bluuebunny/crossref_metadata_2025 huggingface dataset:
The Role of Accounting Conservatism in Mitigating Bondholder-Shareholder Conflicts over Dividend Policy and in Reducing Debt Costs
Authors: Ahmed Anwer S. , Billings Bruce K. , Morton Richard M. , Stanford-Harris Mary
Published: March 2008

Using both a market-based and an accrual-based measure of conservatism, we find that firms facing more severe conflicts over dividend policy tend to use more conservative accounting. Furthermore, we document that accounting conservatism is associated with a lower cost of debt after controlling for other determinants of firms' debt costs. Our collective evidence is consistent with the notion that accounting conservatism plays an important role in mitigating bondholder-shareholder conflicts over dividend policy, and in reducing firms' debt costs.
The Effect of Shareholder-Level Dividend Taxes on Stock Prices: Evidence from the Revenue Reconciliation Act of 1993
Authors: Ayers Benjamin C. , Cloyd C. Bryan , Robinson John R.
Published: March 2008

We investigate the effect of an increase in the individual (shareholder-level) income tax rate on share values. We regress cumulative daily abnormal stock returns surrounding the passage of the Revenue Reconciliation Act of 1993 on firm dividend yield, tax status of the investor as represented by level of institutional ownership, the interaction of these two variables, and control variables. Consistent with our expectations, we find that (1) the higher the firm's dividend yield, the more negative the firm's stock price reaction to the increase in the individual income tax rate (i.e., the dividend tax rate) enacted in the Revenue Reconciliation Act of 1993, and (2) institutional holdings mitigate this negative reaction. Our results suggest that both the dividend policy of the firm and the tax status of the marginal investor influence the extent to which dividend taxes are reflected in share values. Our evidence is consistent with the traditional view that firm dividend policy influences the extent to which tax rate changes affect share values.
The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
Authors: Dechow Patricia M. , Dichev Ilia D.
Published: March 2008

This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. We argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows. We document that observable firm characteristics can be used as instruments for accrual quality (e.g., volatility of accruals and volatility of earnings). Finally, we show that our measure of accrual quality is positively related to earnings persistence.
Discussion of the Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
Authors: McNichols Maureen F.
Published: March 2008

Dechow and Dichev (2002) model earnings quality as the magnitude of estimation errors in accruals, and provide empirical estimates of this construct based on the relation between accruals and cash flows. I characterize the innovation and limitations in this approach, and provide empirical evidence of measurement error in their empirical specification. I also adapt their model to assess the specification of the Jones' (1991) model and document that this model provides estimates of discretionary accruals that are significantly associated with cash flows, which are likely to be substantially nondiscretionary. I conclude with suggestions for future research on earnings quality and earnings management.
Client Importance, Nonaudit Services, and Abnormal Accruals
Authors: Chung Hyeesoo , Kallapur Sanjay
Published: March 2008

The economic theory of auditor independence (DeAngelo 1981b) suggests that auditors' incentives to compromise their independence are related to client importance. Using ratios of client fees and of nonaudit fees divided by the audit firm's U.S. revenues or a surrogate for the audit-practice-office revenues as measures of client importance, we investigate their association with Jones-model abnormal accruals. In a sample of 1,871 clients of Big 5 audit firms we do not find a statistically significant association between abnormal accruals and any of the client importance measures. Our theory development also suggests that auditor incentives to compromise independence should increase with the extent of client opportunities and incentives to manage earnings, and decrease with the strength of corporate governance and auditor expertise. We also do not find a statistically significant association between abnormal accruals and client importance in subsets of the samples partitioned by proxies for these factors.
The Valuation Relevance of Reversing Deferred Tax Liabilities
Authors: Guenther David A. , Sansing Richard C.
Published: March 2008

This paper compares two attributes of a deferred tax liability (DTL) that arise from differences in book and tax depreciation methods. The first attribute is the effect of the DTL on the market value of the firm. The second is the length of time between when the asset is placed into service and when the DTL associated with that asset begins to reverse. The paper shows that a decrease in the time it takes for the DTL to begin to reverse is neither necessary nor sufficient for the value of the DTL to increase. It also shows that the value of the DTL is not equal to the present value of the future deferred tax expense. The effect of one dollar of DTL on firm value depends only on the tax depreciation rate and the discount rate.
Does Investor Selection of Auditors Enhance Auditor Independence?
Authors: Mayhew Brian W. , Pike Joel E.
Published: March 2008

