bluuebunny/crossref_metadata_2025 huggingface dataset:
Analytical and Empirical Evidence of the Impact of Tax Rates on the Trade-off between Debt and Managerial Ownership
Authors: Seetharaman Ananth , Swanson Zane L. , Srinidhi Bin
Published: January 2017

We show that, for a firm facing a high marginal tax rate, the benefit of using debt relative to managerial ownership to control agency costs increases at a decreasing rate. Debt and managerial stock ownership represent alternative mechanisms for reducing agency costs of the relationship between owner-investors and managers in firms. However, although debt and managerial ownership provide overlapping benefits, only debt can provide the differential benefit of reducing the firm's tax liability. While the tax benefit from using debt relative to managerial ownership to control agency conflicts is an increasing function of the firm's marginal tax rate, the decreased managerial ownership results in external investors bearing a larger part of the cost of debt that accrues to the firm. Effectively, for external investors, the relative cost of debt decreases at a decreasing rate when the marginal tax rate increases. Therefore, the trade-off between debt and managerial ownership predicted by the agency literature is expected to be strong at low marginal tax rates, but get progressively weaker at higher marginal tax rates. In this paper, we build an analytical model of this hypothesis and provide strong empirical evidence in its support. Our study contributes to a further understanding of how tax rates might affect the interaction of capital structure decisions with the incentive compatibility issues and corporate governance. The study also provides a basis for future studies to examine factors other than tax rates that differentially affect debt and managerial ownership costs.
Have Earnings Announcements Lost Information Content?
Authors: Buchheit Steve , Kohlbeck Mark
Published: January 2017

We investigate the potential historic decline in the information content of earnings announcements. Like Beaver (1968) we focus on the incremental information content of accounting earnings announcements—whether the announcements convey “new news” to the market as evidenced by unusual price movements. We investigate the price reaction to earnings announcements of a broad range of firms over a 23-year time period (1975 through 1997). We find that, on average, the price reaction to earnings announcements has increased over time. However, the robustness of this finding is called into question based on two factors. First, we find that the change in price reaction to earnings varies depending on the size of firms analyzed. Specifically, we find some evidence that small firms exhibit a decreasing price reaction to earnings announcements over time, while larger firms consistently exhibit an increasing price reaction to earnings announcements. Second, we find that a minority of firms drives the observed increase in price reaction indicating that a cross-sectional mean reaction does not imply such a reaction is typical for individual earnings announcements.
The Effect of Voluntary Disclosure and Preemptive Preannouncements on Earnings Response Coefficients (ERC) When Firms Manage Earnings
Authors: Ronen Joshua , Ronen Tavy , Yaari Varda (Lewinstein)
Published: January 2017

We study analytically the effect of preliminary voluntary disclosure and preemptive preannouncement on the slope of the regression of returns on earnings surprise—the earnings response coefficient (ERC). When firms do not manage earnings, additional disclosure has no effect, and the ERC is proportional to price/permanent earnings ratio. If they manage earnings by attempting to inflate them, the response to (100% credible) negative earnings surprise is stronger than the response to (less than 100% credible) positive surprise. To avert litigation, firms that manage earnings adopt a partial voluntary disclosure strategy—either public revelation of good news and withholding bad news, or public revelation of bad news and withholding good news. Voluntary disclosure affects ERC on positive earnings surprise only, depending on what the firm reveals: the good- news revealing ERC (GRC) is higher than the bad-news revealing ERC (BRC), because good news enhances the credibility of the positive earnings surprise, even though the market discounts good news. Furthermore, preemptive pre-announcements improve ERC accuracy by narrowing the scope of earnings management.
TRACKS: Audit Quality, Earnings, and the Shanghai Stock Market Reaction
Authors: Gul Ferdinand A. , Sun Sunny Y. J. , Tsui Judy S. L.
Published: January 2017

This study examines whether audit quality in the Shanghai Stock Exchange affects the positive association between change in earnings per share and cumulative abnormal return (CAR). Regression results using 659 Shanghai listed company observations in 1996 and 1997 show that the positive market reaction to increase in earnings is stronger for firms audited by high quality auditors. A broad conclusion of the study is that audit quality is playing an important role in China and that investors in the Shanghai market differentiate between high quality versus low quality auditors.
An Empirical Study on the Relationship between Ownership and Performance in a Family-Based Corporate Environment
Authors: Ng Christina Y. M.
Published: January 2017

