing the available information about an enterprise our empirical results are consistent with the hypothesis that price based earnings will outperform univariate time series forecasts by a greater margin for larger firms than for smaller firms

mandated accounting changes and debt covenants the case of oil and gas accounting abstract the relationships among mandated accounting changes bond covenants and security prices has been the focus of several studies these studies have provided mixed evidence on the existence of a bond covenant effect on security prices this paper suggests that inconclusive prior results are a consequence of inappropriately measuring the default risk of debt using an option pricing framework it is shown that the debt to equity alone is not an adequate measure of default risk in particular both the debt to equity ratio and the total risk of the firm are necessary to adequately model the bond covenant effects of an accounting change these theoretical propositions are supported by the empirical analysis of the security market reaction to changes in oil and gas accounting

a dynamic model of the choice of mode for exploiting complementary capabilities this paper examines the choice of mode for a multinational enterprise and a local firm to exploit their complementary capabilities we develop a combined real options and game theoretic model of modal choice by incorporating a range of factors drawn from the dynamic capabilities theory and transaction cost or organizational economics the factors scrutinized in the model include the parties absorptive capacities frictions in knowledge and asset markets and associated incentive problems cost of switching from one mode to another and cost associated with power jockeying the model uses simulation to examine how these factors interact to influence the choice of mode the results identify a number of conditions for one factor to dominate another and help to reconcile different theories that have made contradicting predictions with regard to the effects of such factors as uncertainty and capability divergence on the optimal choice of mode

saddle point analysis in a price advertising model abstract extending a model of phelps and winter 1970 luptacik 1982 considers a nonlinear optimal control model with one state variable x proportion of customers buying from a firm and two control variables namely price p and advertising intensity a in the present paper the saddle point property of the equilibrium is established and economically interpreted the main results are as follows the stable path to the equilibrium in the x a phase plane is downward sloping whereas the stable path in the x p diagram is upward sloping i e the smaller the market share the higher the optimal advertising expenditures but the lower the optimal price of the product

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

earnings management behaviors under different monitoring mechanisms the case of islamic and conventional banks abstract we investigate the impact of organizational religiosity on the earnings quality of listed banks in the middle east and north africa region we analyze islamic banking institutions which operate within strict religious norms and extended accountability constraints and compare them with their conventional counterparts during 2008 2013 we find that islamic banks are less likely to manage earnings and that they adopt more conservative accounting policies based on these findings we argue that religious norms and moral accountability constraints in these organizations have a significant impact on financial reporting quality and agency costs which have implications for both regulators and market participants

understanding discretion in conservatism an alternative viewpoint various studies have investigated variation in reporting conservatism with pre specified contractual incentives lawrence et al forthcoming hereafter lss propose a model to control for normal or non discretionary conservatism while testing for variation in conservatism with contractual forces which they characterize as discretionary variation our objective is to further the discussion on discretion in conservatism by relying on lss and incorporating insights from related studies to shed light on the rationales and relative importance of various controls for normal conservatism suggested by lss furthermore our perspective on discretion in conservatism is distinct from the one developed by lss in some crucial respects ultimately leading us to question the nature of the boundary between discretionary and non discretionary conservatism

performance verifiability and output sharing in collaborative ventures this paper studies the problem of contracting between two firms when they try to exploit their complementary resources in a collaborative venture cv but their performance in the cv cannot be precisely verified by the other party or by a third party arbiter using a mathematical model that treats performance verifiability as a continuous variable the paper first establishes that a party whose performance cannot be perfectly verified has an incentive to shirk if it is paid only a flat fee and that this shirking problem is more severe as its performance is less verifiable then the paper shows in a general setting that a contract under which each party shares a fraction of the output is superior to a contract under which one of them is paid only a flat fee when performance verifiability is sufficiently low in addition with some specific assumptions about the forms of the revenue and cost functions the paper also shows that a party s share of the venture s residual output in the equilibrium is an increasing function of its productivity and a decreasing function of its opportunity cost finally the numerical examples constructed in the paper suggest that a contract which combines the self enforcing mechanism of output sharing with the third party enforcement mechanism of arbitration generally performs better than a contract that utilizes only one of these mechanisms

optimal price and advertising policy under atomistic competition abstract this paper follows that of phelps and winter 1970 with an extension made to include advertising the following question will be discussed should a firm lower price and or increase advertising in order to maximize the present profit value using the theory of optimal control the rules for optimal price and advertising policy under the assumption of atomistic competition will be derived

