bluuebunny/crossref_metadata_2025 huggingface dataset:
Alteration of Reservoir Diatomites by Hot Water Injection
Authors: Ross C. M. , Ikeda M. , Tang G.-Q. , Kovscek A. R.
Published: March 2008

Pore microstructure and mineral composition of diatomaceous reservoir core were analyzed in concert with core-scale thermal recovery tests. Samples from two diatomaceous oil reservoirs were subjected to spontaneous and forced imbibition coreflood experiments using hot synthetic steam condensate (180°C to 230°C, pH = 10). The effects of these experiments on the rock fabric were determined by comparing mineralogy, pore structure, and physical properties of material collected before and after the experiments. One set of reservoir samples consist of relatively clean, calcite-rich opal-A and opal-CT diatomites. Samples from the other reservoir are clay-rich opal-A diatomites.

The hot alkaline fluids produced porosity channels in samples from both reservoir types. These small channels (10 μm to 2 mm in diameter) form initially at the inlet and grow slowly toward the outlet as experiments progressed. Fines mobilization and perhaps hydraulic action during forced imbibition form the channels. Silica dissolution occurs as shown by ICP analysis of the aqueous effluent; however, signs of pitting and corrosion of diatoms were not observed at magnifications up to 10,000X. The channels improve the homogeneity of the diatomite by penetrating low porosity barriers as shown by the CT-imaged oil saturation profiles with time. As a result of the experiments, permeability may either increase or decrease despite porosity channel formation.

Opal-A to opal-CT conversion did not occur during the experiments as determined by scanning electron microscope imaging and X-ray diffraction analyses. An increase in the amount of mixed layer illite/smectite corresponds with a decrease in plagioclase abundance in the clay-rich diatomite samples. In addition, the grain density decreases in these clay-rich samples due to the preferential dissolution of ferroan dolomite and pyrite. In the calcite-rich samples, grain density increases as the relatively low density silica dissolves leaving the samples enriched with calcite. The increase in grain density is much greater in more soluble, and more calcite-rich, opal-A diatomite samples compared to the less soluble opal-CT diatomites.
Correlation of Cold Production Behavior with Acid/Base Number and Asphaltene Content of Heavy Oil
Authors: Peng J. , Tang G.-Q. , Kovscek A. R.
Published: March 2008

So-called "foamy oil" (heavy-oil solution gas drive) is influenced by a number of factors including chemical and compositional characteristics of the crude oil. Measurements of the concentration of organic acid and base groups as well as asphaltene content of crude oil are combined with data from laboratory-scale heavy-oil solution gas drive. We find that significant asphaltene content as well as substantial acid and base numbers are indicators of whether oil is foamy. The acid number is the amount of potassium hydroxide in mg needed to neutralize the acid groups in 1 g of crude oil, whereas the base number is the amount of potassium hydroxide in mg that is required to neutralize the titrant used in an acid titration of 1g of crude oil. The partitioning of acid and base groups between the asphaltene fraction and deasphalted oil is also studied. Organic acid and base groups are clearly present in the asphaltene fraction. We investigate the lifetime of single foam films of crude-oil and asphaltene solutions. Transparent micromodels etched with a sandstone pore network and containing gas dispersed within the oil are also used to investigate the correlation of acid number, base number, and asphaltene content on gas bubble coalesce. The results show that a high concentration of asphaltene that exhibits acid and base functional groups tends to increase foamability and film life time of gas-crude-oil dispersions. The deasphalted fraction is not foamy despite possessing significant acid and base number. We conclude that acid and base in asphaltene are the source of interfacial properties. Asphaltene content and acid/base number of asphaltene are important factors accounting for the stabilization of dispersed gas bubbles in foamy oil.
Field Practice of Improvement of Waterflooding Effect for a Naturally Fractured Low-Permeability Field
Authors: Pu Hui , Yin Daiyin
Published: March 2008

The naturally fractured reservoirs play an important role in the stable output of Daqing oilfield, which is the largest field in China. But after several years’ development, many wells are becoming to be low efficient wells, the production rate is sharply declining and watercut increased greatly. To improve current development effect, research on how to improve the waterflood effect was carried out, and a pilot test was implemented.

The geological study and the multidisciplinary investigation were first performed. Sourceless microseismic fracture monitoring technique shows that there are natural fractures. The statistics results of sourceless microseismic testing of 36 wells indicate that the total number of fractures is 94, among them, there are 23 east-west fractures, occupying 24.15%, 11 north-east fractures(11.17%), 33 east-west fractures(35.11%), and 27 north-south fractures(28.17%). Also pressure buildup cure shows that there exist inflexion points, which indicates that there are natural fractures. Based on the above research results, integrating detailed reservoir description with reservoir numerical simulation, the injection-production adjustment plan and infill drilling were designed. A field test was carried out: the high watercut wells and low production wells on injection line are converted to injection to form a line drive pattern.