This study examines the relationship between family ownership and firm performance in a family-based corporate environment in which managerial ownership is used as a proxy for family ownership. The relationship is in cubic form with a pattern of “entrenchment-alignment-entrenchment,” which is the reverse of that found in earlier U.S. and U.K. studies. This confirms that research based on U.S. and U.K. evidence is not applicable to East-Asian corporations due to the differences in ownership concentration. Taking the endogeneity issue into consideration, the simultaneous equations regression analysis confirms that in a family-owned corporate structure, ownership affects performance and not vice versa. The wide range of alignment in the nonmonotonic relationship supports the classical “convergence of interest” hypothesis. However, at a very high level of ownership, the entrenchment effect becomes dominant. This indicates that if the family form of ownership can be controlled and made use of appropriately, firm performance can be optimized due to convergence of interest. It also follows that a company with high ownership concentration should pay even more attention to improving corporate governance practices in order to enhance its performance.
Securities Price Effects of Napster-Related Events
Authors: Navissi Farshid , Naiker Vic , Upson Stewart
Published: January 2017

Napster released its controversial peer-to-peer music file sharing software to the public in June 1999, and after approximately two years of intense debates and legal battles it was eventually ordered to shut down in February 2001. The opponents of Napster (e.g., the Recording Industry Association of America, RIAA, and Metallica Lars Ulrich) suggested that Napster had collapsed the business structure of the U.S. multibillion-dollar music industry. Napster, on the other hand, argued that its service had increased the music sales. We use Napster as a proxy for diffuse piracy through the Internet since it was the conduit for individual file sharing on a large scale. We examine the effects of 11 prominent Napster-related events on the equity value of firms in the U.S. music industry. If Napster's service stimulated (harmed) music sales, then events that increased (decreased) the effectiveness of Napster would improve (reduce) the stock prices of the music firms.

Our evidence suggests that events that increased the effectiveness of Napster as a distribution mechanism improved the stock prices of the music firms. Additionally, the evidence indicates that events that threatened Napster's survival resulted in decreases in the stock prices of the music firms. Music firms in the sample experienced negative excess returns ranging from minus;1.76 percent to minus;10.69 percent in response to anti-Napster events. On the other hand, retreats from anti-Napster events were accompanied by positive excess returns ranging from +0.56 percent to +5.05 percent. The seven anti-Napster events resulted in a total capital loss in excess of $18 billion and the four pro-Napster events created wealth in excess of $9 billion, compared to the total market capitalization of $101 billion for the sample firms.
Financial Reporting Transparency
Authors: Barth Mary E. , Schipper Katherine
Published: January 2017

This discussion raises issues concerning financial reporting transparency. We first observe that transparency is not well-defined in a financial reporting context. Extrapolating from the ways transparency is used in other contexts, we define financial reporting transparency as the extent to which financial reports reveal an entity's underlying economics in a way that is readily understandable by those using the financial reports. We discuss limitations of this definition relating to its two components, but observe that the conceptual frameworks of the IASB and FASB provide a standard setter perspective on them. We next point out that theoretical research suggests that increased reporting transparency can reduce the cost of capital provided that transparency reduces information risk, and empirical research using a variety of measures of financial reporting transparency provides evidence of an association between transparency and cost of capital. Thus, research supports the notion that transparency is a desirable characteristic of financial reports. Given this potential benefit, we then identify characteristics of financial reporting that foster transparency - either by better reflecting the firm's underlying economics or by enhancing the understandability of information in financial reports. Finally, we describe the challenges to achieving financial reporting transparency globally and discuss how the IASB is attempting to address them. Our discussion implies several standard setting actions that might increase financial reporting transparency.
Discussion of “The Value-Relevance of Changes in Financial Leverage Beyond Growth in Assets and GAAP Earnings”
Authors: Gu Feng
Published: January 2017

Dimitrov and Jain examine whether changes in leverage are associated with firm performance after controlling for growth in assets and accounting earnings. They find that firms with increases (decreases) in leverage have negative (positive) current and future stock returns and negative (positive) accounting performance in future periods. By providing new evidence on the relation between debt financing and firm performance, the study extends prior research on the economic implications of firms' financing choices.

I examine potential measurement problems associated with the authors' empirical construct for changes in leverage. These problems stem from the use of accounting book values of assets and liabilities in the measurement of leverage and the endogeneity of firms' decisions to change leverage levels. I comment on the unusual characteristics of firms with extreme changes in leverage and their possible effect on the authors' results and inferences. I also discuss issues involved in interpreting the authors' results, particularly the plausibility of alternative explanations suggested by prior research. Lastly, I identify several questions raised by this study that can be examined in future research.
Discussion of “Will Harmonizing Accounting Standards Really Harmonize Accounting? Evidence from Non-U.S. Firms Adopting U.S. GAAP”
Authors: Wu Joanna Shuang
Published: January 2017

Bradshaw and Miller (2007) study a sample of non-U.S. firms that voluntarily adopted U.S. Generally Accepted Accounting Principles (GAAP) during the period from 1980 to 2001. They document that the voluntary U.S. GAAP adopters move significantly closer to U.S. firms in terms of compliance with U.S. GAAP and various accounting earnings properties, although they have not fully converged with U.S. firms. This paper is an interesting and comprehensive study of voluntary U.S. GAAP adopters. The paper's research setting, however, limits its ability to address the question raised in its title.
Accounting for Software Development Costs and the Cost of Capital: Evidence from IPO Underpricing in the Software Industry
Authors: Givoly Dan , Shi Charles
Published: January 2017

