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

interpreting comovements in the trade balance and the terms of trade abstract i examine the relation between the trade balance and the terms of trade in a two country dynamic stochastic exchange economy with complete markets along an equilibrium path for this economy the relation is governed by the substitutability between foreign and domestic goods i find in contrast to non stochastic analyses of the harberger laursen metzler effect that a positive association does not require persistent shocks or non constant rates of time preference this contrast highlights the role played by the structure of asset markets complete and otherwise in generating equilibrium comovements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

a tax induced clientele for index linked corporate bonds this paper analyzes the circumstances under which tax considerations favor or disfavor the use of index linked corporate bonds using a model similar to miller s investors choices of assets depend on their tax preferences for interest income versus capital gains and their preferences for the timing of returns it is concluded that the absence of indexlinked bonds in the u s cannot be attributed solely to tax reasons however following the 1986 tax reform act the tax code is expected to disfavor the use of index linked bonds the absence of index linked i l bonds in the u s is puzzling index linked bonds are common in countries that have experienced persistently high and or volatile rates of inflation both the periodic interest payments and the principal of an i l bond are linked to a price index this design provides protection against inflation induced changes in the nominal interest rate and prevents erosion of the bond s real value during inflationary periods anticipated or unanticipated the theoretical literature on i l bonds has focused primarily on the risk reduction aspect see for example sarnat 9 fischer 3 and siegel and warner 11 the recurrent theme of these studies is that the introduction of i l bonds reduces inflationary risks to both debtors and creditors these studies argue that in a portfolio context i l bonds provide investors protection against a risk that cannot be fully hedged otherwise fischer 4 conjectured that a possible reason for the absence of i l bonds in the u s may be the tax treatment of the returns on these bonds 2 from a tax point of view i l bonds differ from nominal bonds bonds hereafter in two respects first the returns on i l bonds consist of a combination of interest income and capital gains whereas the returns on nominal bonds consist in a steady state of interest income only second while the compensation for the inflation induced erosion in the real value of the principal of a nominal bond is part of the periodic interest payments and hence is taxed every period the corresponding compensation on an i l bond is realized and taxed only when the bond is sold thus holding i l bonds allows a tax deferment that is not possible when nominal bonds are held

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

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

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