This field test in the Daqing field is an excellent opportunity to: (1) demonstrate the method to improve the development effect of mature naturally fractured reservoir, (2) show that this should be of reference value to improve the development effect of field.
Utilizing Organosilane With Hydraulic Fracturing Treatments To Minimize Fines Migration Into the Proppant Pack — A Field Application
Authors: El Shaari N. , Swint A. , Kalfayan L.
Published: March 2008

In many of California's shallow, low permeability formations hydraulic fracturing is necessary to enhance production rates. The low closure-stresses of some of these formations require effective proppant flowback control. Such control is not only necessary to minimize problems associated with sand production but also to preserve the integrity of the propped fracture and maintain propped fracture conductivity. Various additives and techniques have been successfully applied to control proppant flow back. These include resins, resin-coated sands, fibers, plastics, and deformable proppants.

Another well production problem associated with proppant pack conductivity loss, rarely addressed by the industry, is the migration of fines from the rock matrix into the proppant pack. Fines migration reduces the permeability of the proppant pack, causing a loss of conductivity. This loss of conductivity produces a choke effect and increases the rate of a well's production decline. In California's C/D sands, in the Lost Hills field, produced fines range in size from 0.06 mm up to 0.1 mm. These fines are larger than silts and clays but smaller than fine sands. Fines production, like those generated from the C/D sands, is a natural process caused by the movement of hydrocarbons and formation water into the wellbore.

An organosilane (referred to herein as "Organosilane") has been successfully applied in acidizing treatments to stabilize fines due to acid dissolution. A process was created in which Organosilane was utilized to also minimize fines migration with fractured wells. Organosilane was added at low concentrations into the pre-pad brine water injection prior to the main fracturing treatment. Based on this experience, well production results indicate the concept of adding organosilane, in conjunction with fracturing, maintained production and minimized well-pulling frequency due to fines intrusion. This paper reviews concepts and examples of treatment applications and their results.
Negotiated Transfer Pricing and Divisional vs. Firm-Wide Performance Evaluation
Authors: Anctil Regina M. , Dutta Sunil
Published: March 2008

A firm with two divisions, each run by a risk-averse manager, contracts with the two managers to operate their divisions and possibly engage in interdivisional trade. Each division can increase the total surplus generated through interdivisional trade by making costly relationship-specific investments. The terms of trade are determined through negotiations between the two managers. Managerial compensation contracts are linear functions of divisional profit and firm-wide profit. If managers are compensated solely on the basis of their divisional profits, they invest less than the first-best amounts. While compensation contracts based on firm-wide profits alone can induce first-best investments, they impose extra risk on risk-averse managers. Therefore, we find that optimal linear compensation contracts will contain both divisional and firm-wide components. Our analysis also identifies a feature of negotiated transfer pricing, namely interdivisional risk sharing, and characterizes its impact on the design of optimal contracts.
Residual Earnings Valuation With Risk and Stochastic Interest Rates
Authors: Feltham Gerald A. , Ohlson James A.
Published: March 2008

This paper provides a general version of the accounting-based valuation model that equates the market value of a firm's equity to book value plus the present value of expected abnormal earnings. Prior theoretical work (e.g., Ohlson 1995; Feltham and Ohlson 1995, 1996) assumes investors are risk neutral and interest rates are nonstochastic and flat. Our more general analysis rests on only two assumptions: no arbitrage in financial markets and clean surplus accounting. These assumptions imply a risk-adjusted formula for the present value of expected abnormal earnings. The risk adjustments consist of certainty-equivalent reductions of expected abnormal earnings. A key issue deals with the capital charge component of abnormal earnings. It is measured by applying the (uncertain) riskless spot interest rate to start-of-period book value. Risks do not affect the rate used in the capital charge, and accounting policies do not affect the formula's constructs. An application of the general formula shows how the classic risk-adjusted expected cash flows model derives as a special case.
Does Forecast Accuracy Matter to Security Analysts?
Authors: Mikhail Michael B. , Walther Beverly R. , Willis Richard H.
Published: March 2008

We investigate if earnings forecast accuracy matters to security analysts by examining its association with analyst turnover. Controlling for firm- and time-period effects, forecast horizon and industry forecasting experience, we find that an analyst is more likely to turn over if his forecast accuracy is lower than his peers. We find no association between an analyst's probability of turnover and his absolute forecast accuracy. We also investigate another observable measure of the analyst's performance, the profitability of his stock recommendations. There is no statistical relation between the absolute or relative profitability of an analyst's stock recommendations and his probability of turnover. We interpret our findings as indicating that forecast accuracy is important to analysts.
Managing Annual Accounting Reports to Avoid State Taxes: An Analysis of Property-Casualty Insurers
Authors: Petroni Kathy R. , Shackelford Douglas A.
Published: March 2008