The paper assesses the value of the information contained in the accounting treatment for software development costs (SDC). The assessment is made in the context of the initial public offerings (IPO) market and is based on the effect of the accounting treatment on information asymmetry and hence IPO underpricing. We hypothesize that by sharing information about the probability of recoverability of SDCs and the amortization period, management that capitalizes SDC reduces information asymmetry and thus underpricing. The results, based on a sample of 390 IPOs in the software industry, are consistent with the hypothesis. The findings suggest that capitalization, through its information impact, lowers the cost of capital. Alternative interpretations of the findings are discussed as well.
The Effect of Audit Specialists on the Informativeness of Discretionary Accruals
Authors: Mascarenhas Duncan , Cahan Steven F. , Naiker Vic
Published: January 2017

Prior literature finds evidence that clients of industry specialists have a lower level of discretionary accruals compared with nonspecialists. This finding suggests that industry specialists constrain the use of discretionary accruals. In addition to opportunistic reasons, however, managers also can use discretionary accruals to make earnings more informative. We examine the market pricing of discretionary accruals of clients of specialist and nonspecialist auditors. If industry specialists constrain opportunistic discretionary accruals but allow informative discretionary accruals, we expect a stronger relation between discretionary accruals and returns for clients of specialists. We use two different analyses based on Subramanyam (1996) and Tucker and Zarowin (2006) to investigate this issue. We find no evidence that the discretionary accruals of clients of industry specialists are more informative or more value relevant, although we do find that clients of specialists have more informative nondiscretionary accruals.
The Use of Independent Fairness Opinions and the Performance of Acquiring Firms
Authors: Chen Lucy Huajing
Published: January 2017

A fairness opinion (FO) in a merger or an acquisition transaction is a report issued by an investment banker to certify the transaction price. The banker issuing the FO can be independent by providing only an FO and receiving a fixed fee. Alternatively, the banker can be nonindependent by also providing advisory services and hence also receiving a contingent fee. I investigate the effect of the acquirers' use of independent FOs and the contingent fees paid to the acquirers' issuing bankers on the acquirers' announcement returns and postannouncement returns and operating performance. I find that around a merger announcement, an acquirer with an independent FO earns a higher abnormal return than an acquirer with a nonindependent FO. In addition, the contingent fee charged by an acquirer's banker that issues an FO is found to be negatively associated with the same return. Moreover, the postbid abnormal return for an acquirer with an independent FO is higher than that for an acquirer with a nonindependent FO up to six months following a merger announcement. Furthermore, I find a negative relation between the contingent fee charged by an acquirer's issuing banker and the postannouncement operating performance of an acquirer. Overall, these results support the claim that the use of an independent FO plays an effective corporate governance role for an acquirer. These results are also consistent with the view that a higher contingent fee paid to the acquirer's banker that provides an FO intensifies the conflict of interest faced by the banker.
The Role of Transfer-Pricing Schemes in Coordinated Supply Chains
Authors: Balachandran Kashi R. , Li Shu-hsing , Wang Taychang , Wang Hsiao-wen
Published: January 2017

The objective of this paper is to study how transfer-pricing schemes interact with subcontractors' opportunistic behaviors to affect supply chain coordination. We model the supply chain by incorporating asymmetric information among all the parties, contractors' innovation activities, subcontractors' misappropriation, and transfer-pricing schemes. We examine the impact of various transfer-pricing schemes on supply chain efficiency. Specifically, we conduct a performance comparison between the variable-cost transfer-pricing scheme and the full-cost transfer-pricing scheme. We find that the subcontractor's choice of transfer-pricing scheme affects the contractor's sourcing decisions and supply chain performance. For a selected set of parameters we show that the variable-cost transfer-pricing scheme achieves better supply chain coordination.
Is Silence Golden? Earnings Warnings and Subsequent Changes in Analyst Following
Authors: Tucker Jennifer Wu
Published: January 2017

Skinner (1994) proposes that managers have reputational incentives to preempt negative earnings news and speculates that firms that fail to warn are less likely to be followed by financial analysts. My study formally puts forward this argument and empirically tests the reputational cost of withholding bad news in the form of a decrease in analyst following. I find that among firms with a similar level of existing disclosure reputation, those that fail to warn experience a significant decrease in analyst following relative to those that warn. This finding is consistent with managers' concerns that withholding bad news would damage their reputation for being transparent about forward-looking earnings news.
Testing for Trade-offs in the Reinsurance Decision of U.K. Life Insurance Firms
Authors: Kader Hala Abdul , Adams Mike , Mouratidis Kostas
Published: January 2017

