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

ethics in finance and accounting editorial introduction in light of the recent crisis and its aftershocks it becomes crucial to reflect on the relationship between finance and accounting and on how to integrate ethics and efficiency as well as on how to motivate and empower practitioners in the world of finance to commit to justice fairness and enhanced understanding and to improving their personal integrity this article written as an editorial introduction to a special issue includes works related to control measurement and ethical behavior misbehaviors in finances and accounting professionalism in accounting ethical investing and corporate reporting we conclude by suggesting further research for a better integration of technical aspects of accounting and finances into business activity human activity actually and an for understanding of ethics not limited to rules but as a mutual and interdependent system of values human goods virtues and principles

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

trust interlinking transactions and credit in the industrial district an essential feature of the industrial district is trust among individuals and firms within it this paper focuses mainly on trust based on investments in building up a good reputation that is a personal capital that can even substitute for collateral in obtaining credit informal credit often linked to other transactions and especially subcontracting is therefore an important way of financing economic development in the industrial district moreover the importance of trust as personal capital gives rise to a double financial intermediation in the industrial district this double intermediation constitutes a device to reduce information problems that are usually responsible for credit rationing c 1994 academic press inc copyright 1994 by oxford university press

the structure of periodic review policies in the presence of random yield this work provides a comprehensive analysis of a general periodic review production inventory model with random variable yield existence of an order point whose value does not depend on yield being random is proved in the single period case without specifying the yield model and using a very general cost structure when yield is a random multiple of lot size the nonorder up to optimal policy is characterized for a finite horizon model the finite horizon value functions are shown to converge to the solution of an infinite horizon functional equation and the infinite horizon order point is shown to be no smaller than when yield is certain

leadtime reduction in a q r inventory system an agency perspective abstract we examine the problem of designing and implementing a continuous review q r inventory system from an agency perspective in which the agent s effort influences the item s replenishment leadtime our results are as follows if the agent is risk neutral a linear or quadratic contract achieves first best for a risk averse agent with an exponential utility function assuming a normal leadtime distribution we determine the optimal linear contract extensive numerical experiments suggest that ignoring the possible influence of the agent on the replenishment leadtime can be costly but that the cost penalty of ignoring agency can be significantly reduced by a simple contract

behavioral rationality in finance the case of dividends as the title suggests this paper attempts to get to the specifics of the behavioral rationality theme of this conference by focusing on an area in the main core of finance namely the demand and supply of dividends where by common consent the essentially rationalist paradigm of the field seems to be limping most noticeably important and pervasive behavior patterns on both the paying and the receiving ends have despairingly been written off as puzzles even by theorists as redoubtable as fischer black see esp his much cited 1976 article behaviorists have homed in on precisely these same dividendrelated soft spots in the current body of theory see esp shefrin and statman 1984 we seem to have in sum an ideal place to look for signs of an imminent paradigm shift in the behavioral direction of precisely the kind envisioned by some of the other contributors to this conference the dividend related difficulties and supposed anomalies at issue here are more than just the parochial concern of finance specialists the dividends seem a natural area in finance where the introduction of behavioral cognitive elements might help resolve long standing anomalies particularly the seeming failure of supply to adjust to taxinduced price penalties a closer look at the empirical record however particularly at evidence of responsiveness to major structural changes shows behavior of the aggregates to be less anomalous than conventional handwringing might suggest behavioral cognitive elements whatever they might contribute to the description of particular microdecisions do not appear to be essential adjuncts to the basic finance model in the major comparative static applications for which it was intended helpful comments on an earlier version of this paper have been received from nai fu chen jean marie gagnon gur huberman kose john james poterba and especially melvin reder

risky debt investment incentives and reputation in a sequential equilibrium the agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information the incentive effect of risky debt on the investment policy of a levered firm is studied in this context in a sequential equilibrium of the model a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment the incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market this anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium some empirical implications of the model for bond rating debt covenants and bond price response to investment announcements are explored

dynamic incentives and dual purpose accounting abstract ongoing employment relationships often give rise to implicit dynamic incentives we describe the implications of implicit incentives when firms use information about both an employee s past performance and his future productivity in a two period agency model we show that when an accounting system serves these dual objectives an employee s implicit incentives may be beneficial or detrimental to the firm as a consequence firms may prefer an accounting system that reports a single metric that combines information about past performance and future productivity over one that reports two distinct metrics one for each purpose