We hypothesize that, in their annual accounting reports, propertycasualty insurers allocate premiums from multistate policies to reduce total state taxes. To test this prediction, we exploit the industry's unique state tax disclosures. We examine firm-level data, collected from the publicly available, statutory reports filed with each state government. Reported premiums at the insurer-state level, scaled by incurred losses, are regressed on state tax measures. Consistent with tax-motivated income shifting, we find the premiumloss ratio is decreasing in state tax rates. The negative relation is greatest for insurers specializing in multistate lines of business.
The Value Relevance of Financial Statement Recognition vs. Disclosure: Evidence from SFAS No. 106
Authors: Davis-Friday Paquita Y. , Folami L. Buky , Liu Chao-Shin , Mittelstaedt H. Fred
Published: March 2008

This study examines whether the market values financial statement data differently if it is disclosed instead of recognized in the body of the financial statements. We identify a sample of 229 SFAS No. 106 adopters who disclose an estimate of their anticipated liability for retiree benefits other than pensions (PRB) in their financial reports prior to the year of recognition. We then test whether the disclosed estimate of the PRB liability is valued differently by the market than is the subsequently recognized PRB liability. We provide modest and model-sensitive evidence that the recognized PRB liability receives more weight than the disclosed liability in market value association tests.
Rate Regulation, Competition, and Loss Reserve Discounting by Property-Casualty Insurers
Authors: Nelson Karen K.
Published: March 2008

This study examines whether the reported loss reserves of property-casualty insurers contain an implicit discount for the time value of money. Reporting the present value of loss reserves enables insurers to justify the competitive level of insurance premiums to regulators. The evidence indicates that there is a positive and significant discount rate implicit in the relation between reported loss reserves and expected future claim payments. Moreover, insurers subject to relatively stringent rate regulation discount to a greater extent than do other insurers. The results also suggest that implicit discounting is distinct from solvency and tax motives to exercise discretion over the loss reserve.
Disclosure Effects in the Laboratory: Liquidity, Depth, and the Cost of Capital
Authors: Bloomfield Robert J. , Wilks T. Jeffrey
Published: March 2008

Greater disclosure quality leads to higher prices and greater liquidity in a laboratory financial market, and these effects are stronger when investors face the risk of unpredictable demand shocks. These results are consistent with a broad class of theoretical and empirical studies. Disclosure has larger effects on prices and liquidity at greater market depths. We conclude that archival studies looking only at quoted transaction prices and spreads (which typically pertain to small transactions) may underestimate the potential importance of disclosure on larger transactions that occur at greater market depths.
Budgeting: An Experimental Investigation of the Effects of Negotiation
Authors: Fisher Joseph G. , Frederickson James R. , Peffer Sean A.
Published: March 2008

Despite the common use of negotiations to set budgets in practice, accounting research has focused primarily on budgets set unilaterally by subordinates, while goal-setting research in management has focused primarily on budgets set unilaterally by superiors. In addition, budgeting research in accounting has focused almost exclusively on the planning aspects of budgets to the exclusion of their motivational aspects. This study complements prior research in two ways. First, the study examines how budgets and the economic consequences of the budget-setting process differ when budgets are set through a negotiation process vs. when set unilaterally. The study also considers factors associated with negotiation agreement and the relation between agreement and the economic consequences of negotiated budgets. Second, the economic consequences examined are budgetary slack and subordinate performance, allowing us to address the trade-offs between the planning and motivational aspects of budgets.

Negotiated budgets differ from unilaterally set budgets in a manner consistent with social norms and/or information transfer occurring during negotiations. Both the budgets and the economic consequences of the budgetsetting process differ when budgets are set through a negotiation process where superiors have final authority in the event of a negotiation impasse vs. when set unilaterally by superiors. Further, negotiation agreement significantly affects the economic consequences of negotiated budgets. Budgets set through a negotiation process ending in agreement contain significantly less slack. A failed negotiation followed by superiors imposing a budget has a significant detrimental effect on subordinate performance.
Effects of Comprehensive-Income Characteristics on Nonprofessional Investors' Judgments: The Role of Financial-Statement Presentation Format
Authors: Maines Laureen A. , McDaniel Linda S.
Published: March 2008

