bluuebunny/crossref_metadata_2025 huggingface dataset:
Evidence from Archival Data on the Relation Between Security Analysts' Forecast Errors and Prior Forecast Revisions*
Authors: ELLIOT JOHN A. , PHILBRICK DONNA R. , WIEDMAN CHRISTINE I.
Published: April 2010

Abstract. This paper examines the association between analysts' forecast errors at the earnings announcement date and the revisions to those forecasts during the preceding year. The study is an initial effort to use archival data from expert decision makers to test behavioral theories that have support in laboratory environments. Consistent with findings of conservatism in laboratory experiments, we find that analysts systematically underweight new information. This finding is most pronounced when the analysts are consistently revising their estimates downward throughout the year.

Résumé. Les auteurs examinent le lien entre les erreurs prévisionnelles des analystes à la date de déclaration des bénéfices et les révisions dont ces prévisions ont fait l'objet au cours de l'exercice précédent. Il s'agit là d'une première tentative d'utilisation des données d'archives des experts en matière décisionnelle dans le but de tester les théories comportementales qui ont été démontrées en laboratoire. Conformément aux observations faites en laboratoire en ce qui a trait à la prudence, les auteurs constatent que les analystes accordent systématiquement trop peu de poids à l'information nouvelle/Cette constatation est très marquée lorsque les analystes révisent continuellement leurs estimations à la baisse au cours de l'année.
Capital Market Experience for Financial Accounting Students*
Authors: BERG JOYCE , DICKHAUT JOHN , HUGHES JOHN , MCCABE KEVIN , RAYBURN JUDY
Published: April 2010

Abstract. In this paper we present an innovative teaching tool for introductory financial accounting students that promotes active learning using methods at the frontier of market research. We describe the implementation of an asset market where students assume the role of traders in order to learn the role of information in price formation. We discuss the pedagogical questions which are addressed in the design of this market, and we relate the responses to questionnaires distributed to students at the end of the quarter. When we control for prior grade point averages (GPAs) of students, we find that those who participate in the market had better classroom performance.

Résumé. Les auteurs présentent ici un instrument pédagogique innovateur, à l'intention des étudiants des cours d'introduction à la comptabilité financière, favorisant l'apprentissage dynamique grâce à l'utilisation de méthodes voisinant de près l'étude de marché. Ils décrivent la mise en place d'un marché de biens où les étudiants assument les fonctions de négociateurs en vue d'apprendre quel est le rôle de l'information dans la formation des prix. Ils analysent les questions pédagogiques que soulève la conception de ce marché et font état des réponses des étudiants aux questionnaires qui leur sont distribués à la fin du trimestre. Lorsqu'ils contrôlent les notes moyennes antérieures des étudiants, les auteurs constatent que ceux qui ont participé au marché font preuve d'un rendement supérieur en classe.
Context‐Dependence of Auditors' Interpretations of the SFAS No. 5 Probability Expressions*
Authors: AMER TAREK , HACKENBRACK KARL , NELSON MARK
Published: April 2010

Abstract. Statement of Financial Accounting Standards (SFAS) No. 5 requires accrual of contingent losses which are deemed probable. This disclosure criterion is intended to be applied uniformly across a variety of contexts. We performed an experiment which examined whether audit managers' interpretations of the SFAS No. 5 probability expressions are influenced by one contextual feature, event base rate. Counter to the intention of the Financial Accounting Standards Board (FASB), interpretations of the expression probable were positively associated with event base rate.

Résumé. Le SFAS no 5 exige l'imputation à l'exercice des pertes éventuelles qui sont jugées «probables». La règle ainsi établie veut que ce critère de présentation d'information soit appliqué uniformément dans des contextes très divers. Les auteurs procèdent à une expérience dans le cadre de laquelle ils examinent si la façon dont les responsables de mission interprètent la gamme de probabilités, au sens du SFAS no 5, est influencée par une caractéristique contextuelle, la fréquence relative de l'événement. Contrairement au résultat visé par le FASB, les interprétations du terme «probable» sont en relation positive avec la fréquence relative de l'événement.
Determinants of the Returns‐Earnings Correlation*
Authors: SHROFF PERVIN K.
Published: April 2010

Abstract. The weak correlation between accounting earnings and security returns documented by numerous empirical studies is an issue of concern in current accounting research. Given that price is determined not solely by accounting earnings but also by other sources of information about future earnings, this paper focuses on the relation between earnings and other information to understand the returns‐earnings association. The analysis indicates that current earnings exhibit high explanatory power for returns if they correlate with expected future earnings (or with other information that reflects expected future earnings). A high price‐to‐earnings (P/E) ratio coupled with a high return on equity (ROE) can ex ante indicate earnings growth, and the earnings of firms with these attributes are positively correlated with future earnings. The high‐growth subset obtains an impressive returns‐earnings R2 of 31 percent and an earnings coefficient of 6.17, demonstrating that it is possible to identify firms whose earnings are strongly correlated with returns using a parsimonious set of firm characteristics.

