bluuebunny/crossref_metadata_2025_split huggingface dataset:
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

AbstractMany 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

AbstractThis 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.
Regulation and the Valuation Relevance of Book Value and Earnings: Evidence from the United States*
Authors: NWAEZE EMEKA T. 
Published: April 2010

AbstractElectric utilities in the United States are subject to a cost‐plus normal profits pricing that is designed to align the market value of equity with the balance sheet book value. Perfect alignment implies the equality of the market and book values. Extant empirical evidence suggests that, for these utilities, actual cost/profit recovery does not follow a pure cost‐plus pricing, raising the prospect that income statement items contribute to the determination of market value. What is not obvious is the extent to which the noted departure from pure cost‐plus pricing results in misalignment of the market and book values, or the relative contribution of income statement items to the valuation of electric utility shares. This study pursues this question, using benchmark results for a sample of manufacturing firms to highlight the degree of market‐to‐book alignment for regulated and competitive firms.The results show a considerable alignment of the market and book values for utilities. In examining the relevance of book value and income statement items in the determination of market value, it is found that the contribution of earnings level to explaining market value diminishes markedly in the presence of book value for electric utilities, and the contribution of earnings change to explaining returns diminishes markedly in the presence of earnings levels. Earnings level complements book value in explaining market value for manufacturing firms, while earnings change complements earnings level in explaining returns. The results further show that the market and accounting values exhibit pronounced misalignments in returns‐earnings models, especially for utilities.
Analysts' Interpretation and Investors' Valuation of Tax Carryforwards*
Authors: AMIR ELI , SOUGIANNIS THEODORE 
Published: April 2010

AbstractWe examine how financial analysts and equity investors incorporate information on deferred taxes from carryforwards into earnings forecasts and share prices. We focus on carryforwards because, in providing this information each period, management must use their private information about the firm's profitability prospects. Thus, accounting measurement of tax carryforwards is another way of providing a management earnings forecast. In analyzing the role of carryforwards in valuation, we distinguish between two conflicting effects. First, deferred taxes from carryforwards represent future tax savings; hence, they should be valued positively as assets. In contrast, the existence of tax carryforwards may signal a higher likelihood of future losses, which would have a negative effect on expected earnings and share prices. We find that analysts consider earnings of firms with carryforwards to be less persistent because of the increased likelihood of future losses. We also find that analysts tend to be less precise and more optimistic (biased) in forecasting earnings of firms with carryforwards. This higher optimism and lower precision are more pronounced just after firms adopt Statement of Financial Accounting Standards (SPAS) 109 and are almost entirely corrected over time. An analysis of investors' valuation indicates a strong positive relation between deferred taxes from carryforwards and share prices, suggesting that these carryforwards are valued as assets. Also, earnings and book values of equity are valued less in firms that have carryforwards than in firms without carryforwards. Finally, the valuation allowance required under SFAS 109 assists equity investors in valuing a firm's earnings and net assets. The combined findings on analysts' interpretation and investors' valuation suggest that analysts fail to fully capture the implication of carryforwards on future earnings within their forecasting horizon.
Determinants of Funding Strategies and Actuarial Choices for Defined‐Benefit Pension Plans*
Authors: ASTHANA SHARAD 
Published: April 2010

AbstractThis paper examines the effects of firms' financial and pension profiles on their funding strategies and actuarial choices. The paper uses reports filed by individual pension plans with the Department of Labor under the requirements of the Employee Retirement Income Security Act of 1974 for the analysis. Evidence reported in the paper shows that as firms become overfunded, they make conservative actuarial choices to avoid visibility costs, and that as firms become underfunded, they make liberal actuarial choices to avoid visibility costs. As the annual contributions increase relative to the permissible contribution ranges, firms make conservative actuarial choices to minimize penalties and maximize tax benefits. As the annual contributions decrease relative to the permissible contribution ranges, firms make liberal actuarial choices to minimize penalties and maximize tax benefits. The larger the profitability, cash flow from operations, and tax liability, and the smaller the debt of a firm, the higher the likelihood that the firm's managers will make conservative actuarial choices to maximize contributions. Conversely, the smaller the profitability, cash flow from operations, and tax liability, and the larger the debt of a firm, the higher the likelihood that the firm's managers will make liberal actuarial choices to minimize contributions. This evidence, which is consistent with the hypothesis of funding management, can aid the Internal Revenue Service (IRS) in regulating the defined‐benefit pension plans more effectively and help plan beneficiaries to manage their retirement portfolios more efficiently. The debiasing method developed in the paper can provide investors and creditors with the tools to identify the discretionary components of pension liabilities and thereby value firms more efficiently.
Evidence That Management Discussion and Analysis (MD&A) is a Part of a Firm's Overall Disclosure Package*
Authors: CLARKSON PETER M. , KAO JENNIFER L. , RICHARDSON GORDON D. 
Published: April 2010