Statement of Financial Accounting Standards (SFAS) No. 130 requires companies to report comprehensive income in a primary financial statement, but allows its presentation in either a statement of comprehensive income or a statement of stockholders' equity (Financial Accounting Standards Board [FASB] 1997). In an experiment, we examine whether and how alternative presentation formats affect nonprofessional investors' processing of comprehensive-income information, specifically, information disclosing the volatility of unrealized gains on available-for-sale marketable securities. The results show that nonprofessional investors' judgments of corporate and management performance reflect the volatility of comprehensive income only when it is presented in a statement of comprehensive income. We provide evidence consistent with our psychology-based framework that these findings occur because format affects how nonprofessional investors weight comprehensive-income information and not whether they acquire this information or how they evaluate it.
The Value Relevance of Nonfinancial Measures of Air Pollution in the Electric Utility Industry
Authors: Hughes K. E.
Published: March 2008

This study examines the relation between the market value of equity and nonfinancial pollution measures (sulfur dioxide emissions) that capture firms' exposure to future environmental liabilities. I find that a nonfinancial pollution proxy is value-relevant for high-polluting electric utilities targeted for air pollution abatement by Phase One of the 1990 Clean Air Act Amendments (CAAA). On average, these utilities' exposure to (unbooked) future environmental liabilities decreased their mean 1990 share price by 16 percent. Moreover, the value relevance of the nonfinancial pollution proxy (1) increased in response to the passage of the stringent 1990 CAAA environmental legislation, and then (2) declined as the market subsequently reduced estimated compliance costs in response to changing economic and technological factors. Utilities not targeted by Phase One of the 1990 CAAA faced minimal exposure to future environmental liabilities and I find no significant relation between their pollution indicators and share prices. I also find that investors in the high-polluting rate-regulated utilities that were targeted by Phase One positively value a favorable regulatory climate.
Reporting Bias
Authors: Fischer Paul E. , Verrecchia Robert E.
Published: March 2008

We present a simple model of managerial reporting bias for a setting in which the capital market is uncertain about the manager's reporting objective. In this setting, the manager's reporting bias reduces the value relevance of the manager's report; that is, it adds noise to the report. Through comparative static results, our model yields insights into factors that affect the slope and intercept terms in a regression of price on earnings. Specifically, we find that the information content of the manager's report, as captured by the earnings slope coefficient, falls as the private cost to the manager of biasing reports falls, and as the uncertainty about the manager's objective increases. We also find that the magnitude of the adjustment for the expected amount of bias, as captured by the absolute value of the intercept, falls as the uncertainty about the manager's objective increases. Finally, to highlight conditions under which managers would lobby to retain an option to bias reports (i.e., retain reporting flexibility), we analyze the effect of the option to bias on the manager's welfare. For example, we show that the ex ante benefit from biasing the report is positive if there is sufficient uncertainty about the manager's reporting objective.
Purchase, Pooling, and Equity Analysts' Valuation Judgments
Authors: Hopkins Patrick E. , Houston Richard W. , Peters Michael F.
Published: March 2008

We provide evidence that analysts' stock-price judgments depend on (1) the method of accounting for a business combination and (2) the number of years that have elapsed since the business combination. Consistent with business-press reports of managers' concerns, analysts' stock-price judgments are lowest when a company applies the purchase method of accounting and ratably amortizes the acquisition premium. The number of years since the business combination affects analysts' price estimates only when the company applies the purchase method and ratably amortizes goodwill—analysts' price estimates are lower when the business-combination transaction is further in the past. However, this joint effect of accounting method and timing is mitigated by the Financial Accounting Standards Board's proposed income-statement format requiring companies to report separate line items for after-tax income before goodwill charges and net-of-tax goodwill charges. When a company uses the purchase method of accounting and writes off the acquisition premium as in-process research and development, analysts' stockprice judgments are not statistically different from their judgments when a company applies pooling-of-interest accounting.
The Balanced Scorecard: Judgmental Effects of Common and Unique Performance Measures
Authors: Lipe Marlys Gascho , Salterio Steven E.
Published: March 2008

The balanced scorecard is a new tool that complements traditional measures of business unit performance. The scorecard contains a diverse set of performance measures, including financial performance, customer relations, internal business processes, and learning and growth. Advocates of the balanced scorecard suggest that each unit in the organization should develop and use its own scorecard, choosing measures that capture the unit's business strategy. Our study examines judgmental effects of the balanced scorecard—specifically, how balanced scorecards that include some measures common to multiple units and other measures that are unique to a particular unit affect superiors' evaluations of that unit's performance. Our test shows that only the common measures affect the superiors' evaluations. We discuss the implications of this result for research and practice.
The Association between Auditor Litigation and Abnormal Accruals
Authors: Heninger William G.
Published: March 2008