Drawing a framework from the insurance and finance literature, we test for trade-offs between underwriting, solvency, and tax management objectives in the decision to purchase reinsurance in U.K.-based life insurance firms. Using a panel data design covering 630 firm-year observations for 1992-2004, we observe that underwriting and solvency risks, and expected taxes, appear to be important determinants of the level of reinsurance purchased by U.K. life insurance firms. Additionally, some of these key determinants interact with each other, suggesting that the reinsurance decision is conjointly determined. Two of the three interactions tested, however, have an impact that is in the direction opposite to that predicted. In addition, firm-specific factors, such as product mix and profitability, appear to explain the corporate decision to purchase reinsurance.
The Impact of Foreign Currency Translation on Reporting during the Phase-in of SFAS No. 52
Authors: Benjamin James J. , Grossman Steven D. , Wiggins Casper E.
Published: January 2017

This article examines the impact of the adoption of FASB Statement No. 52 on foreign currency reporting for multinational companies during the optional three-year adoption period (1981–1983). The results of the study suggest that early adoption of SFAS No. 52 for many companies was motivated by a favorable impact on income and earnings per share but that the relative rankings of the companies before and after SFAS No. 52 were not significantly affected.
Small-Company Initial Public Offerings: The Impact of SEC Registration Form S—18
Authors: Manegold James G.
Published: January 2017

This paper reports on the impact of SEC registration Form S–18 on the new-issues securities market. Form S–18 was intended as an easier, faster, and less costly alternative for small companies to raise public capital. The findings indicate that Form S–18 offerings were slightly less costly and were processed faster than Form S–1 offerings. They also suggest that Form S–18 has helped smaller, start-up companies go public, that potential investors may face additional risk when purchasing Form S–18 offerings, and that underwriters were sensitive to the added risk.
Ethics for Independent Auditors
Authors: Kunitake Walter K. , White Clinton E.
Published: January 2017

This article suggests that the AICPA, state societies, state boards, and CPA firms must reemphasize the need for professional conduct as well as the need to exercise self-restraint so that excessive competitive behavior does not reduce the quality of service and erode the accountant's professional image. It also recommends that the kind of professional ethics likely to promote professionalism be taught in auditing courses at universities as a way of instilling durable professional ethics in young accountants.
The Association of Stock Distribution Announcements and Earnings Performance
Authors: Doran David T. , Nachtmann Robert
Published: January 2017

This paper analyzes the association of unexpected earnings with stock dividend and stock split announcements. Unexpected earnings are modeled as the percentage deviation of actual earnings from expected. Value Line's earnings forecasts are used as a surrogate for the market's timely expectation of future earnings. The primary findings are: (1) postdistribution earnings realizations are greater than expected; and (2) deviations of realized earnings from expected are (a) directly related to the size of the stock distribution and (b) inversely related to the level of market anticipation of the event. Further, distribution size may be a proxy for market anticipation in that small distributions (stock dividends) are dominated by anticipated events and large distributions (stock splits) by unanticipated events. These findings are robust across samples that control for large measurement error due to small levels of forecasted earnings, and event contamination due to the simultaneous announcement of firm-related events.

Examination of analysts' forecasts immediately following the event indicates a significant upward revision in earnings expectations. This finding, coupled with an analysis of a control sample of Value Line earnings forecasts, indicates that the observed unexpected earnings are not the result of systematic Value Line forecast error. Therefore, the paper provides support for the notion that stock distribution announcements convey future earnings information.
Substitutability of Leases and Debt in Corporate Capital Structures
Authors: Marston Felicia , Harris Robert S.
Published: January 2017

Finance theory suggests that leases and debt are substitutes. Surprisingly, however, prior empirical research using financial statement data has been unable to verify this trade-off between the two forms of financing. This study re-examines the issue of substitutability by comparing changes in lease and debt financing over a six-year horizon for a large sample of U.S. firms. The empirical results strongly support the theoretical contention that leases and debt are substitutes and is thus consistent with evidence from surveys of lending officers. There is some evidence, however, that firms do not view leases as displacing nonleasing debt on a dollar-for-dollar basis.
Dividend Decisions and Earnings
Authors: Healy Paul M. , Modigliani Franco
Published: January 2017

This paper examines whether managers use inflation accounting data in making dividend decisions. Two sources of inflation accounting data are used: individual firm data mandated by the FASB, and aggregate data estimated by the Department of Commerce. We find that aggregate dividend changes are related to aggregate inflation adjustments, but no such relation exists using individual firm data. Managers therefore, at least partially, consider the effects of inflation in making decisions to change their firms' dividends. However, their estimates of inflation are quite different from those reported to comply with FASB 33.
Information Structures, Optimal Contracts and the Theory of the Firm
Authors: John Kose , Ronen Joshua
Published: January 2017