This paper reports the results of experiments designed to examine whether investor selection of auditors enhances auditor independence. The experimental design enables us to explore the effect on independence of different institutional rules as to who hires and fires auditors and to directly measure independence violations. The results suggest that transferring the power to hire and fire the auditor from managers to investors significantly decreases the proportion of independence violations. Additional analysis suggests that a reduction in independence violations increases the overall economic surplus generated in the markets examined.
The Balanced Scorecard: The Effects of Assurance and Process Accountability on Managerial Judgment
Authors: Libby Theresa , Salterio Steven E. , Webb Alan
Published: March 2008

The balanced scorecard is one of the major developments in management accounting in the past decade (Ittner and Larcker 2001). Lipe and Salterio (2000) find that managers ignore one of the key scorecard features, the inclusion of measures that are unique to the strategic objectives of a business unit, when making performance evaluation judgments. This study identifies and tests two approaches to reducing this “common measures bias.” We examine whether increasing effort via invoking process accountability (i.e., requiring managers to justify to their superior their performance evaluations) and/or improving the perceived quality of the balanced scorecard measures (i.e., via an independent third-party assurance report on the balanced scorecard) increases managers' usage of unique performance measures in their evaluations. Results suggest that either the requirement to justify an evaluation to a superior or the provision of an assurance report on the balanced scorecard increases the use of unique measures in managerial performance evaluation judgments. Implications for theory and practice are discussed.
Costs of Equity and Earnings Attributes
Authors: Francis Jennifer , LaFond Ryan , Olsson Per M. , Schipper Katherine
Published: March 2008

We examine the relation between the cost of equity capital and seven attributes of earnings: accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism. We characterize the first four attributes as accounting-based because they are typically measured using accounting information only. We characterize the last three attributes as market-based because proxies for these constructs are typically based on relations between market data and accounting data. Based on theoretical models predicting a positive association between information quality and cost of equity, we test for and find that firms with the least favorable values of each attribute, considered individually, generally experience larger costs of equity than firms with the most favorable values. The largest cost of equity effects are observed for the accounting-based attributes, in particular, accrual quality. These findings are robust to controls for innate determinants of the earnings attributes (firm size, cash flow and sales volatility, incidence of loss, operating cycle, intangibles use/intensity, and capital intensity), as well as to alternative proxies for the cost of equity capital.
Quantifying the Costs of Intertemporal Taxable Income Shifting: Theory and Evidence from the Property-Casualty Insurance Industry
Authors: Randolph David W. , Salamon Gerald L. , Seida Jim A.
Published: March 2008

This paper presents a model of optimal tax-motivated intertemporal income shifting given a quadratic cost function that relates the costs associated with shifting income to the amount of income shifted. By formally modeling the income-shifting decision, we: (1) show how parameter estimates of the income-shifting cost function can be extracted from a linear regression where a proxy for income shifted is the dependent variable, (2) provide insight into prior tax-motivated income-shifting research, and (3) clarify the interpretation of independent variables that capture the interaction between tax incentives and nontax costs. We then provide an empirical application of our method for quantifying the costs to shift federal taxable income by investigating the income-shifting behavior of firms in the property and casualty (P&C) insurance industry following the Tax Reform Act of 1986. Our results suggest that the parameters of the cost function are negatively related to firm size, the cost to shift a significant amount of income is nontrivial, and the marginal cost to shift income increases as more income is shifted.
Evidence That Investors Trade on Private Event-Period Information around Earnings Announcements
Authors: Barron Orie E. , Harris David G. , Stanford Mary
Published: March 2008

Holthausen and Verrecchia's (1990) and Kim and Verrecchia's (1997) theoretical models predict that private information inferred at the time of an earnings announcement (private event-period information) is associated with greater trading volume. We provide empirical evidence consistent with these theories. Specifically, announcements that increase analysts' private information (as measured by Barron et al.'s [1998] empirical proxies) are associated with increased trading volume, consistent with some investors similarly acquiring private event-period information. In addition, announcements that decrease analysts' consensus are associated with more trading volume. Because consensus declines when private information increases, this finding provides reinforcing evidence that investors trade following earnings announcements because of private information that becomes useful only in conjunction with the information in the announcement and that this information is important enough to spur trading.
A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences
Authors: Brown Lawrence D. , Caylor Marcus L.
Published: March 2008

Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology to quarterly data for the 1985–2002 time period, we show that, since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases. Our findings suggest that the quarterly earnings threshold hierarchy proposed by Degeorge et al. (1999) does not apply to recent years, and that managers' claim that avoiding quarterly earnings decreases is the threshold they most seek to achieve (Graham et al. 2004) is inconsistent with their actions. We provide an intuitively appealing economic rationale for why the shift in threshold hierarchy occurred; since the mid-1990s, but not before then, investors unambiguously rewarded (penalized) firms for reporting quarterly earnings meeting (missing) analysts' estimates more than they did for meeting (missing) the other two thresholds. We provide several explanations for why investors unambiguously reward firms for reporting quarterly earnings that meet or beat analysts' estimates more than for meeting the other two thresholds late (but not early) in our sample period: increased media coverage given to analyst forecasts, more analyst following, more firms covered by analysts, and temporal increases in both the accuracy and precision of analyst forecasts.
The Halo Effect in Business Risk Audits: Can Strategic Risk Assessment Bias Auditor Judgment about Accounting Details?
Authors: O'Donnell Ed , Schultz Joseph J.
Published: March 2008

Many auditors use an audit methodology that requires a strategic risk assessment of their client's business model as a first step for assessing audit risks. This study examines whether the holistic perspective that auditors acquire in making a strategic risk assessment influences the extent to which they adjust account-level risk assessments when they encounter changes in accounts that are inconsistent with information about client operations. Based on halo theory from the performance evaluation literature, we hypothesize that auditors who (1) perform (do not perform) strategic assessment, and (2) develop favorable (unfavorable) strategic risk assessments, are less (more) likely to adjust account-level risk assessments for inconsistent fluctuations. Data from two laboratory experiments using experienced auditors support both hypotheses. Findings suggest that the halo effect generated during strategic assessment influences judgment by altering auditor tolerance for inconsistent fluctuations.
The Information Intermediary Role of Short Sellers
Authors: Pownall Grace , Simko Paul J.
Published: March 2008

This paper examines the conditions under which the market responds to disclosures of significant increases in short selling, and whether proxies for earnings expectations and alternative information sources help explain this response. Our sample is based on firms that experience abnormal short interest increases (“short spikes”) during 1989–1998. We find that the mean abnormal return around short spike announcements is significantly more negative for firms with low analyst following, consistent with short sellers providing perceived value when there are limited alternative sources of guidance available. For firms with high analyst following we find the market response is dependent on earnings levels, consistent with investors viewing a short interest increase as providing information about the sustainability of earnings. Additional analyses reveal that these inferences are not affected by measures of firms' earnings quality or by the relative size of the short spike. We infer from our analyses that the information content of short interest disclosures is conditional on both the firms' existing information environment and expectations of future performance as conveyed by prior earnings. This inference is consistent with short sellers' role as information intermediaries covering the lower tail of earnings expectations.
Accounting for Software Development Costs and Information Asymmetry
Authors: Mohd Emad
Published: March 2008

I investigate the impact of implementing SFAS No. 86, which provides an exception to the GAAP requirement of the immediate expensing of research and development (R&D), on information asymmetry. Using bid-ask spread and share turnover as proxies for information asymmetry, I find that after the introduction of SFAS No. 86, information asymmetry decreases for software firms relative to that of other high-tech firms. Within the software industry, I find that information asymmetry is significantly lower for firms that capitalize (capitalizers) than for those who expense (expensers) software development costs. Thus, accounting for software development costs per SFAS No. 86 reduces information asymmetry and, consequently, the cost of capital. As well, investors' uncertainty about the future benefits of software development costs is reduced when firms capitalize these costs.
Risk-Relevance of Fair-Value Income Measures for Commercial Banks
Authors: Hodder Leslie D. , Hopkins Patrick E. , Wahlen James M.
Published: March 2008

We investigate the risk relevance of the standard deviation of three performance measures: net income, comprehensive income, and a constructed measure of full-fair-value income for a sample of 202 U.S. commercial banks from 1996 to 2004. We find that, for the average sample bank, the volatility of full-fair-value income is more than three times that of comprehensive income and more than five times that of net income. We find that the incremental volatility in full-fair-value income (beyond the volatility of net income and comprehensive income) is positively related to marketmodel beta, the standard deviation in stock returns, and long-term interest-rate beta. Further, we predict and find that the incremental volatility in full-fair-value income (1) negatively moderates the relation between abnormal earnings and banks' share prices and (2) positively affects the expected return implicit in bank share prices. Our findings suggest full-fair-value income volatility reflects elements of risk that are not captured by volatility in net income or comprehensive income, and relates more closely to capital-market pricing of that risk than either net-income volatility or comprehensiveincome volatility.
Discretionary Accruals and Earnings Management: An Analysis of Pseudo Earnings Targets
Authors: Ayers Benjamin C. , Jiang John (Xuefeng) , Yeung P. Eric
Published: March 2008