discussion of accounting discretion in fair value estimates an examination of sfas 142 goodwill impairments beatty and weber examine an accounting choice that managers made upon adoption of statement of financial accounting standards 142 whether to record a goodwill asset impairment as a cumulative effect of an accounting change at the time of adoption or delay the recognition of such an impairment to the future perhaps indefinitely when they would be recorded as expenses in earnings from continuing operations the authors consider several factors that might influence management s reporting of transition effects including contracting equity market incentives and regulatory forces participants at the 2005journal of accounting research conference questioned whether such a complex accounting decision can be captured with simple linear models and noisy proxy variables while also speculating upon whether the results would generalize to other settings in this discussion i summarize beatty and weber s research highlight its contribution to the accounting literature and provide a record of the main issues raised by the conference participants 1 summary

why have measures of earnings quality changed over time the properties of earnings have changed dramatically over the past 40 years prior studies interpret this trend as a decline in earnings quality but disagree on whether it results from changes in the real economy or changes in accounting standards i find that each new cohort of listed firms exhibits lower earnings quality than its predecessors mainly because of higher intangible intensity i conclude that the trend of decline in earnings quality is due more to changes in the sample of firms than to changes in generally accepted accounting principles gaap or in the earnings quality of previously listed firms

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 transaction costs theory of joint ventures an empirical study of japanese subsidiaries in the united states this paper offers the first large sample empirical study of the factors which influence the choice of japanese firms between full or partial ownership of their u s manufacturing subsidiaries it studies for the first time the ownership policies of investors of a single home country in a single host country thus keeping variations within home and host countries constant one methodological improvement over previous studies is the use as independent variables of the relevant characteristics of the investing firms these had been proxied in previous studies by data on u s industries entered the results suggest that the degree of ownership taken by japanese manufacturing investors in their american subsidiaries is driven by the same general transaction costs variables that determine the choices made by their u s counterparts japanese parents joint venture when they need to combine with other firms intermediate inputs which are subject to high market transaction costs an intriguing result however is the lack of significance of two variables which in the u s case strongly push towards full control of foreign subsidiaries in this study neither the japanese parent s r d nor its advertising intensities had any significant impact on their ownership policies

optimal pricing and production in an inventory model abstract this paper deals with the problem of simultaneously determining the optimal price policy and production rate over a given planning horizon for nonlinear demand functions and convex inventory and shortage cost functions the optimal solution paths are derived by using optimal control theory the treatment of linear nonsmooth cost functions requires the use of a generalized maximum principle the solution method is a phase portrait analysis providing insight into the optimal pricing and production policies as well as the resulting inventory paths moreover it is shown that in the case of nonsmooth piecewise linear cost functions the equilibrium is approached within finite time although the model is nonlinear in the control variables finally it is illustrated that exogenous fluctuations in the demand rate seasonal demand pattern amount to cyclical optimal solutions

empirical tax research in accounting this paper traces the development of archival microeconomic based empirical income tax research in accounting over the last 15 years the paper details three major areas of research i the coordination of tax and non tax factors ii the effects of taxes on asset prices and iii the taxation of multijurisdictional international and interstate commerce methodological concerns of particular interest to this field also are discussed the paper concludes with a discussion of possible directions for future research r 2001 elsevier science b v all rights reserved jel classification m41 h25 k34 g32 f23

cross sectional dependence and problems in inference in market based accounting research this paper provides a framework and some empirical evidence to evaluate the seriousness of problems in inference that arise in stockreturn based studies when the data are cross sectionally dependent the study is motivated on the grounds that statistical procedures designed to address such problems are often infeasible and even when they can be implemented they sometimes introduce other more serious difficulties thus researchers have frequently adopted an approach that ignores the cross sectional dependence e g ordinary least squares ols the objective of this paper is to help identify the contexts in which ignoring the dependence would lead to serious misstatement of significance levels cross sectional dependence in stock returns data is likely to exist when at least some of the returns are sampled from common time periods this would be the case in all studies of the reaction of stock prices to a

asymmetric timeliness of earnings market to book and conservatism in financial reporting abstract using an accounting conservatism theory that reflects accounting s role in practice we investigate the relation between two extensively used measures of conservatism asymmetric timeliness of earnings and the market to book ratio mtb we predict and observe that when asymmetric timeliness is measured cumulatively over long periods its relation with end of period mtb is positive when asymmetric timeliness is measured over short periods its dependence on beginning of period composition of equity value ev is responsible for its negative association with mtb further asymmetric timeliness appears to measure conservatism more efficiently when it is estimated cumulatively over multiple periods