AbstractThe objective of this study is to investigate the role, if any, that management discussion and analysis (MD&A) plays in a firm's disclosure package. First, we present evidence regarding the usefulness of MD&A. Our evidence is uniformly supportive of the view that MD&A is a source of new and useful information and indicates that MD&A is used for financial analysis purposes by at least one significant user group, sell‐side analysts, who are members of the Toronto Society of Financial Analysts. We then provide evidence on disclosure quality. The results reveal that, overall, MD&A disclosure quality varies with disclosure stimuli similar to those found to influence disclosure choice in other disclosure channels. However, a more refined analysis of the MD&A subcomponents reveals that different factors influence disclosure quality for those subcomponents. Taken together, our results are consistent with the notion that MD&A is a part of a firm's overall disclosure package.
Accounting Accruals and Auditor Reporting Conservatism*
Authors: FRANCIS JERE R. , KRISHNAN JAGAN 
Published: April 2010

AbstractAccounting accruals are managers' subjective estimates of future outcomes and cannot, by definition, be objectively verified by auditors prior to occurrence. This causes audits of high‐accrual firms to pose more uncertainty than audits of low‐accrual firms because of potential estimation error and a greater chance that high‐accrual firms have undetected asset realization and/or going concern problems that are related to the high level of accruals. One way that auditors can compensate for this risk exposure is to lower their threshold for issuing modified audit reports, an action that will increase modified reports and, therefore, lessen the likelihood of failing to issue a modified report when appropriate. We call this auditor reporting conservatism and test if high‐accrual firms in the United States, are more likely to receive modified audit reports for asset realization uncertainties and going concern problems. Empirical results for a large sample of U.S. publicly listed companies support the hypothesis that auditors are more conservative, that is, more likely to issue both types of modified audit reports for high‐accrual firms. Further analyses show that income‐increasing accruals are somewhat more likely to result in reporting conservatism than income‐decreasing accruals, and that only the Big Six group of auditors show evidence of reporting conservatism. These findings add to our understanding of the audit report formation process and the potentially important role played by accounting accruals in that process.
A Bargaining Model of Auditor Reporting*
Authors: ZHANG PING 
Published: April 2010

AbstractIn this paper, I demonstrate that the quasi‐rents earned in audits undermine an auditor's independence By considering the incentives of the auditor and the client and the interaction between them, I conclude that auditor will maintain his or her independence if the firm‐specific quasi‐rents are zero, but compromise his or her independence if the quasi‐rents are positive. The extent of the compromise is an increasing function of the quasi‐rents, since the auditor will propose that a higher value be reported in the financial statements when the quasi‐rents increase. I also show that disputes between the auditor and the client increase as the scope for errors for an auditor's test increases. When the error scope is large, the client becomes more aggressive in preparing a proposal while the auditor becomes more cautious.
Managing Insurance Company Financial Statements to Meet Regulatory and Tax Reporting Goals*
Authors: GAVER JENNIFER J. , PATERSON JEFFREY S. 
Published: April 2010

AbstractThis study investigates the extent to which property‐casualty insurers select levels of loss reserves, net capital gains, and net stock transactions to meet solvency and tax reporting goals. Insurer solvency is reflected in financial measures known as IRIS (Insurance Regulatory Information System) ratios. IRIS ratios are generally enhanced by underestimating loss reserves, accelerating the realization of capital gains, postponing the realization of capital losses, issuing stock, and cutting dividends. Taxable income is reduced by reporting higher reserves and lower net capital gains on investments. We use simultaneous equations to model the three discretionary choices individually, while controlling for potential tradeoffs among the decisions.During the sample period of the study (1990‐95), there is a shift in the regulatory environment that we argue tends to reduce incentives to meet IRIS goals. Specifically, risk‐based capital (RBC) requirements were adopted in 1994. Although IRIS ratios continued to be used for solvency screening, their effect is expected to be diluted in the post‐RBC period. Our results provide qualified support for this claim. Evidence of the phenomenon is stronger when the choice variables are net capital gains and stock transactions, and weaker when loss reserves are considered. Two of the three discretionary choices affect taxable income: loss reserves and capital gains. We find that tax incentives are significantly associated with the loss reserve estimate throughout the sample period. In contrast, our results are only weakly consistent with the view that capital gains are timed to achieve tax relief.
Optimal Contracting, Accounting Standards, and Market Structures*
Authors: KIRSCHENHEITER MICHAEL 
Published: April 2010

AbstractIn this study I use a principal‐agent framework to analyze optimal contracting under two accounting standards, referred to as historical cost (HC) and market value (MV), and under differing asset market assumptions. I distinguish HC from MV by the way revenue is recognized and in the reporting discretion allowed. The MV standard recognizes both realized and unrealized holding gains; HC recognizes only realized holding gains. MV allows the manager reporting discretion; the HC standard does not. Also, distinguishing an asset's value‐in‐use (VIU) from its net realizable value (NRV), I consider markets where the asset's VIU and NRV are always equal as well as markets where VIU and NRV differ.I show the following. If an asset's NRV and VIU are equal and if the manager's available reporting discretion is known, the principal prefers the MV standard because it provides better information about the manager's effort. However, the principal may prefer the HC standard if sufficiently uncertain about the manager's reporting discretion or if the asset's NRV exceeds its VIU, so that expected revenue is sufficiently enhanced by selling the asset earlier. Using an example (normal distribution and mean/variance preferences with linear contracts), I provide a case where the principal prefers the HC standard. Also, I compare the optimal effort and contract under each standard, and provide comparative static results that show how expected revenue, cost, and net income change due to changes in certain model parameters.
Post‐Earnings Announcement Drift and the Dissemination of Predictable Information*
Authors: SOFFER LEONARD C. , LYS THOMAS 
Published: April 2010