Concern that earnings management erodes the quality of financial reporting has prompted the Securities and Exchange Commission to question the role of the external auditor. To help address that concern, this study examines the relation between earnings management and auditor litigation. While prior research on the relation between auditor litigation and total accruals has yielded inconclusive results, I find that the risk of auditor litigation is positively associated with a sharper measure of earnings management—abnormal accruals. Using a larger and more recent sample, this study provides evidence that the probability of auditor litigation increases as clients report more positive (income-increasing) abnormal accruals. This result holds in: (1) univariate analyses, (2) logit analyses that also control for auditor size, client importance to the auditor, length of the auditor-client relationship, client industry, client financial condition, client size, and client growth, and in (3) the subsample of lawsuits alleging wrongdoing in the more recent time period (1984–1998).
Accruals and the Prediction of Future Cash Flows
Authors: Barth Mary E. , Cram Donald P. , Nelson Karen K.
Published: March 2008

Building on the Dechow et al. (1998) model of the accrual process, this study investigates the role of accruals in predicting future cash flows. The model shows that each accrual component reflects different information relating to future cash flows; aggregate earnings masks this information. As predicted, disaggregating accruals into major components—change in accounts receivable, change in accounts payable, change in inventory, depreciation, amortization, and other accruals—significantly enhances predictive ability. Each accrual component, including depreciation and amortization, is significant with the predicted sign in predicting future cash flows, incremental to current cash flow. The cash flow and accrual components of current earnings have substantially more predictive ability for future cash flows than several lags of aggregate earnings. The inferences are robust to alternative specifications, including controlling for operating cash cycle and industry membership.
Do Auditors Objectively Evaluate Their Subordinates' Work?
Authors: Tan Hun-Tong , Jamal Karim
Published: March 2008

In this study, we investigate whether audit managers' assessment of the quality of work their subordinates perform is influenced by the managers' prior impressions of these subordinates, and whether managers whom the firm considers outstanding are less susceptible to such an effect. We conduct an experiment using actual audit senior-manager teams. Each senior and manager participating in the experiment has been classified by his or her firm as either outstanding or average. Each manager is paired with two audit seniors (one outstanding senior and one average senior), and each evaluates the memos written by his or her paired seniors. Managers evaluate the quality of the memos twice: (1) first, with the identities of the seniors indicated on the memos, and (2) later, when the seniors' identities are not explicitly revealed. Results show that average managers evaluate memos written by outstanding seniors more favorably than those written by average seniors when they know the identities of the memos' authors, but not when the identities of the seniors are not revealed. Outstanding managers do not appear susceptible to this effect.
Estimating the Hidden Costs of Environmental Regulation
Authors: Joshi Satish , Krishnan Ranjani , Lave Lester
Published: March 2008

This paper examines the extent to which accounting systems separately identify all the costs of environmental regulation. We estimate the relation between the “visible” costs of regulatory compliance (costs that firms' accounting systems correctly classify as “environmental”) and “hidden” environmental costs embedded in other accounts. We use plant-level data from 55 steel mills to estimate hidden costs, and we follow up with structured interviews of corporate-level managers and plant-level accountants. Empirical results show that a $1 increase in the visible cost of environmental regulation is associated with an increase in total cost (at the margin) of $10–$11, of which $9–$10 are hidden in other accounts. The findings suggest that inappropriate identification and accumulation of the costs of environmental compliance are likely to distort costs in firms subject to environmental regulation.
The Effect of Missing a Quarterly Earnings Benchmark on the CEO's Annual Bonus
Authors: Matsunaga Steven R. , Park Chul W.
Published: March 2008

We investigate the effects of missing quarterly earnings benchmarks on the CEO's annual bonus. After controlling for the general pay-for-performance relation, we find a significant incremental adverse effect on CEO annual cash bonuses when the firm's quarterly earnings fall short of the consensus analyst forecast or the earnings for the same quarter of the prior year, for at least two quarters during the year. However, we find that the relation between the bonus and the number of loss quarters is not significant. Our results suggest that CEO bonus payments provide CEOs with economic incentives to meet quarterly analyst earnings forecasts and earnings from the same quarter of the prior year.
The Revenue Implications of Financial and Operational Measures of Product Quality
Authors: Nagar Venky , Rajan Madhav V.
Published: March 2008

We examine the future sales implications of product quality measures for 11 plants of a manufacturing group in a Fortune 500 firm. Our results indicate that both financial quality measures, such as external failure costs incurred due to product failures at customer sites, and nonfinancial quality measures, such as defect rates and on-time deliveries, are leading indicators of future sales. While changes in defects and on-time deliveries affect sales in the subsequent quarter, changes in external failure costs are negatively associated with sales two and three quarters hence. Corroborating popular claims about the importance of external failure costs, we find that a $1 increase in external failure costs is associated with a cumulative sales decrease of $26, or approximately $10.40 in lost profits.
Why Does Fixation Persist? Experimental Evidence on the Judgment Performance Effects of Expensing Intangibles
Authors: Luft Joan L. , Shields Michael D.
Published: March 2008