Résumé. La faible corrélation entre les bénéfices comptables et le rendement des titres de placement sur laquelle se sont penchés de nombreux auteurs d'études empiriques retient aujourd'hui l'attention des chercheurs en comptabilité. Le cours des titres étant déterminé non seulement par les bénéfices comptables mais aussi par d'autres sources d'information relative aux bénéfices futurs, l'auteur s'intéresse ici à la relation entre les bénéfices et d'autres renseignements, dans le but d'expliquer le lien entre rendement et bénéfices. L'analyse révèle que les bénéfices courants ont un pouvoir explicatif élevé à l'égard du rendement si ce dernier est en corrélation avec les bénéfices futurs prévus (ou avec d'autres renseignements indicateurs des bénéfices futurs prévus). Un ratio cours/bénéfice élevé associé à un rendement des capitaux propres élevé peut indiquer, ex ante, une croissance des bénéfices, et les bénéfices des entreprises qui possèdent ces caractéristiques sont en corrélation positive avec les bénéfices futurs. Le sous‐groupe des entreprises à forte croissance obtient un R2 étonnant de 31 pour cent, résultat d'une analyse de régression du rendement par rapport aux bénéfices, et un coefficient de bénéfices de 6,17, ce qui démontre qu'il est possible de déterminer quelles sont les entreprises dont les bénéfices présentent une forte corrélation avec le rendement, lorsqu'on utilise un ensemble parcimonieux de caractéristiques des entreprises.
Detecting Framing Effects in Financial Statements*
Authors: JAMAL KARIM , JOHNSON PAUL E. , BERRYMAN R. GLEN
Published: April 2010

Abstract. In this study, we address the question of what kinds of cognitive representations auditors use in a situation of potential financial statement fraud. We divide the problem of detecting fraud into two parts: detecting the frame management has constructed to mask the fraud, and detecting the fraud. We examine two ways proposed by Kahneman and Tversky (1986) for detecting a frame: (1) use of multiple representations that provide alternative interpretations of data in the financial statements; and (2) use of a procedure that transforms financial statement data into a standard representation.

Twenty‐four audit partners served as participants in the study. Each partner conducted a simulation of a concurring partner review. All auditors reviewed four cases in which management had created a misleading description of the company (a frame) and a financial statement fraud.

The results support Kahneman and Tversky's proposal that frames can be detected by transforming a problem into a standard representation. Auditors who used a standard representation successfully detected management's frame, aggregated the items, and detected fraud in all four cases. Auditors who used a standard representation followed a procedure specified by generally accepted auditing standards (Canadian Institute of Chartered Accountants 1988, American Institute of Certified Public Accountants 1984) for aggregating items. Auditors who used multiple representations detected management's frame on all four cases. These auditors, however, did not use the aggregation procedure specified by auditing standards and failed to detect the fraud on all four cases.
La détection des effets de mise en scène dans les états financiers*
Authors: Jamal Karim , Johnson Paul E. , Berryman R. Glen
Published: April 2010

Résumé. Les auteurs s'intéressent ici à la nature des représentations cognitives qu'utilisent les vérificateurs en situation de fraude potentielle dans les états financiers. Ils divisent le problème de détection de la fraude en deux parties: la détection de la mise en scène élaborée par la direction pour masquer la fraude et la détection de la fraude. Ils examinent les deux méthodes de détection des mises en scène proposées par Kahneman et Tversky (1986): 1) l'utilisation de représentations multiples aboutissant à différentes interprétations possibles des données contenues dans les états financiers; et 2) l'utilisation d'une méthode permettant de transposer les données contenues dans les états financiers sous forme de représentation normalisée.

Vingt‐quatre associés de vérification ont participé à l'étude. Chacun d'eux devait procéder à la contre‐révision d'un dossier de vérification. Tous les vérificateurs examinaient quatre cas dans lesquels la direction avait présenté une image trompeuse de l'entreprise (au moyen d'une mise en scène) et produit des états financiers frauduleux.

Les résultats obtenus par les auteurs confirment la thèse de Kahneman et Tversky selon laquelle les mises en scène peuvent être décelées grâce à la transposition du problème sous forme de représentation normalisée. Les vérificateurs qui ont eu recours à une représentation normalisée sont parvenus à percer à jour la mise en scène de la direction, à totaliser les éléments correctement et à déceler la fraude dans tous les cas. Ils ont, pour cela, appliqué des procédés conformes aux normes de vérification généralement reconnues (Institut Canadien des Comptables Agréés, 1988; American Institute of Certified Public Accountants, 1984) pour totaliser les éléments. Les vérificateurs qui ont eu recours à des représentations multiples ont aussi détecté la mise en scène élaborée par la direction dans les quatre cas. Ils n'ont cependant pas appliqué les procédés de totalisation recommandés dans les normes de vérification et ne sont parvenus à détecter la fraude dans aucun des quatre cas.
The Effect of Investment Banking Relationships on Financial Analysts' Earnings Forecasts and Investment Recommendations*
Authors: DUGAR AMITABH , NATHAN SIVA
Published: April 2010