We investigate whether the positive associations between discretionary accrual proxies and beating earnings benchmarks hold for comparisons of groups segregated at other points in the distributions of earnings, earnings changes, and analystsbased unexpected earnings. We refer to these points as “pseudo” targets. Results suggest that the positive association between discretionary accruals and beating the profit benchmark extends to pseudo targets throughout the earnings distribution. We find similar results for the earnings change distribution. In contrast, we find few positive associations between discretionary accruals and beating pseudo targets derived from analysts-based unexpected earnings. We develop an additional analysis that accounts for the systematic association between discretionary accruals and earnings and earnings changes. Results suggest that the positive association between discretionary accruals and earnings intensifies around the actual profit benchmark (i.e., where earnings management incentives may be more pronounced). We find similar effects around the actual earnings increase benchmark. However, analogous patterns exist for cash flows around the profit and earnings increase benchmarks. In sum, we are unable to eliminate other plausible explanations for the associations between discretionary accruals and beating the profit and earnings increase benchmarks.
Audit Partner Tenure and Audit Quality
Authors: Carey Peter , Simnett Roger
Published: March 2008

Rotation of audit partners is one of the main policy initiatives that has been implemented in many jurisdictions around the world to deal with concerns about audit quality. The basis of any requirement limiting the tenure of audit partners is that there is a reduction in audit quality associated with long periods of tenure. Using data from Australia, where the audit partner can be identified and for a period where partner rotation was not mandatory, we examine the association between audit quality and long audit partner tenure. The three measures of audit quality examined are the auditor's propensity to issue a going-concern audit opinion for distressed companies, the direction and amount of abnormal working capital accruals, and just beating (missing) earnings benchmarks. For long tenure observations we find a lower propensity to issue a going-concern opinion and some evidence of just beating (missing) earnings benchmarks, consistent with deterioration in audit quality associated with long audit partner tenure. There is no evidence of an association of long audit tenure with abnormal working capital accruals.
Measuring Reporting Conservatism
Authors: Givoly Dan , Hayn Carla K. , Natarajan Ashok
Published: March 2008

The paper examines the power and reliability of the differential timeliness (DT) measure developed by Basu (1997) to gauge reporting conservatism. We identify certain characteristics of the information environment unrelated to conservatism that affect the DT measure and find that it is sensitive to the degree of uniformity in the content of the news during the examined period, the types of events occurring in the period, and firms' disclosure policies. Our tests, based on both actual and simulated data, indicate that assessing the extent of reporting conservatism using this measure requires the recognition of, and control for, these characteristics. We also find that the difference in the timeliness of reporting bad versus good news is likely to be more pronounced than previously reported. Further, we provide additional evidence on the negative association between the DT measure and alternative aspects of conservatism, suggesting that the exclusive reliance on any single measure to assess the overall conservatism of a reporting regime (firms, countries, or time periods) is likely to lead to incorrect inferences.
Who Trades on Pro Forma Earnings Information?
Authors: Bhattacharya Nilabhra , Black Ervin L. , Christensen Theodore E. , Mergenthaler Richard D.
Published: March 2008

In recent years, many companies have emphasized adjusted-GAAP earnings numbers in their quarterly press releases. While managers use different names to describe these nonstandard earnings metrics, the financial press frequently refers to them as “pro forma” earnings. Managers and other advocates of pro forma reporting argue that these disclosures provide a clearer picture of companies' core earnings. On the other hand, regulators, policymakers, and the financial press often allege that managers' pro forma earnings disclosures are opportunistic attempts to mislead investors. Recent evidence suggests that while many pro forma earnings disclosures are altruistically motivated, some may represent managers' attempts to portray overly optimistic financial performance. If this is the case, then less wealthy, less sophisticated, individual investors are arguably the most at risk of being misled. Consequently, this study investigates who trades on pro forma earnings information. Our intraday investigation of transactions around earnings announcements containing pro forma earnings information reveals that less sophisticated investors' announcement-period abnormal trading is significantly positively associated with the magnitude and direction of the earnings surprise based on pro forma earnings. In contrast, we find no association between sophisticated investors' trading and manager-reported pro forma information. Overall, our analyses and numerous robustness tests suggest that the segment of the market that relies on pro forma earnings information is populated predominantly by less sophisticated individual investors. This evidence is particularly relevant to standard-setters and regulators given that Section 401(b) of the Sarbanes-Oxley Act of 2002 and subsequent SEC regulations are specifically designed to protect ordinary investors from misleading pro forma information.
Is Openness Penalized? Stock Returns around Earnings Warnings
Authors: Tucker Jennifer W.
Published: March 2008