We are grateful for comments made by participants at the Symposium on the “Measurement of Profit and Productivity: Theory and Practice,” on December 16, 1988, in the University of Florida, cosponsored by the Vincent C. Ross Institute of Accounting Research, Leonard N. Stern School of Business, New York University, the Public Policy Research Center, Graduate School of Business, University of Florida, and The Kruger Center of Finance, Jerusalem School of Business Administration, Hebrew University; at workshops at the Leonard M. Stern School of Business, New York University; at the Accounting Research and Education Center of McMaster University; at the European Accounting Association meeting in Stuttgart, Germany; at workshops at Wharton School University of Pennsylvania; University of California at Berkeley; Northwestern University; French Finance Association Meeting.
Experimental Stock Markets with Controlled Risk Preferences
Authors: O'Brien John R.
Published: January 2017

In this paper the empirical validity of the binary lottery preference inducing technique is tested in a real world market institution. In each market the potential gains to exchange arise from induced risk preferences, and the predicted competitive equilibrium is equivalent to the Pareto optimal risk sharing allocation. Price convergence to (and near) the competitive equilibrium price was rapid in each market, and most trades were individually rational with respect to induced certainty equivalents. This evidence implies that preferences can be induced in an oral double auction institution, using this technique.
Accommodating Outliers and Nonlinearity in Decision Models
Authors: Kennedy Duane , Lakonishok Josef , Shaw Wayne H.
Published: January 2017

This paper describes and compares six procedures that can be used in a regression model to adjust for outliers in the data and nonlinearities in the relationship between the dependent and independent variables. The data accommodation procedures are: (1) no-adjustment; (2) winsorizing; (3) trimming; (4) regression on ranks; (5) nonlinear regression; and (6) piecewise linear regression. The results show that the choice of data accommodation procedure has a major impact on the predictive ability and coefficient estimates of the regression model. The winsorizing and ranking procedures produce a regression model that fits the data well and has a low level of prediction error.
The Usefulness of SFAS No. 82 (Current Cost) Information in Discriminating Business Failure: An Empirical Study
Authors: Aly Ibrahim M. , Barlow H. A. , Jones Richard W.
Published: January 2017

This study examines the usefulness of current cost information (CC) provided to meet the requirements of SFAS No. 33 and SFAS No. 82, as compared to historical cost information (HC) in discriminating business failure. The study also examines the usefulness of CC data as supplement to HC data. Two multivariate statistical techniques, multiple discriminant analysis (MDA) and logistic regression analysis (LRA), are used to derive the ex-post classification results. Three functions are developed based on ratios computed with HC, CC, and the combined HCICC. The resulting functions are used to classify fifty-two firms as failed or nonfailed. The analysis is repeated for three time periods: one, two, and three years before bankruptcy. The main results of the various analyses indicate that the combined HCICC model has more discriminant power than does the HC model alone in each of the three years before bankruptcy. LRA has a better classification rate than MDA for the selected sample.
Valuing Depreciable Assets
Authors: Kraizberg Elli
Published: January 2017

The 1986 Tax Reform Act is likely to extend optimal holding periods of depreciable assets until the point in time at which the tax basis is exhausted. Additionally, practitioners in the real estate markets tend to argue that the 1986 Tax Reform calls for a major reduction in depreciation tax benefits. Despite the reduction in benefits, values of depreciable properties may nevertheless rise. This paper analyzes various tax legislations in terms of the effect these legislations have on the optimal trading policy for depreciable assets. The tax code of the 1981 accelerated cost recovery system (ACRS), the 1984 ACRS, and the new 1986 Tax Reform Act are compared.
A Note on Conditional Heteroskedasticity in the Market Model
Authors: Diebold Francis X. , Lim Steve C. , Lee C. Jevons
Published: January 2017

We examine the usefulness and implications of modeling conditional heteroskedasticity in market model residual returns. Autoregressive conditional heteroskedasticity (ARCH) plays a key role in our approach. To highlight the salient issues, we first provide a case study of one firm, Winn-Dixie Stores. Formal testing procedures reveal strong ARCH effects. ARCH models are then estimated and used to infer the pattern of time-varying volatility; differences in parameter estimates caused by use of the fully efficient estimator are also noted. Next, we provide a systematic examination of the entire New York Stock Exchange (NYSE) market. We find ARCH in roughly 25 percent of NYSE firms; moreover, we cannot reject the null hypothesis that the firms that display ARCH are unrelated to those with unconditional heteroskedasticity. The percentage of firms displaying some form of heteroskedasticity therefore appears quite large.
An Investigation of the Firm Size—Effective Tax Rate Relation in the 1980s
Authors: Omer Thomas C. , Molloy Karen H. , Ziebart David A.
Published: January 2017