Abstract. This study shows that financial analysts of brokerage firms that provide investment banking services to a company (investment banker analysts) are optimistic, relative to other (noninvestment banker) analysts, in their earnings forecasts and investment recommendations. Returns earned by following the investment recommendations of investment banker analysts, however, are not significantly different from those of non‐investment banker analysts. Given that information regarding the investment banking relationships of brokerage firms is publicly available, we find evidence that capital market participants rely relatively less on the investment banker analysts in forming their earnings expectations. Although we find a significant capital market reaction around the noninvestment banker analysts' research report dates and not around the investment banker analysts' research report dates, the difference between the two market reactions is not statistically significant. Finally, we find that investment banker analysts' earnings forecasts are, on average, as accurate as those of noninvestment banker analysts.

Résumé. Les auteurs mettent en évidence le fait que les analystes financiers des maisons de courtage qui offrent des services de prise ferme aux entreprises (les analystes de courtiers preneurs ferme) sont optimistes dans leurs prévisions de bénéfices et leurs recommandations de placements, par comparaison aux autres analystes (c'est‐à‐dire aux analystes de courtiers qui ne sont pas preneurs ferme). Les rendements obtenus par les investisseurs qui observent les recommandations de placements des analystes de courtiers preneurs ferme ne sont cependant pas sensiblement différents de ceux qu'obtiennent les investisseurs qui se fient aux analystes des courtiers qui ne sont pas preneurs ferme. Compte tenu du fait que l'information relative aux relations qu'entretiennent les maisons de courtage en matière de prise ferme est du domaine public, les constatations des auteurs confirment que les participants au marché financier s'appuient relativement moins sur le verdict des analystes des courtiers preneurs ferme dans le calcul de leur espérance de gains. Bien que les auteurs observent une réaction marquée du marché financier à proximité des dates de publication des rapports de recherche des analystes des courtiers qui ne sont pas preneurs ferme, ce qui n'est pas le cas à proximité des dates de publication des rapports de recherche des analystes des courtiers preneurs ferme, la différence entre ces deux réactions n'est pas statistiquement significative. Enfin, les auteurs constatent que les prévisions de bénéfices des analystes des courtiers preneurs ferme sont, en moyenne, aussi exactes que celles des analystes des courtiers qui ne sont pas preneurs ferme.
Further Evidence on Nontrading‐Period Information Release*
Authors: BAGINSKI STEPHEN P. , HASSELL JOHN M. , PAGACH DONALD
Published: April 2010

Abstract. Using a sample of 856 management earnings forecasts, we provide evidence that managers release larger shock‐earnings forecasts in nontrading periods. Our results do not depend on whether the magnitude of the shock is measured exogenously (unexpected accounting earnings) or endogenously (security market reaction). The timing effects are more pronounced for less‐precise (i.e., open‐interval and closed‐interval) forecasts. Also, we provide evidence of an overnight reaction to closed‐period management forecast releases.

Our results are consistent with explanations for voluntary disclosure that rely on a precommitted policy of information asymmetry reduction (see Diamond 1985; King, Pownall, and Waymire 1990). These explanations lead to predictions of strategic timing of greater shocks in the nontrading period in order to provide the less‐informed with a period for information evaluation.

Résumé. À partir d'un échantillon de 856 prévisions de bénéfices publiées par la direction de diverses entreprises, les auteurs démontrent que les prévisions publiées par les gestionnaires en période où les titres ne sont pas négociés ont davantage d'impact. Les résultats qu'ils obtiennent ne dépendent pas du caractère exogène (bénéfices comptables inattendus) ou endogène (réaction du marché des valeurs mobilières) de la mesure de l'impact. L'effet du choix du moment est plus prononcé pour les prévisions moins précises (c'est‐à‐dire à intervalle ouvert et à intervalle fermé). Les auteurs démontrent aussi qu'il se produit une réaction à la publication de prévisions par la direction en période de fermeture, dans les vingt‐quatre heures qui suivent la publication.

Les résultats de l'étude sont conformes au principe de la présentation facultative d'information dont l'explication repose sur une politique, préalablement adoptée, de réduction de l'asymétrie de l'information (voir Diamond, 1985; King, Pownall et Waymire, 1990). Cette explication mène à des prédictions voulant que l'on choisisse, à des fins stratégiques, les périodes de non‐négociation des titres pour publier les prévisions de bénéfices dont l'impact est plus grand, de manière à laisser aux investisseurs moins bien informés un certain laps de temps pour évaluer l'information.
Regulatory Capital, Tax, and Earnings Management Effects on Loan Loss Accruals in the Canadian Banking Industry*
Authors: CHEN PETER , DALEY LANE
Published: April 2010

Abstract. This paper examines the degree to which managerial discretion over accruals relating to loan losses in the Canadian banking industry during 1977–87 may have been utilized to manage regulatory capital, taxable income, and reported earnings. These years reflect a unique period in which accounting and regulatory practices differed significantly from the post‐1987 period. These prior practices created different types of incentives and highlighted different policy issues such as the role of tax benefits in loan loss accrual decisions.