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

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

the allowance for uncollectible accounts conservatism and earnings management we study the interrelation between conservatism and earnings management by examining the allowance for uncollectible accounts and its income statement counterpart bad debt expense we find that the allowance is conservative and that it has become more conservative over time conservatism may however facilitate earnings management we find that firms manage bad debt expense downward and even record income increasing bad debt expense to meet or beat analysts earnings forecasts and that conservatism accentuates the extent to which firms manage bad debt expense further we find that firms manage bad debt expense downward by drawing down previously recorded over accruals of bad debt expense that have accumulated on the balance sheet an implication of our study is that tighter limits on the amount by which firms are permitted to understate net assets may reduce their ability to manage earnings

association between accounting performance measures and stock prices a test of the life cycle hypothesis abstract this paper posits that stock market response to two accounting performance measures sales growth and capital investment is a function of firm life cycle stage firms are grouped into various life cycle portfolios using dividend payout sales growth and age as predicted the empirical results indicate a monotonic decline in the response coefficients of unexpected sales growth and unexpected capital investment from the growth to the stagnant stages additional analysis suggests that this relation is not driven by a firm size effect risk differences or measurement error in the proxies for performance measures

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

international differences in the timeliness conservatism and classification of earnings in this paper we analyze differences in the timeliness of income recognition between the u s and u k gaap financial reporting regimes building on previous work in the area we focus on the links between current reported earnings and current and past changes in market value in the light of basu 1997 we present a formal model in which the response of reported earnings to changes in market value varies according to whether the value change is good news or bad this model yields a number of insights with regard to the definition and measurement of earnings conservatism we also report evidence indicating that controlling for cross jurisdictional classification differences affects comparisons of earnings timeliness and earnings conservatism specifically we find that apparent differences in conservatism between the u s and u k accounting regimes are sensitive to the inclusion or exclusion of extraordinary items in u k accounting earnings recent research documents significant variation in the information content of earnings across international gaap regimes e g alford et al tlancaster university tuniversity of manchester the research support of the eco

managerial overconfidence and accounting conservatism managerial overconfidence overconfident managers overestimate ixwxuhuhwxuqviurpwkhluilupv lqyhvwphqwv 7kxv zh predict that overconfident managers will tend to accelerate good news recognition delay loss recognition and generally use less conservative accounting furthermore we test whether external monitoring helps to mitigate this effect using measures of both conditional and unconditional conservatism we find robust evidence of a negative relation between ceo overconfidence and accounting conservatism we further find that external monitoring does not appear to mitigate this effect our findings add to the growing literature on overconfidence and complements findings in schrand and zechman 2011 that overconfidence affects financial reporting behavior

non discretionary conservatism evidence and implications a large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices we extend existing research by modeling the impact of extant accounting rules on conservative accounting accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values we document evidence of the resulting non discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives

plant closing decisions and the market value of the firm abstract we investigate the underlying causes and the announcement effects of plant closings the closing in our sample do not appear related to takeover activity instead they appear motivated by declining firm profitability firms announcing closings have lower earnings than market or industry medians earnings typically improve slightly after the announcement we find a negative stock market reaction to plant closing announcements

accounting standards and debt covenants has the balance sheet approach led to a decline in the use of balance sheet covenants abstract recent years have seen a sharp decline in the use of balance sheet based covenants in private debt contracts i hypothesize that changes in accounting standards can explain part of this decline standard setting has shifted towards a balance sheet approach which i predict has made the balance sheet less useful for contracting i measure the effect of the balance sheet approach on specific borrowers using a volatility ratio i find that borrowers with greater volatility ratios are less likely to have balance sheet based covenants this evidence is consistent with reductions in the contracting usefulness of the balance sheet being associated with reductions in balance sheet covenants