AbstractBuilding on the work of Bernard and Thomas 1990, we develop a model to infer the degree to which the information in an earnings announcement is incorporated into investors' expectations for the subsequent earnings announcement at any point in time between the two announcements. We are unable to reject the null hypothesis that investors' earnings expectations are based on a seasonal random walk and reflect none of the implications of the immediately prior earnings announcement up to 15 trading days after that announcement. By mid‐quarter, expectations are significantly more sophisticated than a seasonal random walk. Two trading days before the next earnings announcement, as much as one half of the information in the prior earnings announcement is reflected in earnings expectations. We also find that the dissemination of information, albeit predictable information, speeds the incorporation of prior earnings information into earnings expectations.Our results suggest that as information about future earnings that could have been discerned from the earlier announcements (because past earnings surprises predict future ones) is disseminated in a more transparent form, investors revise their earnings expectations to reflect this information. Thus, the investors' expectations appear to incorporate more and more of the serial correlation in earnings surprises as the quarter progresses, even though they do not consider per se the serial correlation in earnings surprises in forming their expectations.
An Analysis of Historical and Future‐Oriented Information in Accounting‐Based Security Valuation Models*
Authors: TSE SENYO Y. , YAANSAH ROBERT A. 
Published: April 2010

AbstractThe Ohlson (1995) and Feltham and Ohlson (1995) valuation model provides a rigorous framework for summarizing the information in expected future earnings and book values. However, the model provides little guidance on selecting an empirical proxy for expected future earnings. We examine whether and under what circumstances historical earnings and analyst earnings forecasts offer comparable explanation of security prices. This issue is of particular interest because analyst forecasts are less readily available than historical data. Under appropriate circumstances, historical data may allow wider use of the Feltham‐Ohlson valuation model by researchers and investors. A related issue is the incremental explanatory power of historical earnings and realized future earnings (perfect‐foresight forecasts) for security prices beyond analyst forecasts. If historical earnings are incrementally informative, that would suggest that analyst forecasts do not fully reflect price‐relevant information in past earnings. If future earnings are incrementally informative, that would suggest that security prices reflect investors' implicit earnings forecasts beyond analyst forecasts.We examine these issues using a historical model (based on past earnings), a perfect‐foresight model (based on realized future earnings), and a forecast model (based on Value Line earnings forecasts). All three models provide significant explanatory power for security prices, and each set of earnings data provides incremental explanatory power for prices when used with the other sets of earnings data. We estimate the models separately for firms with moderate and extreme earnings‐to‐price (E/P) ratios, a proxy for earnings permanence. For moderate‐E/P firms, the historical model's explanatory power exceeds that of the perfect foresight model, and is indistinguishable from that of the analyst forecast model. In contrast, for extreme‐E/P firms, the perfect‐foresight model offers greater explanatory power than the historical model, but lower explanatory power than analyst forecasts.Our results suggest that financial analysts' forecasting efforts are best focused on firms whose earnings contain large temporary components (extreme E/P firms). However, in general, both historical data and analyst forecasts are complementary information sources for security valuation.
Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure*
Authors: HEALY PAUL M. , HUTTON AMY P. , PALEPU KRISHNA G. 
Published: April 2010

AbstractThis paper investigates whether firms benefit from expanded voluntary disclosure by examining changes in capital market factors associated with increases in analyst disclosure ratings for 97 firms. The disclosure rating increases are accompanied by increases in sample firms' stock returns, institutional ownership, analyst following, and stock liquidity. These findings persist after controlling for contemporaneous earnings performance and other potentially influential variables, such as risk, growth, and firm size. While it is difficult to draw unambiguous causal conclusions, these results are consistent with disclosure model predictions that expanded disclosure leads investors to revise upward valuations of the sample firms' stocks, increases stock liquidity, and creates additional institutional and analyst interest in the stocks.
Earnings, Book Values, and Dividends in a Stewardship Setting with Moral Hazard*
Authors: OHLSON JAMES A. 
Published: April 2010

AbstractThe paper addresses the following question: in a multiple‐date agency setting, under what conditions will the dividend policy be of no incentive relevancy? It is shown that if the accounting data—earnings, book values, and dividends — satisfy standard owners' equity accounting constructs, and if these indicate that paying dividends is a zero NPV activity, then dividend policy incentive irrelevancy applies. The basic idea is to ensure that the (history of) abnormal (residual) earnings summarize the relevant information and the solution to the incentive problem. The paper also compares classical value irrelevancy with incentive irrelevancy, and the analysis shows that conditions for incentive irrelevancy are more stringent.