We model a three‐equation, simultaneous system around three annual discretionary choices: the amount of loan loss experience accrued (based on specific provisions), the size of reserve transfers to the Appropriation for Contingencies (based on general provisions), and the extent of external regulatory capital raised. Results indicate strong support for the capital maintenance predictions and weaker, but significant, support for the tax management predictions. Results do not support the predictions of the earnings management hypothesis.

Résumé. Les auteurs examinent la mesure dans laquelle la discrétion dont jouissait la direction dans la présentation des montants cumulatifs des pertes sur prêts, dans le secteur bancaire canadien entre 1977 et 1987, pourrait avoir été mise à profit dans la gestion du capital réglementaire, du revenu imposable et des bénéfices publiés. Cette décennie est unique puisqu'elle se caractérise par le fait que les méthodes comptables et réglementaires présentaient des différences significatives par rapport à celles de la période postérieure à 1987. Les méthodes initiales ont donné naissance à différents types d'incitatifs et mis en relief des questions différentes relatives aux politiques, telles que le rôle des avantages fiscaux dans les décisions touchant les pertes sur prêts cumulatives.

Les auteurs créent un modèle à partir d'un système de trois équations concomitantes, autour de trois choix annuels discrétionnaires: le montant cumulatif des pertes sur prêts qui sont subies (basé sur des dispositions précises), l'importance des transferts de réserves aux provisions pour éventualités (basée sur des dispositions générales), et l'importance du capital réglementaire externe recueilli. Les résultats confirment éloquemment les prédictions relatives au maintien du capital et de façon plus tempérée, mais néanmoins significative, les prédictions relatives à la gestion fiscale. Ils ne confirment cependant pas les prédictions relatives à la gestion des bénéfices.
Consensus, dispersion et prix des titres*
Authors: L'HER JEAN‐FRANÇOIS , SURET JEAN‐MARC
Published: April 2010

Résumé. Cette étude établit et teste, dans un cadre d'équilibre d'anticipations rationnelles bruité, l'existence d'une relation linéaire formelle entre le prix des titres, la moyenne (le consensus) et la dispersion des anticipations des agents. Les variations de la moyenne et de la dispersion des anticipations des agents, mesurées par les prévisions de bénéfices réalisées par les analystes financiers transmises par I/B/E/S, ont respectivement un effet positif et négatif sur le prix des titres. Les difficultés soulevées par cette estimation, ainsi que les dimensions institutionnelles de l'industrie de l'analyse financière sont examinées. Les principaux résultats sont les suivants: 1) les variations les plus importantes du consensus (en valeur absolue) correspondent aux variations les plus importantes (en valeur absolue) de la dispersion des prévisions d'analystes, 2) les changements dans le consensus et la dispersion des prévisions sont respectivement liés positivement et négativement aux rendements des actions canadiennes mais en raison du décalage entre la réalisation et la diffusion des prévisions, une part importante de l'ajustement de prix a lieu avant la diffusion publique des changements dans les prévisions, 3) l'effet des variations du consensus sur le rendement des titres domine l'effet des variations de la dispersion des prévisions. Il semble donc que l'impact de l'arrivée d'information sur le prix des titres ne dépende pas uniquement du sens et de l'ampleur de la révision moyenne des anticipations, mais aussi du sens et de l'ampleur du changement dans la dispersion des anticipations.
Valuation and Clean Surplus Accounting: Some Implications of the Feltham and Ohlson Model for the Relative Information Content of Earnings and Cash Flows*
Authors: CLUBB COLIN D.B.
Published: April 2010

Abstract. This paper provides an analysis of the implications of the Feltham and Ohlson (1995) model for the relationship between unexpected security returns and unexpected earnings and cash flows. A simplified version of the Feltham and Ohlson linear information model is utilized to provide an intuitive explanation of the coefficients in the unexpected returns equation and to show that incremental information content for unexpected free cash flow beyond accounting earnings in the model depends on the existence of positive net present value (NPV) investment opportunities. The paper concludes by arguing that the model provides useful insights into factors that may influence the empirical relationship between security returns and accounting data.

Résumé. L'auteur expose les résultats d'une analyse des répercussions du modèle de Feltham et Ohlson (1995) sur la relation entre les rendements imprévus des titres, d'une part, et les bénéfices et les flux monétaires imprévus, d'autre part. Il a recours à une version simplifiée du modèle d'information linéaire de Feltham et Ohlson pour expliquer intuitivement les coefficients de l'équation des rendements imprévus et pour montrer que, dans le modèle, le contenu marginal en information supérieur des flux monétaires disponibles imprévus par rapport aux bénéfices comptables dépend des possibilités d'investissement existantes offrant une valeur actualisée nette (VAN) positive. L'auteur conclut en affirmant que le modèle livre des renseignements utiles quant aux facteurs susceptibles d'influencer la relation empirique entre les rendements des titres et les données comptables.
Les déterminants du niveau d'endettement de l'entreprise: une analyse de séries chronologiques constituées à partir des données contenues dans les déclarations de revenus produites aux États‐Unis*
Authors: SHIH MICHAEL S. H.
Published: April 2010