This study shows experimentally that when individuals use information on intangibles expenditures to predict future profits, expensing (vs. capitalizing) the expenditures significantly reduces the accuracy, consistency, consensus, and self-insight of individuals' subjective profit predictions. The experimental design allows us to eliminate several competing explanations for this apparent fixation on accounting. Subjects do not base their judgments on a nai¨ve prior belief that expensing precludes effects on future profits; a preexperiment question shows that subjects expect intangibles expenditures will affect future profits even when expensed. Moreover, subjects do not lack, or fail to use, data that would allow them to learn the exact expenditure-profit relation. They receive data on intangibles expenditures and profits as a basis for learning, and in some respects the learning is quite successful even when intangibles are expensed; subjects' profit predictions accurately reflect the mean and standard deviation of actual profits. Nevertheless, consistent with psychological theories of learning, subjects do not learn the exact magnitude of the effect of intangibles on future profits as well when the intangibles are expensed. Although the mean of their predictions is accurate, they do not discriminate well between cases with high and low actual profits. In consequence, their prediction accuracy, consistency, consensus, and self-insight are lower when intangibles are expensed. Thus, in this case, learning does not mitigate fixation on accounting, because accounting affects the learning process itself.
“Cost of Capital” in Residual Income for Performance Evaluation
Authors: Christensen Peter O. , Feltham Gerald A. , Wu Martin G. H.
Published: March 2008

We consider a setting in which a firm uses residual income to motivate a manager's investment decision. Textbooks often recommend adjusting the residual income capital charge for market risk, but not for firmspecific risk. We demonstrate two basic flaws in this recommendation. First, the capital charge should not be adjusted for market risk. Charging a market risk premium results in “double” counting because a risk-averse manager will personally consider this risk. Second, while investors can avoid firm-specific risk through diversification, a manager cannot. If the manager faces significant firm-specific risk at the time he makes his investment decision, then it is optimal to charge him less than the riskless return so as to partially offset his reluctance to undertake risky investments. On the other hand, the manager will vary his investment decisions with the pre-decision information he receives, which accentuates his compensation risk, and the firm must compensate him for bearing this additional risk. Hence, if the manager will receive relatively precise pre-decision information, then it is optimal to charge him more than the riskless return to reduce the variability of his investment decisions.
An Exploratory Study of the Valuation Properties of Cross-Listed Firms' IAS and U.S. GAAP Earnings and Book Values
Authors: Ashbaugh Hollis , Olsson Per
Published: March 2008

Despite the increasing integration of global capital markets, there is little evidence on the valuation properties of cross-listed, non-U.S. firms' accounting variables. We use the relative performance of the earnings capitalization, the book value, and the residual income valuation models to explore the valuation properties of International Accounting Standards and U.S. Generally Accepted Accounting Principles earnings and book values reported by non-U.S., cross-listed firms trading in a common equity market. Using non-U.S./non-U.K. firms whose shares trade on the International Stock Exchange Automated Quotation system in London, we find that the earnings capitalization model is the dominant accounting-based valuation model when crosslisted firms report under International Accounting Standards. In contrast, we find that when cross-listed firms report under U.S. Generally Accepted Accounting Principles, the residual income model is the dominant accountingbased valuation model. Our exploratory study provides insights into the valuation implications of allowing a dual reporting system for foreign registrants trading in a common equity market.
The Interaction between Accrual Management and Hedging: Evidence from Oil and Gas Firms
Authors: Pincus Morton , Rajgopal Shivaram
Published: March 2008

This research investigates whether oil and gas producing firms use abnormal accruals and hedging with derivatives as substitutes to manage earnings volatility. Firms engaged in oil exploration and drilling are exposed to two kinds of risks that can cause earnings volatility: oil price risk and exploration risk. Firms can use abnormal accrual choices and/or derivatives to reduce earnings volatility caused by oil price risk, but cannot directly hedge the operational risk of unsuccessful drilling. Because hedging and using abnormal accruals are costly activities, and because prior research suggests managers do not eliminate all volatility (Haushalter 2000; Barton 2001), we expect that, at the margin, managers will use these smoothing mechanisms as substitutes to manage earnings volatility. Our results suggest a sequential process whereby managers of oil and gas producing firms first determine the extent to which they will use derivatives to hedge oil price risk, and then, especially in the fourth quarter, manage residual earnings volatility by trading off abnormal accruals and hedging with derivatives to smooth income.
Using Electronic Data Interchange (EDI) to Improve the Efficiency of Accounting Transactions
Authors: Anderson Shannon W. , Lanen William N.
Published: March 2008