cash flow asymmetry causes and implications for conditional conservatism research earnings asymmetric timeliness captures both accrual and operating cash flow cfo asymmetric timeliness because recognition of operating cash flows does not reflect differential verification thresholds for recognizing unrealized gains versus losses cfo asymmetry adds noise or bias to tests of conditional conservatism we show that cfo asymmetry is predictable in the cross section and varies systematically with life cycle characteristics removing cfo from earnings and using accruals based measures of asymmetric timeliness eliminates several biases that prior studies have attributed to other sources moreover accrual asymmetric timeliness varies in the cross section as theory predicts going forward we recommend researchers use accruals based asymmetric timeliness measures when testing for conditional conservatism

econometrics of the basu asymmetric timeliness coefficient and accounting conservatism a substantial literature investigates conditional conservatism defined as asymmetric accounting recognition of economic shocks news and how it depends on various market political and institutional variables studies typically assume the basu 1997 asymmetric timeliness coefficient the incremental slope on negative returns in a piecewise linear regression of accounting income on stock returns is a valid conditional conservatism measure we analyze the measure s validity in the context of a model with accounting income incorporating different types of information with different lags and with noise we demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments such as the length of the firm s operating and investment cycles and its degree of diversification we particularly examine one characteristic the extent to which unbooked information such as revised expectations about rents and growth options is independent of other information and discuss the conditions under which a proxy for this characteristic is the market to book ratio we also conclude that much criticism of the basu regression misconstrues researchers objectives

discussion of asymmetric timeliness of earnings market to book and conservatism in financial reporting abstract roychowdhury and watts 2007 asymmetric timeliness of earnings market to book and conservatism in financial reporting journal of accounting and economics provide a thought provoking discussion of an important topic and consider a controversial role of accounting inconsistent with the valuation perspective of accounting currently adopted by standard setters the paper uses a contracts based view of accounting to explain the empirical relation between two measures of conservatism the market to book ratio and asymmetric timeliness although the predictions from their framework are consistent with the previously documented negative correlation between these measures suggesting this criticism of asymmetric timeliness may be misguided i will be surprised if their paper eliminates the controversy over these measures of conservatism

accounting discretion in fair value estimates an examination of sfas 142 goodwill impairments this study examines statement of financial accounting standards 142 adoption decisions focusing on the trade off between recording certain current goodwill impairment charges below the line and uncertain future impairment charges included in income from continuing operations we examine several potentially important economic incentives that firms face when making this accounting choice we find evidence suggesting that firms equity market concerns affect their preference for above the line vs below the line accounting treatment and firms debt contracting bonus turnover and exchange delisting incentives affect their decisions to accelerate or delay expense recognition our study contributes to the accounting choice literature by examining managers use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross sectional hypotheses of the determinants of firms preferences for immediate below the line versus delayed above the line expense recognition

entry and price dynamics in a perfect foresight model abstract this paper studies firms entry and price dynamics in a model that combines the assumptions of free entry and perfect foresight with the hypothesis of consumer s loyalty postulated by phelps and winter the analysis of the transition to long run equilibrium reveals that in such a model the entry of firms is related to the difference between current prices and costs in relation to the growth of the firms output it is shown that the model is consistent with gibrat s law finally it is shown that the size distribution of firms approaches asymptotically a pareto distribution

the importance of accounting changes in debt contracts the cost of flexibility in covenant calculations abstract in this paper we examine how the exclusion of voluntary and mandatory accounting changes from the calculation of covenant compliance affects the interest rate charged on the loan after controlling for self selection bias and other factors known to affect loan spreads we find that the rate charged is 84 basis points lower when voluntary accounting changes are excluded and 71 basis points lower when mandatory accounting changes are excluded our results suggest that borrowers are willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations and to avoid duplicate record keeping costs

why are losses less persistent than profits curtailments vs conservatism it is well documented that losses are less persistent than profits and that stock prices anticipate the lower persistence of losses yet the underlying explanation for these results is unclear one explanation lies in the abandonment option whereby firms with losses are more likely to curtail operations e g hayn hayn c 1995 the information content of losses j accounting econom 20 2 125 153 another explanation involves timely loss recognition stemming from conservative accounting e g basu basu s 1997 the conservatism principle and the asymmetric timeliness of earnings j accounting econom 24 1 3 37 we provide direct evidence that curtailments are an important factor contributing to the lower persistence of losses an implication of our results is that popular measures of conservatism such as the measure proposed by basu also reflect curtailments this paper was accepted by suraj srinivasan accounting