Résumé. L'auteur examine comment le risque d'épuisement des obligations fiscales des sociétés avant la déduction des intérêts débiteurs influe sur leur niveau d'endettement. L'étude diffère des travaux précédents sous trois aspects: 1) elle fait usage de données compilées par l'Internal Revenue Service (IRS) à partir des déclarations de revenus des sociétés plutôt que de données comptables; 2) elle mesure le risque d'épuisement de l'impôt avec plus de précision; et 3) elle fait appel à une méthode reposant sur les séries chronologiques et le calcul des différences d'ordre 1, de sorte que les sociétés servent d'élément d'autocontrôle entre années successives. Ces innovations méthodologiques réduisent les distorsions attribuables à l'erreur de mesure et aux variables omises que l'on retrouvait dans les travaux précédents.

Les résultats donnent à penser que, toutes choses étant égales par ailleurs, le risque élevé d'épuisement de l'impôt amène les sociétés à réduire leur utilisation du levier financier. L'étude fournit également des données confirmant pour la première fois que les impôts des particuliers influent de manière sensible sur le niveau d'endettement des sociétés. Les effets des décisions relatives au niveau d'endettement sur d'autres variables font également l'objet de tests dont les résultats confirment les prévisions énoncées dans les travaux théoriques précédents.
The Relation Between Security Returns, Firm Earnings, and Industry Earnings*
Authors: LANG MARK , LUNDHOLM RUSSELL
Published: April 2010

Abstract. In this paper we examine the relation between a firm's stock return and the earnings of other firms in the same industry, controlling for the firm's own earnings. We present a model in which the sign of this relation depends on the relative uncertainty there is about the size of the total industry value versus the division of that value between firms. We document considerable cross‐industry variation in the relation between a firm's return and other firms' earnings, and demonstrate empirically that the sign of the relation depends on information provided prior to the industry earnings announcement period.

Résumé. Les auteurs examinent la relation entre le rendement de l'action d'une société et les bénéfices des entreprises appartenant au même secteur d'activité, en veillant à contrôler les bénéfices de la société en question. Dans le modèle qu'ils proposent, le sens (positif ou négatif) de cette relation dépend de l'incertitude relative qui caractérise l'importance de la valeur globale du secteur d'activité par rapport au partage de cette valeur entre les entreprises qui le constituent. Les auteurs ont recueilli quantité d'information confirmant l'existence d'une forte variation dans la relation entre le rendement des actions d'une entreprise et les bénéfices des autres entreprises d'un même secteur; ils démontrent aussi empiriquement que le sens de la relation dépend de l'information produite avant la période où les bénéfices du secteur sont communiqués.
Earnings Announcements and Market Depth*
Authors: BUSHMAN ROBERT , DUTTA SUNIL , HUGHES JOHN , INDJEJIKIAN RAFFI
Published: April 2010

Abstract. This paper investigates how strategic trading around the time of earnings announcements affects market liquidity (e.g., bid‐ask spreads). We model an investor with private information in advance of an earnings announcement (e.g., inside information). The investor trades before and after the earnings announcement in a market populated by liquidity‐motivated traders who have some discretion over the timing of their trades. The main result of the analysis is that an earnings announcement that reduces an insider's private information may lead to a less liquid market in the postannouncement period.
The Provision of Nonaudit Services by Accounting Firms to their Audit Clients*
Authors: FIRTH MICHAEL
Published: April 2010

Abstract. There has been a strong growth in accounting firms' provisions of nonaudit services to their audit clients. To date, however, there have been few studies into the determinants of this joint provision of audit and nonaudit services. One reason for the paucity of research is the lack of publicly available data with which to empirically examine relationships and test theories. However, recent legislation in the United Kingdom requires publication of nonaudit fees paid to a company's auditor, and this disclosure provides the data with which to investigate the joint provision of consultancy and audit services. A model is developed that seeks to explain a company's decision to hire nonaudit services from the auditor. The model argues that companies that face potentially high agency costs purchase relatively smaller amounts of nonaudit services from their auditor. High agency‐cost companies require independent audits in order to reassure investors and creditors; the provision of joint services, which increases the economic bonding of the auditor to the client, may jeopardize independence or the appearance of independence. The model is tested using data observations from 500 companies, and the results indicate that companies that have higher agency‐cost proxies are associated with smaller purchases of nonaudit services from their auditors.
Two Models of the Auditor ‐ Client Interaction: Tests with United Kingdom Data*
Authors: HANSEN STEPHEN C. , WATTS JOHN S.
Published: April 2010