Prior research finds that firms warning investors of an earnings shortfall experience lower returns than non-warning firms with similar risks and earnings news. Openness thus appears to be penalized by investors. Yet, this finding may be due to a self-selection bias that occurs when firms with a larger amount of unfavorable non-earnings news (“other bad news”) are more likely to warn. In this paper I use a Heckman selection model to infer the amount of other bad news and document that, on average, warning firms have a larger amount of other bad news than non-warning firms. After controlling for this effect, I find that warning firms' returns remain lower than those of non-warning firms in a short-term window ending five days after earnings announcement. When this window is extended by three months, however, warning and non-warning firms exhibit similar returns. My evidence suggests that openness is ultimately not penalized by investors.
Segment Profitability and the Proprietary and Agency Costs of Disclosure
Authors: Berger Philip G. , Hann Rebecca N.
Published: March 2008

We exploit the change in U.S. segment reporting rules (from SFAS No. 14 to SFAS No. 131) to examine two motives for managers to conceal segment profits: proprietary costs and agency costs. Managers face proprietary costs of segment disclosure if the revelation of a segment that earns high abnormal profits attracts more competition and, hence, reduces the abnormal profits. Managers face agency costs of segment disclosure if the revelation of a segment that earns low abnormal profits reveals unresolved agency problems and, hence, leads to heightened external monitoring. By comparing a hand-collected sample of restated SFAS No. 131 segments with historical SFAS No. 14 segments, we examine at the segment level whether managers' disclosure decisions are influenced by their proprietary and agency cost motives to conceal segment profits. Specifically, we test two hypotheses: (1) when the proprietary cost motive dominates, managers tend to withhold the segments with relatively high abnormal profits (hereafter, the proprietary cost motive hypothesis), and (2) when the agency cost motive dominates, managers tend to withhold the segments with relatively low abnormal profits (hereafter, the agency cost motive hypothesis). Our results are consistent with the agency cost motive hypothesis, whereas we find mixed evidence with regard to the proprietary cost motive hypothesis.
Accruals Quality and Internal Control over Financial Reporting
Authors: Doyle Jeffrey T. , Ge Weili , McVay Sarah
Published: March 2008

We examine the relation between accruals quality and internal controls using 705 firms that disclosed at least one material weakness from August 2002 to November 2005 and find that weaknesses are generally associated with poorly estimated accruals that are not realized as cash flows. Further, we find that this relation between weak internal controls and lower accruals quality is driven by weakness disclosures that relate to overall company-level controls, which may be more difficult to “audit around.” We find no such relation for more auditable, account-specific weaknesses. We find similar results using four additional measures of accruals quality: discretionary accruals, average accruals quality, historical accounting restatements, and earnings persistence. Our results are robust to the inclusion of firm characteristics that proxy for difficulty in accrual estimation, known determinants of material weaknesses, and corrections for self-selection bias.
Unbalanced Information and the Interaction between Information Acquisition, Operating Activities, and Voluntary Disclosure
Authors: Einhorn Eti , Ziv Amir
Published: March 2008

As different activities cannot be measured or communicated with the same precision, accounting information is often only a partial and unbalanced reflection of the fundamental economics, emphasizing certain aspects of the underlying operations while disregarding others. We highlight this inherent imbalance in information as the source of an interaction between corporate operating and discretionary disclosure strategies, and thereby also as an important determinant of the information acquisition strategy. We demonstrate that information imbalance, via its distorting effect on operating activities, leads to a reduction in the propensity of managers to acquire information and provide voluntary disclosures.
The Influences of Financial Statement Recognition and Analyst Coverage on the Market's Valuation of R&D Capital
Authors: Kimbrough Michael D.
Published: March 2008

Statement of Financial Accounting Standards No. 141 (SFAS No. 141)'s requirement that an acquirer in a business combination estimate the fair value of the target's separately identifiable assets and liabilities (including research and development capital) provides a rare occasion where estimated fair values of U.S. firms' research and development (R&D) capital based on private information about their R&D activities are publicly disclosed. The degree to which equity values impound the estimated fair values of R&D depends upon the extent to which the private information implicit in the R&D estimates is reflected in investor expectations. Financial statement recognition of R&D capital and analyst activities have been cited as alternative mechanisms by which private information about firms' R&D activities can be revealed to investors. I investigate the degree to which both mechanisms lead to the public revelation of the private information implicit in the R&D fair value estimates by examining whether financial statement recognition of R&D assets by the target prior to the merger announcement and/or analyst coverage of a target prior to the merger announcement influence the degree to which the target's pre-merger announcement equity value reflects the acquirer's subsequently disclosed estimate of the fair value of the target's R&D capital. I find that the degree to which a target's pre-merger announcement equity value reflects the estimated fair value of its R&D capital is increasing in the amount of R&D-related intangibles captured in the target's pre-merger announcement balance sheets and in the number of analysts covering the target prior to the merger announcement. This evidence is consistent with the notion that both financial statement recognition and analysts' private information search activities lead to the revelation of private information about the value of R&D assets that investors incorporate into equity values. I further find that the positive relation between analyst following and the market's valuation of R&D capital is strongest for the portion of the estimated fair value of R&D capital that is unrecognized by the target prior to the merger announcement. This finding is consistent with analysts filling in the information gap left by the lack of financial statement recognition. The results of this study confirm the theorized roles of financial statement recognition and analyst activities in aiding the market's valuation of intangible assets.
Accounting Quality and Debt Contracting
Authors: Bharath Sreedhar T. , Sunder Jayanthi , Sunder Shyam V.
Published: March 2008