where should the line be drawn on insider trading ethics finance ethics have drawn increasing attention from both government regulators and academic researchers this paper addresses the issue of insider trading ethics previous studies on insider trading ethics have failed to provide convincing arguments and consistent results in particular the arguments against insider trading are based primarily on moral and philosophical grounds and lack empirical rigor this study intends to establish and examine the relationship between the ethical issue and economic issue of insider trading we argue that the ethics of insider trading is in essence an economic rather than a moral issue it is so far not clear to what extent insider trading may increase or decrease shareholders wealth until then we must take care to avoid over regulating insider trading

fundamental information analysis fundamental analysis is aimed at determining the value of corporate securities by a careful examination of key value drivers such as earnings risk growth and competitive position in the context of such analysis we identify below a set of financial variables fundamentals claimed by analysts to be useful in security valuation and examine these claims by estimating the incremental value relevance of these variables over earnings our findings support the incremental value relevance of most of the identified fundamentals in fact for the 1980s the fundamentals add approximately 70 on average to the explanatory power of earnings with respect to excess returns we also show that the returns fundamentals relation is considerably strengthened when it is conditioned on macroeconomic variables thereby demonstrating the importance of a contextual capital market analysis for example several fundamentals that appear only weakly value relevant or even irrelevant in the unconditional analysis exhibit strong association with returns under specific economic conditions e g the accounts receivable and the provision for doubtful receivables signals during high inflation from a general examination of the role of fundamentals in security valuation we turn to the related issues of earnings persistence growth and the earnings response coefficient we hypothesize that the funda

the role of ethics in finance the role of ethics in the financial community today seems to be limited to its role in financial economic theory contemporary financial economists view ethics in the context of objective wealth maximization in this context ethics functions primarily as a constraint on behavior this view is both illogical and ambiguous it is illogical because it may actually sanction unethical behavior if such behavior can be shown to lead to material gain it is ambiguous because throughout he 2000 year history of moral philosophy ethics has generally been viewed as a behavioral motivation not as a constraint if a conception of ethics as the fundamental objective in all human endeavor is disseminated in the financial community there is real hope that ethics will be accepted as both logically consistent and desirable

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

market and political regulatory perspectives on the recent accounting scandals not surprisingly the recent accounting scandals look different when viewed from the perspectives of the political regulatory process and of the market for corporate governance and financial reporting we do not have the opportunity to observe a world in which either market or political regulatory processes operate independently and the events are recent and not well researched so untangling their separate effects is somewhat conjectural this paper offers conjectures on issues such as what caused the scandalous behavior why was there such a rash of accounting scandals at one time who killed arthur andersen the securities and exchange commission or the market did fraudulent accounting kill enron or just keep it alive for too long what is the social cost of financial reporting fraud does the united states in fact operate a principles based or a rules based accounting system was there market failure or was there regulatory failure or both was the sarbanes oxley act a political and regulatory overreaction does the united states follow an ineffective regulatory model

diversification under supply uncertainty supply chain management is becoming an increasingly important issue especially when in most industries the cost of materials purchased comprises 40 60 of the total sales revenue despite the benefits cited for single sourcing in the popular literature there is enough evidence of industries having two three sources for most parts in this paper we address the operational issue of quantity allocation between two uncertain suppliers and its effects on the inventory policies of the buyer based on the type of delivery contract a buyer has with the suppliers we suggest three models for the supply process model i is a one delivery contract with all of the order quantity delivered either in the current period with probability or in the next period with probability 1 model ii is also a one delivery contract with a random fraction of the order quantity delivered in the current period the portion of the order quantity not delivered is cancelled model iii is similar to model ii with the remaining quantity delivered in the next period we derive the optimal ordering policies that minimize the total ordering holding and penalty costs with backlogging we show that the optimal ordering policy in period n for each of these models is as follows for x a n order nothing for vi n x a n use only one supplier and for x vi n order from both suppliers for the limiting case in the single period version of model i we derive conditions under which one would continue ordering from one or the other or both suppliers for model ii we give sufficient conditions for not using the second more expensive supplier when the demand and yield distributions have some special form for the single period version of models ii and iii with equal marginal ordering costs we show that the optimal order quantities follow a ratio rule when demand is exponential and yields are either normal or gamma distributed

from local networks of smes to virtual districts evidence from recent trends in italy abstract industrial districts as local networks of small and medium enterprises smes rooted their competitiveness in a mix of economic relationships and social ties recently network technologies have promised gains of efficiency through a reduction in transaction costs and showed new commercial opportunities for small firms despite the morphological similarities between industrial districts and network technologies a longitudinal analysis of ict diffusion within italian districts shows that the foreseen convergence between the district economic model and new technologies should not be taken for granted the observed specific evolutionary paths concerning technology innovation in local systems also opens up issues of economic policy