Abstract. Accounting research contains two distinct approaches to the interaction between accounting management and the independent auditor. Game theory suggests that the auditor's testing strategy will affect the manager's reporting strategy and that the two strategies form an equilibrium. The game‐theoretic approach views the auditor as active, in that the auditor acknowledges the effect that his or her testing strategy has on the manager's reporting. In contrast, in the decision‐theoretic approach, the auditor tests reports, but ignores the effect that such testing might have on the manager's reporting behavior. Essentially, the decision‐theoretic approach views the auditor as passive, taking the reporting strategy as given when designing tests. We use United Kingdom data to estimate both models and test their validity using nested hypothesis tests. Our results demonstrate that the active, game‐theoretic model better describes the auditor‐manager interaction. This is the first empirical validation of the game‐theoretic model using archival accounting data.
Debiasing Framing Effects in Auditors' Internal Control Judgments and Testing Decisions*
Authors: EMBY CRAIG , FINLEY DAVID
Published: April 2010

Abstract. This paper reports the results of an experiment examining the framing bias and a potential debiasing technique. Practicing auditors formed a judgment about a hypothetical client's inventory internal control system to determine the amount of related substantive testing. Auditors from two Big Six firms were randomly assigned to one of four treatments in a fully crossed 2 times 2 between‐subjects design. The initial description of the internal control system was identical for all treatments, as were the items of additional evidence about the system. Auditors either judged the risk of the control system or the strength of the control system. The risk‐strength frames were crossed with two levels of debiasing technique: “none” or “evidence rating.” Results indicate that without debiasing, significant framing effects were present, but that evidence rating significantly mitigated the framing effect. In this auditing context, the framing bias appears to be easily induced, but is not robust. Although the profession should be aware of this potential problem, effective remedial or proactive steps can be easily implemented and may naturally occur in current practices.
Accounting‐Based Stock Price Anomalies: Separating Market Inefficiencies from Risk*
Authors: BERNARD VICTOR , THOMAS JACOB , WAHLEN JAMES
Published: April 2010

Abstract. We examine six accounting‐based stock price anomalies using two sets of tests to determine the extent to which the anomalies (1) represent market mispricing or (2) reflect premia for unidentified risks. Market mispricing is indicated if the anomalous returns are concentrated around subsequent earnings announcements in patterns suggesting that the earnings information causes traders to re‐examine their prior (incorrect) beliefs. Mispricing is also indicated if anomalous returns on zero‐investment portfolios are positive, period after period. Our results indicate that an anomaly based on earnings momentum probably reflects market mispricing, but that two value‐glamour anomalies (based on the book‐market ratio and the earnings‐price ratio), and two anomalies based on computerized fundamental analyses (from Ou and Penman 1989 and Holthausen and Larcker 1992) are more likely to reflect risk premia than indicated by prior research. Evidence on a sixth anomaly, based on price momentum, is mixed.
Option Trading, Price Discovery, and Earnings News Dissemination*
Authors: AMIN KAUSHIK I. , LEE CHARLES M. C.
Published: April 2010

Abstract. Option market activity increases by more than 10 percent in the four days before quarterly earnings announcements. We show that the direction of this preannouncement trading foreshadows subsequent earnings news. Specifically, we find option traders initiate a greater proportion of long (short) positions immediately before “good” (“bad”) earnings news. Midquote returns to active‐side option trades are positive during nonannouncement periods and are significantly higher immediately prior to earnings announcements. Bid‐ask spreads for options widen during the announcement period, but traders do not gravitate toward high delta contracts. Collectively, the evidence shows option traders participate generally in price discovery (the incorporation of private information in price), and more specifically in the dissemination of earnings news.
An Investigation of the Effects of Specialization in Audit Workpaper Review*
Authors: BAMBER E. MICHAEL , RAMSAY ROBERT J.
Published: April 2010

Abstract. This study examines the effect of specialization at the different stages of an audit workpaper review. Auditing literature advises focusing each review level on specific kinds of errors (i.e., seniors on mechanical errors and managers on conceptual errors), rather than having seniors and managers perform successive all‐encompassing reviews. However, surveys of review practice suggest that all‐encompassing reviews are common. To determine whether specialization at different levels of review improves reviewers' overall effectiveness, this study has 35 managers and 39 seniors actually perform a review of a realistic set of workpapers. Half the subjects performed specialized reviews, whereas the other half performed all‐encompassing reviews. Overall accuracy rates in our study are consistent with prior research. In addition, the combined reviews of seniors and managers are more effective than those of either seniors or managers separately, demonstrating the benefits of hierarchical review. However, specialized review leads reviewers to be significantly less accurate than reviewers performing all‐encompassing reviews. The results suggest specialization will not automatically improve review effectiveness, and that accounting firms may need to re‐evaluate their review guidance and professional training on workpaper reviews.
An Examination of Moral Development within Public Accounting by Gender, Staff Level, and Firm*
Authors: BERNARDI RICHARD A. , ARNOLD DONALD F.
Published: April 2010