We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt, i.e., bank loans. This is consistent with banks possessing superior information access and processing abilities that reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. In the case of private debt, since there is greater recontracting flexibility, both the price (i.e., interest) and non-price (i.e., maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality.
SEC Scrutiny and the Evolution of Non-GAAP Reporting
Authors: Kolev Kalin , Marquardt Carol A. , McVay Sarah E.
Published: March 2008

We empirically examine the effects of intensified scrutiny over non-GAAP reporting on the quality of non-GAAP earnings exclusions. We find that, on average, exclusions are of higher quality (i.e., more transitory) following intervention by the Securities and Exchange Commission (SEC) into non-GAAP reporting. We further find that firms that stopped releasing non-GAAP earnings numbers after the SEC intervention had lower quality exclusions in the pre-intervention period. These results are consistent with the SEC's objectives of improving the quality of non-GAAP earnings figures. However, when we decompose total exclusions into special items and other exclusions, we find evidence that the quality of special items has decreased in the post-intervention period, which suggests that managers adapted to the new disclosure environment by shifting more recurring expenses into special items. This suggests that there may be unintended consequences arising from the heightened scrutiny over non-GAAP reporting.
Executive Stock Options, Missed Earnings Targets, and Earnings Management
Authors: McAnally Mary Lea , Srivastava Anup , Weaver Connie D.
Published: March 2008

This paper examines whether stock-option grants explain missed earnings targets, including reported losses, earnings declines, and missed analysts' forecasts. Anecdotal evidence and surveys suggest that managers believe that missing an earnings target can cause stock-price drops (Graham et al. 2006). Empirical studies corroborate this notion (Skinner and Sloan 2002; Lopez and Rees 2002). Thus, a missed target could benefit an executive via lower strike price on subsequent option grants. Prior option grant studies explore only general downward earnings management (Balsam et al. 2003; Baker et al. 2003), but our study is the first to explore whether option grants encourage missed earnings targets. Indeed, if missed targets drive the prior results, then the literature has failed to document an important negative outcome of stock-option incentives. We use quarterly and annual data for fixed-date options granted after firms announce they have missed earnings targets. We find that firms that miss earnings targets have larger and more valuable subsequent grants. Further, we find that the likelihood of missing earnings targets for firms that manage earnings downward increases with stock-option grants. To control for the possibility that firms miss earnings targets for operational reasons, we only include firms that likely managed earnings downward (Dechow et al. 1995; Phillips et al. 2003). Backdating or opportunistic timing of grants cannot explain our results because we include only fixed-date grants. While many studies explicitly consider whether and why managers meet or beat earnings targets, ours is the first study to find that some managers may seek to miss earnings targets (Burgstahler and Dichev 1997).
The Effect of SOX Internal Control Deficiencies and Their Remediation on Accrual Quality
Authors: Ashbaugh-Skaife Hollis , Collins Daniel W. , Kinney William R. , LaFond Ryan
Published: March 2008

This paper investigates the effect of internal control deficiencies and their remediation on accrual quality. We first document that firms reporting internal control deficiencies have lower quality accruals as measured by accrual noise and absolute abnormal accruals relative to firms not reporting internal control problems. Second, we find that firms that report internal control deficiencies have significantly larger positive and larger negative abnormal accruals relative to control firms. This finding suggests internal control weaknesses are more likely to lead to unintentional errors that add noise to accruals than intentional misstatements that bias earnings upward. Third, we document that firms whose auditors confirm remediation of previously reported internal control deficiencies exhibit an increase in accrual quality relative to firms that do not remediate their control problems. Finally, we find firms that receive different internal control audit opinions in successive years exhibit changes in accrual quality consistent with changes in internal control quality. Collectively, our cross-sectional and intertemporal change tests provide strong evidence that the quality of internal control affects the quality of accruals.
Having One Kidney Does Not Accelerate the Rate of Development of Diabetic Nephropathy Lesions in Type 1 Diabetic Patients
Authors: Chang Shirley , Caramori M. Luiza , Moriya Rika , Mauer Michael
Published: March 2008

OBJECTIVE—Reduced nephron number is hypothesized to be a risk factor for chronic kidney disease and hypertension. Whether reduced nephron number accelerates the early stages of diabetic nephropathy is unknown. This study investigated whether the rate of development of diabetic nephropathy lesions was different in type 1 diabetic patients with a single (transplanted) kidney compared with patients with two (native) kidneys.