Given the recent emphasis on effective tax rates by policy makers and accounting researchers, this study investigates the relation between firm size and corporate tax burdens on a yearly and an industry basis. The analysis is conducted using five effective tax measures employed in previous studies in order to determine the degree to which inferences between size and tax burden are robust across these different effective tax measures. The results indicate that the relation is fairly robust across measures and, in instances in which the relation is not upheld by our analysis, sample composition explains differences in the observed relation between firm size and corporate tax burden.
The Market's Reaction to the Release of Drill-Core Assay Results by Junior Mining Firms
Authors: Kryzanowski Lawrence , Jenkins Charles
Published: January 2017

The abnormal returns and volumes of a sample of junior resource companies who publicly released drill-core assay results are studied. Firms with favorable assay result announcements exhibited a liquid market for both event window panes, whereas firms with unfavorable assay result announcements exhibited a liquid market for the pre-and near-center part of the postannouncement panes of their event windows. Firms with favorable announcements exhibited statistically significant positive abnormal returns prior to (and during) the week of such announcements, and statistically significant negative abnormal returns after such announcements. Firms with unfavorable announcements exhibited statistically significant negative abnormal returns before and after such announcements. Participants who sold short into the abnormally high trading volumes prior to such announcements potentially would have earned abnormal returns by covering their short positions after the public announcements. However, the profitable realization of these identified large abnormal returns for a real-world trader can be expected to be severely constrained by the impact of bid-ask spreads, brokerage costs, and various institutional impediments (such as stringent short-sale regulations and the absence of “official” market makers).
Contemporaneous Announcements of Dividends and Earnings
Authors: Leftwich Richard , Zmijewski Mark E.
Published: January 2017

The information content of dividends is well documented in the literature. The marginal information content of dividends in the presence of contemporaneous earnings announcements, however, is ambiguous empirically and theoretically. This paper documents that quarterly dividend announcements convey information beyond that contained in contemporaneous quarterly earnings announcements. Earnings provide information beyond that provided by dividends regardless of the type of information in the dividend announcement, but especially when dividends and earnings provide consistent information or when dividends provide no information. The marginal information content of dividends, however, appears to be a result from the subsample of observations for which earnings indicate “favorable” news about the firm and dividends contemporaneously indicate “unfavorable” news. Dividends convey little, if any, information that is not already conveyed in contemporaneous earnings for other subsamples of firms.
The Effect of Adopting Accounting-Based Bonus and Performance Incentive Plans on the Earnings Response Coefficient
Authors: Arora Alka , Alam Pervaiz
Published: January 2017

This study examines the disparate market response to earnings announcements for firms adopting bonus or performance incentive plans that state plan goals in terms of an earnings-based measure of performance. Bonus plans have a one year performance horizon while performance incentive plans reward managers for improved performance over a three-to-six-year period. A reduction in the earnings response coefficient is predicted for firms that adopt bonus plans since prior research documents that managers of firms with bonus plans have incentives to manipulate earnings numbers. On the other hand, an increase in the earnings response coefficient of firms that adopt performance incentive plans is expected as prior research demonstrates that managers of firms adopting performance incentive plans are motivated to improve long-term profitability. Our results do not support the hypothesis that firms adopting bonus plans experience a decline in the earnings response coefficient. However, our results are consistent with the hypothesis that the earnings response coefficient significantly increases from the pre- to the post-adoption period for firms adopting performance incentive plans.
Transfer Pricing under Capacity Constraints
Authors: Gavious Arieh
Published: January 2017

This study introduces a model of a firm consisting of two interacting divisions with capacity constraints that are private information. The model takes place in a setting in which the capacity of each division is known only to the division manager. Under this setting, top management can monitor only those parameters that are documented and not the actual state of the divisions. The paper shows that under fairly realistic assumptions, a simple transfer-pricing mechanism may achieve the best outcome in the sense of truth revealing and making optimal decisions.
Management of Note Disclosures: The Case of Unconsolidated Subsidiaries Prior to FAS No. 94
Authors: Wiedman Christine I. , Wier Heather A.
Published: January 2017

Statement of Financial Accounting Standards Number 94 (FAS 94) requires that firms consolidate all majority-owned subsidiaries, including those that were previously exempt from consolidation requirements due to the dissimilarity of parent/subsidiary operations. Prior to FAS 94, firms disclosed summary information on unconsolidated subsidiaries in their notes. This research demonstrates that, although the overall sample is unbiased, pre–FAS 94 note disclosures were insufficient to enable users to obtain an accurate picture of consolidated leverage for a number of firms. The research also illustrates that firms that underreported subsidiary debt had significantly higher consolidated leverage (as measured using pre–FAS 94 note disclosures) than other firms and that the market appeared to have relied on these inaccurate disclosures in assessing firm value.
Error Cost and Auditors' Termination Decisions
Authors: Menon Krishnagopal , Williams David D.
Published: January 2017

Recent studies have shown that auditor changes are frequently initiated by the auditor rather than the client. In this study, we argue that auditors' decisions to resign or decline engagements can be explained predominantly by audit error cost, the cost of undiscovered audit errors. This cost reflects both the auditor's assessment of the likelihood of client misrepresentations and the expected losses if these misrepresentations are subsequently revealed. We provide empirical evidence to support our theory.