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

gaap versus the street an empirical assessment of two alternative definitions of earnings managers security analysts investors and the press rely increasingly on modified definitions of gaap net income known by such names as operating and pro forma earnings we document this phenomenon and discuss competing explanations for the recent rise in the use of such modified earnings numbers and implications for the interpretation of related accounting research our results show that over the past 20 years there has been a dramatic increase in the frequency and magnitude of cases where gaap and street earnings differ further there is a very strong bias toward the reporting of a street earnings number that exceeds the gaap earnings number we also show that the market response to the street earnings number has displaced gaap earnings as a primary determinant of stock prices finally through an analysis of earnings releases we show that management has taken a proactive role in defining and emphasizing the street number when communicating to analysts and investors

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

ethics in finance ii the best way to approach professional ethics whether in the finance profession or elsewhere is from the perspective of virtue ethics theory this theory places particular emphasis on the character and motivations of an individual professional and on the organizational community in which the individual acts this article extends and clarifies the central argument of an earlier article on financial ethics several real world examples illustrate the role of virtue ethics in professionalism

a periodic review inventory system with emergency replenishments this paper proposes and analyzes a periodic review inventory system with two replenishment modes regular orders are placed periodically following a base stock policy on inventory position and arrive at the stocking location after a deterministic lead time the location also has the option of placing emergency orders characterized by a shorter lead time but higher acquisition cost in case of imminent stockouts thus at some appropriate time in the replenishment cycle the necessity and size of an emergency order is determined according to a base stock policy on net stock the timing of the emergency order is such that this order arrives and can be used to satisfy the demand in the time period just before the arrival of a regular order when the likelihood of a stockout is highest an approximate cost model is developed which can easily be optimized with respect to the order up to parameters this model is used as the basis for a heuristic algorithm which leads to solutions that are very close to the exact optimal solutions determined through simulation it is shown that the proposed system offers substantial cost savings relative to a system without the emergency replenishment option

inventory models with variable lead time and present value the figures for inventory make up a huge proportion of a company s working capital because of this we formulated the optimal replenishment policy considering the time value of money to represent opportunity cost in this article we provide a mixed inventory model in which the distribution of lead time demand is normal to consider the time value first the study tries to find the optimal reorder point and order quantity at all lengths of lead time with components crashed to their minimum duration secondly we develop a method to insure the uniqueness of the reorder point to locate the optimal solution finally some numerical examples are given to illustrate our findings

moral hazard and adverse selection the question of financial structure this paper looks at the moral hazard and adverse selection problems confronting an entrepreneur offering securities to an uninformed but competitive financial market the adverse selection aspect of the problem is generated by the unobservable entrepreneur s ability to transform effort into value moral hazard arises because the investment decision is made subsequent to financing we consider the joint use of both debt and equity and characterize the equilibrium relation between capital structure and unobservable attributes it is shown that 1 investment and financing are not separable 2 there is an underinvestment problem for better firms and 3 simultaneous use of both debt and equity can resolve this difficulty we also establish a connection between expected terminal firm value and debt promised payment level and between share retention and standard deviation agency problems in corporate finance originated with the influential papers of jensen and meckling 11 myers 17 ross 21 and leland pyle 14 they show that the market imperfections induced by unobservable actions lack of contracting ability and information asymmetry generally lead to second best outcomes in which the distribution of corporate ownership is achieved only at significant cost these costs take the form of excessive perquisite consumption overinvestment underinvestment and incomplete diversification of personal investment portfolios moral hazard and adverse selection comprise two forms in which agency problems may take shape arrow 1 equates these two terms with hidden action and hidden information respectively moral hazard arises when the action undertaken by the agent is unobservable and has a differential value to the agent as compared to the principal adverse selection problems arise when the agent has more information than the principal the resolution of such difficulties has been explored in a number of contexts with both signals and contingent contracting mechanisms these definitions exclude certain agency problems in the delegation literature for which the preference incongruity results from a lack of precommitment rather than some exogenous feature of the model in corporate finance one would thus identify the jensen meckling paper with moral hazard because perquisites enter the insider s objective differently from outsiders while darrough is from columbia university and stoughton is from the university of california irvine the second author s research was partially supported by grant number 410 83 0786 r 1 from the social sciences and humanities research council of canada this paper was presented at the 1984 meetings of the western finance association in vancouver and at the 1985 european finance association meetings in bern we thank kose john and frans tempelaar for their comments at the meetings