RESEARCH DESIGN AND METHODS—Three groups of volunteers were studied: 28 type 1 diabetic kidney transplant recipients with 8–20 years of good graft function, 39 two-kidney patients with duration of type 1 diabetes matched to the time since transplant in the one-kidney group, and 30 age-matched normal control subjects. Electron microscopic morphometry was used to estimate glomerular structural parameters on 3.0 ± 1.4 glomeruli per biopsy.

RESULTS—In the one- versus two-kidney diabetic subject groups, respectively, serum creatinine (means ± SD 1.3 ± 0.4 vs. 0.9 ± 0.2 mg/dl; P < 0.001), systolic blood pressure (133 ± 13 vs. 122 ± 11 mmHg; P < 0.001), and albumin excretion rate (median [range] 32.1 μg/min [2–622] vs. 6.8 μg/min [2–1,495]; P = 0.006) were higher. There were no differences in the one- versus two-kidney diabetic subject groups, respectively, in glomerular basement membrane width (median [range] 511 nm [308–745] vs. 473 nm [331–814]), mesangial fractional volume (mean ± SD 0.30 ± 0.06 vs. 0.27 ± 0.07), mesangial matrix fractional volume (0.16 ± 0.05 vs. 0.16 ± 0.06), and mesangial matrix fractional volume per total mesangium (0.61 ± 0.07 vs. 0.64 ± 0.09). However, these glomerular structural parameters were statistically significantly higher in both diabetic subject groups compared with normal control subjects. Results were similar when patients receiving ACE inhibitors were excluded from the analyses.

CONCLUSIONS—Reduced nephron number is not associated with accelerated development of diabetic glomerulopathy lesions in type 1 diabetic patients.
Overcoming Environmental Dose Rate Changes in Luminescence Dating of Waterlain Deposits
Authors: Li Bo , Li Sheng-Hua , Wintle Ann
Published: March 2008

This study investigates lacustrine and fluvial sediments on the Sala Us River in the Mu Us Desert in central north China. Significant changes in environmental dose rate in part of the section could be shown to have occurred from measurements of the present day radioactivity and by the age reversal for some samples that had been dated by optically stimulated luminescence (OSL) measurements on quartz. These changes in dose rate can be attributed to recent uptake of radioactive elements found in the sediments; this resulted in significant underestimation of the OSL ages. In this study, the new isochron method using K-feldspar grains has been applied to overcome the effects of changes in dose rate. Calculations are used to show that changes in the environmental dose rate factors, i.e. K, U, Th, water content and cosmic ray flux, and disequilibrium in the U and Th decay chains, e.g. radon escape, have a negligible effect on the isochron age. After applying the new isochron method, the effects of changes in dose rate caused by recent uptake of radioactive elements and changes in past water content were effectively overcome and true ages are obtained; this was verified by repeating the luminescence isochron measurements on samples of overlying and underlying sediments.
Bell-Boole Inequality: Nonlocality or Probabilistic Incompatibility of Random Variables?
Authors: Khrennikov Andrei
Published: March 2008

The main aim of this report is to inform the quantum information community about investigations on the problem of probabilistic compatibility of a family of random variables: a possibility to realize such a family on the basis of a single probability measure (to construct a single Kolmogorov probability space). These investigations were started hundred of years ago by J. Boole (who invented Boolean algebras). The complete solution of the problem was obtained by Soviet mathematician Vorobjev in 60th. Surprisingly probabilists and statisticians obtained inequalities for probabilities and correlations among which one can find the famous Bell’s inequality and its generalizations. Such inequalities appeared simply as constraints for probabilistic compatibility. In this framework one can not see a priori any link to such problems as nonlocality and “death of reality” which are typically linked to Bell’s type inequalities in physical literature. We analyze the difference between positions of mathematicians and quantum physicists. In particular, we found that one of the most reasonable explanations of probabilistic incompatibility is mixing in Bell’s type inequalities statistical data from a number of experiments performed under different experimental contexts.
Adaptive one‐step‐ahead optimal controller based on WLS schemes
Authors: Lo Kueiming , Jiang Rui , Li Donghai
Published: March 2008