We make a distinction in our study between resignations and declinations and treat these two types of events separately in both our modeling and empirical tests. Additionally, we examine the role of auditor expertise in an auditor's decision to continue an engagement. We argue that expertise reduces expected audit error costs and consequently limits the likelihood that an auditor will resign or decline an engagement.

Finally, some evidence is provided concerning the assertion made by Big Six auditing firms that they are staying away from litigation-prone sections of the economy.
Options Reporting and the Political Costs of CEO Pay
Authors: Baker Terry A.
Published: January 2017

Managers' systematic influence on accounting policy is well documented in the earnings management literature. Recent studies in the “management of information” line of research suggest that such influence is exhibited in financial reporting more generally, including supplemental disclosures in proxy statements. Using 1996 compensation data, I extend recent research on how firms report the value of options paid to their CEOs. I conduct several tests of the argument that potential political costs of unexplained compensation explain cross-sectional variation in how aggressively firms report option awards. Even after incorporating several variables not considered previously, I find strong support for the assertion that firms whose CEOs receive unexplained pay relative to performance tend to report lower grant date values for their CEOs' option awards. The evidence also suggests that the tendency to report lower grant date values is stronger for firms under more scrutiny from institutional owners. Contrary to previous research, I find that unexplained pay also increases the likelihood that the firm will choose grant date reporting methods (over the allowable alternative) in their proxy disclosures. I interpret the overall results as consistent with the argument that political costs related to compensation influence options reporting. The findings have implications for accounting standard-setters and for researchers who rely on estimates of option values reported in proxy statements.
Multi-Lagged Specification of the Ohlson Model
Authors: Morel Mindy
Published: January 2017

This paper extends the study by Bar-Yosef, Callen, and Livnat (BCL) (1996), in which they test the single lagged formulation of the Ohlson (1995) linear valuation model by assuming that book values, earnings, and dividends are the underlying primitives in a multi-lagged Garman-Ohlson (1980) framework. Unlike BCL who focus solely on the information dynamic, this paper estimates both the information dynamic and the valuation equation. Also, since Akaike's (1969a, 1969b) final prediction error (FPE) and Akaike's (1973, 1974) information criterion (AIC) are known to overfit in small samples, the lag structure specification in this study is estimated by the AICe criterion suggested by Hurvich and Tsai (1989, 1991, 1994) rather than by the FPE criterion of BCL. Furthermore, to bias the case against a multi-lagged structure, the maximum lag structure is limited to three lags per variable rather than the five lags of BCL.

Utilizing the result that the lag structure of the information dynamic determines the lag structure of the valuation equation, the internal consistency of the model is evaluated from the estimated lag structures. The median lag structure for the valuation equation implied by the lag structure of the estimated information dynamic is found to be somewhat inconsistent with the median lag structure estimated directly from the valuation equation. Further testing on a stationary subsample suggests that the inconsistency may be induced by nonstationarities. Overall, the results indicate strongly that the modeling of earnings and book values in a linear valuation framework necessarily requires a multi-lagged formulation rather than the single lag formulation common to the empirical accounting literature.
The Importance of Call Delays and Cash Flow Positions in Evaluating the Information Content of Convertible Preferred Stock Calls
Authors: Fields L. Paige , Wilkins Michael S. , Mais Eric L.
Published: January 2017

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct information elements. First, price responses to delayed calls are increasingly negative the larger the cash flow disadvantage to calling. In other words, common investors respond more negatively to calls when the forced conversion results in convertible holders receiving larger dividends than were previously required. Second, both cash flow advantage and cash flow disadvantage firms experience significant downward shifts in earnings growth during post-call periods, suggesting that delayed calls are timely signals of decreasing profitability.
Specific Muscle Protein‐sparing Postoperative Dextrose‐free Amino Acid Infusions
Authors: Kaminski M.V. , Dunn N.P. , Wannemacher R.W. , Dinterman R.E. , DeShazo R. , Wilson W.W. , Carlson D.E.
Published: January 2017

The protein‐sparing and ketogenic effect of postoperative infusion of maintenance solutions containing either 3.5% amino acids or 5% dextrose in 0.33 normal (N) saline was compared by nitrogen balance and urinary acetone determination in 31 patients. A specific muscle protein sparing effect was determined by quantitation of excretion of 3‐methylhistidine in seven patients of the amino acid group and eight patients in the dextrose group. In addition, an extensive hormone and substrate profile was determined. It was found that amino acid infusions not only produce a less negative nitrogen balance but also significantly reduce excretion of 3‐methylhistidine indicating specific preservation of the muscle compartment.
Calcium Requirements During Total Parenteral Nutrition in Well‐nourished Individuals
Authors: Wittine Marion F. , Freeman Joel B.
Published: January 2017