Electronic data interchange (EDI) is an information technology that standardizes the exchange of information between transacting parties. Using data from a major U.S. office furniture manufacturer that adopted EDI primarily to improve the efficiency of accounting transactions, we evaluate whether EDI reduces order-processing time (the time from sales order receipt to sales order scheduling) and whether this improvement is greater for more complex orders. Our measure of complexity reflects both the mix of different products the dealer orders as well as features and options the dealer selects for each product in the order. We find that EDI is associated with faster order processing, independent of complexity, and that EDI mitigates most of the negative effects of complexity on processing time. We also find that dealers learn to submit error-free orders to the manufacturer, and that previous errors provide feedback that helps dealers submit more accurate orders. However, we find only mixed evidence that order complexity impedes learning.
The Relation between Cost Shifting and Segment Profitability in the Defense-Contracting Industry
Authors: McGowan Annie S. , Vendrzyk Valaria P.
Published: March 2008

We test the conjecture from prior research that defense contractors' excess profitability in the 1980s stemmed from their ability to shift common overhead costs to government contracts that typically allow cost reimbursement or price renegotiation (Rogerson 1992; Thomas and Tung 1992; Lichtenberg 1992). Although we confirm prior evidence that defense contractors enjoyed abnormally high profitability on their government work in the 1984–1989 period (a period of relatively low competition for defense contracts), we find no evidence that this excess profitability is attributable to cost shifting. In addition, we find no evidence that the Top 100 defense contractors (firms that likely wield above-average market power) are able to use cost shifting to exploit a lack of competition in the industry. Our results suggest that, contrary to the conjectures in prior research, the unusually high profitability reported on government contracts in 1984–1989 is more likely attributable to nonaccounting explanations than to cost shifting.
Federal Tax Legislation as an Implicit Contracting Cost Benchmark: The Definition of Excessive Executive Compensation
Authors: Harris David G. , Livingstone Jane R.
Published: March 2008

We examine how tax legislation that restricted firms' deductions of CEO compensation above $1 million reduced the implicit contracting cost of compensation for firms that were expected to pay below that amount and that were not directly affected by the law change. We find that firms that expected to pay their CEOs less than $1 million actually increased their CEOs' cash compensation, contrary to Congress's expectations. Moreover, the magnitude of the unexpected increase in compensation is proportional to how far the CEO's expected compensation fell below Congress's new $1 million reasonable-compensation standard. Thus, our study provides evidence that some of the largest U.S. corporations responded in a manner contrary to policymakers' expectations. Our findings also support the theory of implicit contracting costs, by demonstrating that many firms reacted in an economically rational fashion when a change in the tax law decreased their implicit costs of CEO compensation.
Evaluating Financial Reporting Quality: The Effects of Financial Expertise vs. Financial Literacy
Authors: McDaniel Linda , Martin Roger D. , Maines Laureen A.
Published: March 2008

Audit committees evaluate financial reporting quality as part of their corporate oversight responsibilities. Given this responsibility, the national stock exchanges now require all audit committee members to be financially literate and at least one member to have financial expertise. In light of recent debates over this requirement, we provide evidence on how experts and literates differ in their evaluations of financial reporting quality. Results suggest that experts' evaluations of financial reporting quality are more strongly associated with their assessments of characteristics underlying reporting quality (e.g., relevance) espoused in Statement of Financial Accounting Concepts No. 2's framework than literates' evaluations. Additionally, literates are more likely than experts to identify concerns about reporting treatments for business activities that are prominent in the business press or are distinguished by their nonrecurring nature, while experts are more likely to raise concerns about reporting treatments for less prominent, recurring activities. This same pattern occurs in the ratings of the quality of the reporting treatments for specific financial statement items with respect to elements underlying reporting quality (e.g., neutrality); literates (experts) assess the quality elements for the reporting treatments of prominent and nonrecurring items (less prominent and recurring items) comparatively lower than experts (literates). These results suggest that including financial experts on audit committees is likely to change the structure and focus of audit committee discussions about financial reporting quality, and may affect the committee's overall assessment of the quality of a company's financial reports.
The Relation between Auditors' Fees for Nonaudit Services and Earnings Management
Authors: Frankel Richard M. , Johnson Marilyn F. , Nelson Karen K.
Published: March 2008

This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that nonaudit fees are positively associated with small earnings surprises and the magnitude of discretionary accruals, while audit fees are negatively associated with these earnings management indicators. We also find evidence of a negative association between nonaudit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.
Analyst Forecast Revisions and Market Price Discovery
Authors: Gleason Cristi A. , Lee Charles M. C.
Published: March 2008