the effect of ethical orientation and professional commitment on earnings management behavior the purpose of this study is twofold the first objective is to examine the impact of an individual s ethical ideology and level of professional commitment on the earnings management decision the second objective is to observe whether the presence of a personal benefit affects an individual s ethical orientation or professional commitment within the context of an opportunity to manage earnings using a sample of 375 undergraduate business majors our results suggest a significant relationship between an individual s ethical orientation and decision making further participants with higher levels of professional commitment seem to be less likely to engage in earnings management behavior and less likely to behave opportunistically these results have the potential to add to our understanding of certain behaviors in entry level personnel and should be of interest to managers practitioners academicians and researchers

conflicts of interest in financial intermediation the last years have seen a surge of scandals in financial intermediation this article argues that the agency structure inherent to most forms of financial intermediation gives rise to conflicts of interest though this does not excuse scandalous behavior it points out market imperfections there are four types of conflicts of interest personal individual personal organizational impersonal individual and finally impersonal organizational conflicts analyzing recent scandals we find that all four types of conflicts of interest prevail in financial intermediation

effects of inflation and time value of money on an inventory model with time dependent demand rate and shortages abstract in a recent paper datta and pal investigated the effects of inflation and time value of money on an inventory model with linearly increasing demand and finite shortage cost however their models are formulated under the assumption of equal inventory carrying time during each replenishment cycle in this paper we redevelop the models of datta and pal by relaxing this assumption and modifying their mathematical formulations our models can be applicable to both growing and declining markets with general continuous time dependent demand rates numerical examples are provided to illustrate the developed models

the duality of collaboration inducements and opportunities in the formation of interfirm linkages i argue that the linkage formation propensity of firms is explained by simultaneously examining both inducement and opportunity factors drawing upon resource based and social network theory literatures i identify three forms of accumulated capital technical commercial and social that can affect a firm s inducements and opportunities to form linkages firms possessing these capital stocks enjoy advantages in linkages formation however firms lacking these accumulated resources can still form linkages if they generate a radical technological breakthrough thus i identify paths to linkage formation for leading as well as peripheral firms i test these arguments with longitudinal data on technical collaborative linkages in the global chemicals industry copyright 2000 john wiley sons ltd

the detection of earnings manipulation presented are a profile of a sample of earnings manipulators their distinguishing characteristics and a suggested model for detecting manipulation the model s variables are designed to capture either the financial statement distortions that can result from manipulation or preconditions that might prompt companies to engage in such activity the results suggest a systematic relationship between the probability of manipulation and some financial statement variables this evidence is consistent with the usefulness of accounting data in detecting manipulation and assessing the reliability of reported earnings the model identifies approximately half of the companies involved in earnings manipulation prior to public discovery because companies that are discovered manipulating earnings see their stocks plummet in value the model can be a useful screening device for investment professionals the screening results however require determination of whether the distortions in the financial statement numbers r

is shareholder wealth maximization immoral for those educated in modern business schools the justification for decisions made by financial professionals in business organizations has been supplied by financial economic theory broadly thi

leadtime management in a periodic review inventory system a state dependent base stock policy we examine a single item periodic review inventory system with stochastic leadtimes in which a replenishment order is delivered immediately or one period later depending probabilistically on costly effort the objective is to determine a joint inventory policy and effort choice strategy that minimizes the expected total costs our analytical and computational analysis suggests that i a state dependent base stock policy is optimal ii the optimal effort strategy is such that the marginal cost of effort is equal to the value of immediate delivery and iii the cost impact of leadtime reduction can be very large we also provide some counter intuitive results compared with the traditional multi period newsvendor model

a breed apart security analysts and herding behavior herding behavior occurs when security analysts ignore their private opinions and issue public forecasts that mimic the earnings forecasts of others joining the consensus provides cover for analysts reputations we question the ethics of this practice when the motive to protect one s reputation takes precedence over the forecast accuracy motive while seemingly predictable behavior from a self interested perspective herding behavior has subtle but long term ramifications for the efficient pricing of securities and the preservation of the public trust in the financial services profession we call upon each individual analyst as well as the profession to exercise the moral courage necessary to cultivate a climate of personal and public integrity personal resistance and pro active policies are prescribed as actions to assist analysts to become more cognizant of their motivations as well as to promote a more ethical professional context