Eleven patients, receiving all nutrition intravenously, were given varying doses of calcium (0–20 mg/kg/day) to determine an optimal level for calcium administration during postoperative parenteral nutrition. During each study period, nitrogen, phosphorus, vitamin, and caloric intakes were constant. Negative calcium balance resulted when less than 2 mg Ca++/ kg body weight was given daily. During excessive urinary calcium losses, serum calcium concentration remained in the normal range. Increasing calcium intake to approximately 5 mg/kg/day (500 mg/day) yielded an apparent retention of calcium, as did higher doses. Serum calcium did not rise at this time. Urinary calcium excretion was directly proportional to calcium intake. The preliminary data suggest that a minimum dose of 5 mgCa++/kg/day is necessary to attain equilibrium between intake and urinary output. This value is higher than recent suggestions for calcium replacement during intravenous feeding.
Historical Perspectives in Hospital Nutrition
Authors: Lincoln Abraham
Published: January 2017

“If we could first know where we are and whither we are tending, we could better judge what to do and how to do it.”
Protein‐Sparing Effect of Intravenously Administered Branched Chain Amino Acids in Adult Rats
Authors: Yoshimura Norman N. , Tao Robert C. , Wolfe Allan M.
Published: January 2017

Branched chain amino acids (BCAA) serve as intermediate energy substrates for peripheral tissues. Experiments were conducted to evaluate protein‐sparing properties of BCAA at different doses without dextrose. Forty healthy male adult Wistar rats, weighing 437 $ 34 gm, were randomly assigned to one of five groups. Four groups of eight rats were cannulated at the jugular vein and infused with 3% amino acid solutions containing 13, 23, 50 or 100% BCAA; an additional eight fasted rats served as controls. Results show that weight loss was not significantly different between groups, but was lower than in the fasted rats. Nitrogen balance (NB) was least negative in the 23% BCAA group, followed by 13, 50 and 100% BCAA. Protein‐sparing index (PSI), defined as that portion of the infused nitrogen that is used for sparing body proteins, agreed with the calculated fat/protein ratios. Higher PSI and fat/protein ratios resulted from solutions containing balanced‐amino acid patterns (13 and 23%). No obvious imbalances in plasma amino acid patterns were observed. It is concluded that more protein conservation can be achieved with amino acid solutions containing a balanced amino acid pattern and that the effect of additional BCAA on protein conservation is limited in adult rats.
Distal Decompression and Proximal Feeding for Nutritional Support During Bowel Obstruction
Authors: Carlton Paul K. , Page Carey P. , Haft Roderick C. , Bickley Clifford J.
Published: January 2017

The treatment for acute mechanical intestinal obstruction is a timely operation. A select group of patients may, however, be nutritionally supported with continual administration of elemental diet proximal to long tube decompression under two sets of circumstances: 1. while awaiting spontaneous or treatment‐induced resolution of the underlying process, and 2. while reversing catabolism during evaluation prior to operation. Eleven patients with chronic intermittent bowel obstruction were studied: six with obstruction involving radiated small bowel, three with an acute exacerbation of chronic inflammatory bowel disease, one with obstruction secondary to an intra‐abdominal phlegmon and one with a segmental motility problem. They received nutritional support with continual gastrointestinal administration of elemental diet proximal to long tube decompression after initial observation for signs or symptoms of altered intestinal viability and stabilization of fluid and electrolyte status. Six of the 11 patients eventually required operation. All patients maintained body weight and three gained weight. Mean nutritional input was 1,873 calories and 12.6 gm nitrogen/day. There were no complications related to the technique of proximal feeding and distal decompression because of careful patient selection and appropriate administration of elemental diet under carefully controlled guidelines.
Specialized Nutritional Support and Cancer
Authors: Deitel Mervyn , Vasic Vladimir , Alexander Michael
Published: January 2017

Over a 7 1/2‐year period, 94 cancer patients presenting considerable operative risk were managed by total parenteral nutrition (TPN). All were nutritionally depleted, had obstruction to the gastrointestinal tract or had postoperative complications such as enterocutaneous fistulas, evisceration or intra‐abdominal sepsis, which left TPN as the only means of achieving anabolism. When TPN was started preoperatively and continued postoperatively (28 patients–‐Group 1), no deaths or significant complications occurred. When TPN was first started after life‐threatening complications had occurred (58 patients–‐Group 2), the mortality was 17.2%, so that a high incidence of recovery was achieved. When TPN was used in inoperable cachectic patients (8 patients–‐Group 3) to enable them to tolerate radiotherapy or chemotherapy, the mortality was 37.5%. This latter group is small, but TPN is worthwhile in selected patients where significant palliation and improvement in the quality of life can occur. With careful technique, risk of sepsis with TPN was no greater than in noncancer patients.