Abstract. This study extends prior research on the average level of moral development in public accounting by examining five large accounting firms and three staff levels. The research is important because it highlights the need to include auditors from several firms in research designs, provides evidence of differences in moral development among public accounting firms, and profiles the professions' average level of moral development for three levels. The data are from 494 managers and seniors (204 females and 290 males) from five Big Six firms. Using the Defining Issues Test (Rest 1979a) to measure moral development, several results were noted. First, the results indicate a difference in the average level of moral development among firms, suggesting that use of subjects from only one firm inhibits the generalizability of findings regarding moral development. Second, female managers are at a significantly higher average level of moral development than male managers. In fact, the average scores for male managers fell between those expected for senior high school and college students. The data suggest that a greater percentage of high‐moral‐development males and low‐moral‐development females are leaving public accounting than their respective opposites. These results indicate that the profession has retained, through advancement, males who are potentially less sensitive to the ethical implications of various issues. The analysis also indicates that Kohlberg's (1969) theory of moral development is not biased towards the thought processes of males because female auditors did not score lower on the Defining Issues Test.
Accounting Consultation Units: An Organizational Memory Analysis*
Authors: SALTERIO STEVEN , DENHAM ROSS
Published: April 2010

Abstract. Regulators have recently cited concerns about the extent and quality of accounting consultation within accounting firms on difficult client accounting policy issues. In this paper we report the results of research that examines the role of accounting consultation units in public accounting firms. We describe the five largest accounting consultation units in Canada. The accounting consultation units are then examined through the lens of organizational memory theory. We find differences among the accounting consultation units in their ability to act as a source of organizational memory for their firms. These differences include the following: the amount of resources devoted to the consultation function, the structure of the units, the mandate received by the unit from the firm, and the availability and amount of documentation about previous consultations. These differences suggest that firms' accounting consultation units differ in their ability to provide technical accounting advice. This variability may affect the actual or perceived quality of such advice to both clients and external regulators. In addition, this paper introduces organizational memory theory to the accounting literature. This theoretical approach may be useful in expanding the bounds of behavioral auditing research beyond the current emphasis on the individual auditor.
The Incremental Informativeness of Stock Prices for Future Accounting Earnings*
Authors: MORTON RICHARD M.
Published: April 2010

This study extends previous research that documents a stock price reaction leading accounting earnings. The primary issue is that prior studies use a naive earnings expectation model (random walk) as the benchmark for the information content of lagged returns and do not adequately address the “incremental” information content of lagged returns. This study identifies and estimates firm‐specific models of earnings to control directly for the autocorrelation in earnings. The explanatory power of lagged prices with respect to this earnings residual is investigated using both a multiple regression model of lagged returns and a multiple time‐series vector autoregressive model.

In‐sample estimation of the models provides clear evidence that stock prices impound information about future earnings incremental to the information contained in historical earnings data. Holdout period analysis of the earnings forecasts from these lagged return models finds that both models outperform the naive seasonal random walk expectation, but neither model outperforms the more sophisticated Box‐Jenkins forecasts. On an individual firm basis, earnings forecasts supplemented with the lagged return data tend to be less precise than the Box‐Jenkins forecasts, but the price‐based models demonstrate an ability to rank the earnings forecast errors from the time‐series models. The analysis helps to characterize the limitations of lagged returns as a means of predicting future earnings innovations.
Bias and Accuracy of Management Earnings Forecasts: An Evaluation of the Impact of Auditing*
Authors: MCCONOMY BRUCE J.
Published: April 2010

This paper assesses how the bias and accuracy of managers' earnings forecasts in prospectuses were affected by a 1989 regulation that required the forecasts to be audited by public accountants. Theory suggests that auditors' association with the forecasts would reduce positive (optimistic) bias, by reducing moral hazard. Regulators expected that the audit requirement would also improve the accuracy of the forecasts. Both predictions were tested using management earnings forecasts disclosed in prospectuses of Canadian initial public offerings. The results show that audited forecasts contained significantly less positive bias than reviewed forecasts, but there was only a marginally significant improvement in accuracy.
Tax Planning and the Exercise of Employee Stock Options*
Authors: HUDDART STEVEN
Published: April 2010

This paper analyzes tax planning by holders of employee stock options and examines their response to a proposed tax rate increase. Consistent with tax planning, the frequency of exercise is greater for employees affected by the tax change than for (1) employees unlikely to be affected by the tax increase who contemporaneously held identical options, and (2) employees with comparable incomes who held similar options in other years. Despite the greater frequency of exercise, less than one‐third of the option holders who would benefit most from exercise for tax reasons chose to exercise early.
Discretionary Accounting Choices and CEO Compensation*
Authors: BALSAM STEVEN
Published: April 2010

This paper makes four contributions to the literature relating accounting choices to CEO compensation. First, it shows that discretionary accruals are associated with CEO cash compensation, a result that holds after controlling for both the nondiscretionary components of income and increases in shareholder wealth. Although significant, the coefficient on discretionary accruals is significantly lower than that on nondiscretionary accruals, which in turn is significantly lower than the coefficient on operating cash flows. Second, the paper shows a differential reaction to positive and negative discretionary accruals —‐ the association between positive discretionary accruals and CEO cash compensation is significantly greater than the association between negative discretionary accruals and CEO cash compensation. Third, the paper shows the association between discretionary accruals and CEO cash compensation varies depending upon the circumstances of the firm. In particular, when positive discretionary accruals allow the firm to reduce or avoid a loss, the association between CEO cash compensation and discretionary accruals is significantly greater. Finally, this paper shows that the association of CEO cash compensation with reported income generally increases with the level of discretionary accruals, consistent with management responding to the incentives provided.
Performance Measure Manipulation*
Authors: DEMSKI JOEL S.
Published: April 2010