We document several factors that help explain cross-sectional variations in the post-revision price drift associated with analyst forecast revisions. First, the market does not make a sufficient distinction between revisions that provide new information (“high-innovation” revisions) and revisions that merely move toward the consensus (“low-innovation” revisions). Second, the price adjustment process is faster and more complete for “celebrity” analysts (Institutional Investor All-Stars) than for more obscure yet highly accurate analysts (Wall Street Journal Earnings-Estimators). Third, controlling for other factors, the price adjustment process is faster and more complete for firms with greater analyst coverage. Finally, a substantial portion of the delayed price adjustment occurs around subsequent earnings-announcement and forecast-revision dates. Collectively, these findings show that more subtle aspects of an earnings revision signal can hinder the efficacy of market price discovery, particularly in firms with relatively low analyst coverage, and that subsequent earnings-related news events serve as catalysts in the price discovery process.
The Influence of Interim Auditor Reviews on the Association of Returns with Earnings
Authors: Manry David , Tiras Samuel L. , Wheatley Clark M.
Published: March 2008

The Securities and Exchange Commission now requires auditors to review interim earnings reports on a timely basis. Previously, auditors could perform this review retrospectively, as part of the year-end audit. We investigate whether timely reviews are likely to increase the relevance and reliability of reported earnings, as reflected by the extent to which the earnings-return relation is contemporaneous. We find that when the auditor reviews interim earnings on a timely basis, the association between quarterly returns and earnings (and between quarterly returns and unexpected earnings) is predominantly contemporaneous. When the auditor reviews interim earnings retrospectively, however, the association between quarterly returns and earnings is not entirely contemporaneous; with retrospective reviews, returns lead interim earnings. We conclude from these findings that timely reviews increase the likelihood that accounting earnings reflect economic events contemporaneously with returns.
The Effect of Information Complexity on Analysts' Use of That Information
Authors: Plumlee Marlene A.
Published: March 2008

In this study I investigate the relation between information complexity and financial analysts' use of that information. I rank by complexity six tax-law changes enacted by the Tax Reform Act of 1986, and then examine analysts' explicit forecasts of effective tax rates around those changes. I show that analysts' revisions of their forecasts of effective tax rates appear to impound the effects of the less complex tax-law changes but not the more complex changes. Furthermore, as expected, if analysts assimilate less complex (but not more complex) information, the magnitude of the errors in their forecasts of effective tax rates increases with the effects of the more complex tax-law changes, but is unrelated to the less complex changes. Taken together, these results indicate that analysts assimilate less complex information to a greater extent than they assimilate more complex information. Either analysts' abilities to incorporate specific information into their forecasts is a decreasing function of the complexity of that information, or analysts choose not to assimilate complex information because the cost would exceed the benefit. In either case, complexity reduces analysts' use of information. These results demonstrate the importance of considering information attributes, such as complexity, when investigating why analysts' forecasts fail to incorporate all public information.
Accrued Earnings and Growth: Implications for Future Profitability and Market Mispricing
Authors: Fairfield Patricia M. , Whisenant J. Scott , Yohn Teri Lombardi
Published: March 2008

Prior research reveals that the accrual component of profitability is less persistent than the cash flow component, and that investors fail to fully appreciate their differing implications for future profitability (Sloan 1996). However, accruals are a component of growth in net operating assets as well as a component of profitability. Just as we can disaggregate profitability into accruals and cash flows from operations, we can disaggregate growth in net operating assets into accruals and growth in long-term net operating assets. We find that, after controlling for current profitability, both components of growth in net operating assets—accruals and growth in long-term net operating assets—have equivalent negative associations with one-year-ahead return on assets. This result is consistent with conservative accounting and diminishing marginal returns on investments. We also find that, after controlling for current profitability, the market appears to equivalently overvalue accruals and growth in long-term net operating assets relative to their association with one-year-ahead ROA. Our evidence suggests that the accrual anomaly documented in Sloan (1996) is a special case of what could be viewed as a more general growth anomaly.
The Information Content of the Deferred Tax Valuation Allowance
Authors: Kumar Krishna R. , Visvanathan Gnanakumar
Published: March 2008

An event study demonstrates that disclosures of changes in deferred tax valuation allowances (VA) provide information beyond contemporaneous earnings reports. Prior research shows that, in setting VA, managers consider the extent that taxable income is available from various sources for the realization of deferred tax assets (DTA). Our evidence supports a characterization where investors use VA disclosures to infer management's expectations about DTA, its realizability, and future taxable income available for realization. These findings are more generally relevant for assessing the consequences of reporting standards that require or permit management judgment, especially about future outcomes. In particular, they support the view that discretion can be a vehicle for management to communicate expectations to the benefit of investors.