An optimal adaptive control technique for the discrete linear systems is discussed in this paper. The system parameters are unknown and one‐step‐ahead adaptive control design is based on the input matching approach and the weighted least‐squares (WLS) algorithm. It is shown that the adaptive stochastic system is globally closed‐loop stable and the system identification is consistent. The adaptive controller converges to the one‐step‐ahead optimal controller. Finally, some simulation examples are given to demonstrate the reliability of the new optimal adaptive control algorithm. Copyright © 2008 John Wiley & Sons, Ltd.
Neither serum ferritin nor the number of red blood cell transfusions affect overall survival in refractory anemia with ringed sideroblasts
Authors: Chee Cheng E. , Steensma David P. , Wu Wenting , Hanson Curtis A. , Tefferi Ayalew
Published: March 2008

In a retrospective study of 126 adult patients with French–American–British‐defined refractory anemia with ringed sideroblasts (RARS), staging by the International Prognostic Scoring System was highly predictive of survival outcome (P < 0.0001). In addition, red blood cell (RBC) transfusion requirement at diagnosis (P = 0.001), but not the number of RBC units transfused during the disease course (P = 0.17), was independently associated with inferior survival. There were no correlations between survival and serum ferritin level, measured either at diagnosis (median 567 ng/mL, range 16–3,475; P = 0.24) or during follow‐up (median 1,108 ng/mL; range 238–43,500; P = 0.72). Similarly, there was no difference in survival when patients were stratified by serum ferritin levels of < or ≥1,000 ng/mL at diagnosis or peak serum ferritin levels of <1,000, 1,000–5,000, or >5,000 ng/mL during follow‐up. The current study does not support the contention that transfusional hemosiderosis is an adverse prognostic factor in “good risk” myelodysplastic syndrome. Am. J. Hematol., 2008. © 2008 Wiley‐Liss, Inc.
Blood doping in athletes—Detection of allogeneic blood transfusions by flow cytofluorometry
Authors: Arndt Patricia A. , Kumpel Belinda M.
Published: March 2008

Athletes may undergo blood transfusion to increase their red cell mass and the oxygen carrying capacity of their blood in order to confer a competitive advantage. Allogeneic transfusions are normally mismatched at one or more minor blood group antigens. The most sensitive and accurate method known to detect this form of blood doping is flow cytometry. Low percentages of antigen‐positive and antigen‐negative red blood cells (RBCs) can be quantitated using suitable specific alloantibodies and careful analysis. By testing blood samples taken at various times, a reduction in the percentage of a minor population of RBCs will indicate transfusion has occurred. Am. J. Hematol., 2008. © 2008 Wiley‐Liss, Inc.
Characterization of acute graft‐versus‐host disease following reduced‐intensity stem‐cell transplantation from an HLA‐identical related donor
Authors: Murashige Naoko , Kami Masahiro , Mori Shin‐ichiro , Katayama Yuta , Kobayashi Kazuhiko , Onishi Yasushi , Hori Akiko , Kishi Yukiko , Hamaki Tamae , Tajima Kinuko , Kanda Yoshinobu , Tanosaki Ryuji , Takaue Yoichi
Published: March 2008

To investigate clinical features of acute graft‐versus‐host disease (GVHD) following reduced intensity stem‐cell transplantation (RIST), we retrospectively investigated medical records of 65 patients with hematologic malignancies who underwent RIST from a matched related donor. Preparative regimen comprised fludarabine 30 mg/m2 (n = 53) or cladribine 0.11 mg/kg (n = 12) for 6 days plus busulfan 4 mg/kg for 2 days. Twelve patients received rabbit antithymocyte globulin 2.5 mg/kg/day for 2–4 consecutive days. Grade II to IV acute GVHD was diagnosed in 36 patients (55%). Its median onset was day 58 (range, 17–109), while it was bimodal, peaking day 15–29 (early‐onset GVHD, n = 18) and day 75–89 days (late‐onset GVHD, n = 18). Variables that were more common in early‐onset GVHD than late‐onset GVHD included skin rash (89% vs. 61%) and noninfectious fevers (33% vs. 11%). Desaturation, pulmonary infiltrates and hyperbilirubinemia (>2.0 mg/dL) were more common in late‐onset GVHD (6% vs. 22%, 0% vs. 17%, and 6% vs. 33%, respectively). All of the patients with early‐onset GVHD given corticosteroid responded to it, while 5 of the 18 patients with late‐onset GVHD failed to respond it. Patients with either early‐onset or late‐onset GVHD tended to have better progression‐free survival (PFS) than those without it; however, there was no significant difference in PFS between patients with early‐onset GVHD and those with late‐onset GVHD. This study suggests that several etiologies might have contributed to the development of acute GVHD following RIST. Am. J. Hematol., 2008. © 2008 Wiley‐Liss, Inc.