A two‐period model in which communication restrictions preclude the usual revelation representation is analyzed, and the communication policies take on the appearance of “income smoothing.” The driving force is the information content of the “smoothed” or manipulated series, relative to its counterpart were manipulation not possible. Various possibilities arise, depending on the underlying stochastic structure: performance measure manipulation might be socially efficient, or not; and when it is best to invite and motivate this manipulation, the optimal policy itself can take on a variety of forms.
Competition in Auditing: Evidence from Entry, Exit, and Market Share Mobility in Germany versus The Netherlands*
Authors: BUIJINK WILLEM F. J. , MAIJOOR STEVEN J. , MEUWISSEN ROGER H. G.
Published: April 2010

This paper investigates the usefulness of a dynamic analysis of audit‐market competition in terms of audit‐market‐share mobility, audit‐firm entry, and audit‐firm exit. These dynamic measures of market structure are compared between the more regulated German audit market and the more liberal Dutch audit market. Prior research on audit market structure has focused on static analyses in terms of seller concentration of single national audit markets. By using data on the number of auditors as the measure of audit‐firm size, this paper covers all firms active in the two audit markets in the period 1970 to 1994. The results indicate that the more liberal Dutch audit market has the highest dynamic measures of market structure and the highest concentration. Hence, the results show that high concentration can go hand in hand with high‐market‐share mobility and high audit‐firm entry and exit. The results for market‐share mobility also hold for an analysis including only the largest audit firms. The paper therefore concludes, that compared with a static seller concentration analysis, an analysis of audit‐market dynamics provides a better description of the degree of competition in audit markets.
The Differential Impact of Accurate Product Cost Information in Imperfectly Competitive Markets: A Theoretical and Empirical Investigation*
Authors: CALLAHAN CAROLYN M. , GABRIEL E. ANN
Published: April 2010

Many researchers claim that costing systems that provide materially more accurate or precise cost reports have a strict value‐enhancing effect on decisions (i.e., Cooper 1988, 1995; Cooper and Kaplan 1991; Christensen and Sharp 1994; Rogers. Comstock. and Pritz 1994; Swenson 1995; Gupta and King 1997). However, this study provides theoretical and empirical evidence that the value of more accurate cost information may be dependent upon the firm's competitive market structure, as well as the firm's product market strategy. We extend the theoretical work of Gal‐Or 1986 to incorporate an endogenous imprecise cost signal in two imperfect market structures: Cournot competition and Bertrand competition with imperfectly substitutable products. In addition, we theoretically link market structure to product market strategy. To examine product market strategy, we employ a laboratory markets design that allows for strategic reaction by a rival firm in each of these markets, because the competitive position of a firm is determined by its capacity to produce at low cost, or to differentiate its product from other products (Porter 1985). Consistent with our theoretical work, we argue that firms that compete on the basis of cost leadership (which we demonstrate may be characterized as Cournot competition), benefit through increased profits from increased product cost accuracy, whereas firms that compete on the basis of product differentiation (which we demonstrate may be characterized as Benrand competition) do not benefit from such increased product cost accuracy. Our results are consistent with this contention. That is, profit is higher in the experimental cost leadership markets (operationalized as Cournot markets) when subjects know their true cost, while profit is higher in the experimental product differentiation markets (operationalized as Bertrand markets) when subjects receive uninformative cost reports and make their decisions based on expected costs. These results suggest that the value of more accurate cost reports may be dependent upon the firm's competitive market structure strategy and product market strategy.
Voluntary Disclosure, Information Asymmetry, and Insider Selling through Secondary Equity Offerings*
Authors: MARQUARDT CAROL. A. , WIEDMAN CHRISTINE I.
Published: April 2010

This paper examines the relation of voluntary disclosure of management earnings forecasts and information asymmetry to insider selling through secondary equity offerings. We hypothesize that the pattern of voluntary disclosure and level of information asymmetry prior to secondary equity offerings differs systematically based on the identity of the seller. Specifically, we predict a greater frequency of voluntary disclosure and decreased level of information asymmetry when managers sell their stock through a secondary offering. We examine this hypothesis in a cross‐sectional analysis of 210 secondary equity offerings from 1984‐91, using a two‐stage conditional maximum likelihood simultaneous equations estimation procedure, which allows for possible endogeneity in the manager's decision to sell stock. Consistent with our predictions, we document a significantly positive association between managerial participation and voluntary disclosure of earnings forecasts in the nine‐month period prior to registration of the offering. We also document a significantly negative association between managerial participation and two proxies for information asymmetry. The findings provide evidence that managers act as if reduced information asymmetry correlates with a reduced cost of capital.