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Abstract:
We document that firms' management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increase during the period prior to SOX, followed by a significant decline after passage of SOX. However, the increase in earnings management preceding SOX was primarily in poorly performing industries. We also show that the informativeness of earnings increased steadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX.

Earnings Management, Sarbanes Oxley Act

Abstract:
I investigate the determinants and economic consequences associated with firms financial reporting choices. Recognizing the endogeneity associated with these choices, Ifind evidence of a positive association between investors demands for firm-specificinformation and financial reporting quality. I also find that higher proprietary costs areassociated with a lower quality of financial information. As for the economic consequences, the evidence suggests that firms with high quality financial reportingpolicies have reduced information asymmetries. However, after accounting for the endogeneity associated with the reporting quality choice, I find no significant evidence that firms choosing to provide financial information of higher quality enjoy a lower cost of equity capital. These results demonstrate the importance of explicitly modeling the endogeneity of financial reporting choices in investigating the associated economic consequences.

Financial reporting quality, cost of equity capital, proprietary costs, risk factors, endogeneity

Abstract:
I investigate the determinants and economic consequences associated with firms' financial reporting choices. Recognizing the endogeneity associated with these choices, I find evidence of a positive association between investors' demands for firm-specific information and financial reporting quality. I also find that higher proprietary costs are associated with a lower quality of financial information. As for the economic consequences, the evidence suggests that firms with high quality financial reporting policies have reduced information asymmetries. However, after accounting for the endogeneity associated with the reporting quality choice, I find no significant evidence that firms choosing to provide financial information of higher quality enjoy a lower cost of equity capital. These results demonstrate the importance of explicitly modeling the endogeneity of financial reporting choices in investigating the associated economic consequences.

financial reporting quality, earnings quality, disclosure, cost of capital, proprietary costs, risk factors, endogeneity

Abstract:
We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.

Earnings Management, Sarbanse-Oxley Act, Executive Compensation

Abstract:
The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms that considerably increased the total risk exposure of CEOs. We examine the effects of these regulatory changes on compensation contracts of CEOs and their effect on risk taking subsequent to SOX. We find that while overall compensation did not change, salary and bonus compensation increased and option compensation decreased following the passage of SOX. The sensitivity of CEO's wealth to changes in shareholder wealth also decreased after SOX. These results indicate that the pay for performance sensitivity of CEO compensation has declined following SOX. Our results indicate that these changes reduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs' pay for performance sensitivities and their risky investments following SOX are associated with a reduction in stock return volatility. However, we do not find any evidence indicating that these changes are associated with lower future operating performance.

Sarbanes Oxley Act, Executive Compensation, Incentives, Regulation

Abstract:
We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation, and how this behavior varies over time and cross-sectionally. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual-based, earnings management tools around SEOs. Second, consistent with the expectation that the Sarbanes-Oxley Act (SOX) has made accrual-based earnings management more costly, we find that firms have substituted from accrual to real earnings management after SOX. Finally, we show how the tendency for firms to trade-off real versus accrual-based earnings management activities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firm s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms trade-off between real versus accrual methods of earnings management.

Abstract:
We examine earnings management behavior around SEOs, focusing on both realactivities and accrual-based manipulation, and how this behavior varies over time andcross-sectionally. Although research has addressed the issues of earnings managementaround SEOs and earnings management via real activities manipulation, ours is the firstpaper to put these two issues together. We make three contributions to the literature.First, we document that firms use real, as well as accrual-based, earnings managementtools around SEOs. Second, consistent with the expectation that the Sarbanes-Oxley Act(SOX) has made accrual-based earnings management more costly, we find that firmshave substituted from accrual to real earnings management after SOX. Finally, we show how the tendency for firms to tradeoff real versus accrual-based earnings managementactivities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firm s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management.

Abstract:
We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual-based, earnings management tools around SEOs. Second, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firms ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management. Third, we compare the economic costs of accrual versus real earnings management around SEOs, by examining the effect of each type of earnings management on the firms future performance. We provide the first evidence on this important issue by showing that the costs of real earnings management are likely greater than the costs of accrual earnings management, at least in the SEO context.

Seasoned Equity Offerings, Earnings Management, Real Earnings Management

Abstract:
Controlling for firm-specific characteristics determining financial reporting quality, this paper finds evidence of a negative association between firms' total risk and financial reporting quality. While the results imply that firms providing financial information of higher quality do not necessarily enjoy a lower cost of equity capital, a significant negative relation is documented between reporting quality and idiosyncratic risk. This suggests that the quality of accounting information is not an additional systematic priced risk factor as suggested in recent studies. The evidence reported demonstrates the importance of explicitly controlling for the determinants of financial reporting quality when investigating the associated economic consequences.

financial reporting quality, information risk, cost of capital, idiosyncratic risk

Abstract:
I investigate the determinants and economic consequences associated with financialreporting quality. I find evidence of a positive association between investors demands for firm-specific information and financial reporting quality. In addition, the evidence suggests that higher proprietary costs (proxied by capital intensity, product market competition, and growth opportunities) are associated with a lower quality of financial information. Controlling for the firm-specific characteristics determining financial reporting quality, I find evidence of a negative association between firms total risk and financial reporting quality. Decomposing total risk into a systematic component and an idiosyncratic one, the results imply that firms providing financial information of higher quality do not necessarily enjoy a lower cost of equity capital. However, a significant negative relation is documented between reporting quality and idiosyncratic risk. Thissuggests that the quality of accounting information cannot be characterized as anadditional systematic priced risk factor, but rather as an idiosyncratic one, once the firmspecific characteristics determining information quality are controlled for. These results demonstrate the importance of explicitly controlling for the determinants of financial reporting quality when investigating the associated economic consequences and question recent empirical evidence on the association between reporting quality and the cost of equity capital.

Abstract:
I investigate the determinants and economic consequences associated with financial reporting quality. I find evidence of a positive association between investors' demands for firm-specific information and financial reporting quality. In addition, the evidence suggests that higher proprietary costs (proxied by capital intensity, product market competition, and growth opportunities) are associated with a lower quality of financial information. Controlling for the firm-specific characteristics determining financial reporting quality, I find evidence of a negative association between firms' total risk and financial reporting quality. Decomposing total risk into a systematic component and an idiosyncratic one, the results imply that firms providing financial information of higher quality do not necessarily enjoy a lower cost of equity capital. However, a significant negative relation is documented between reporting quality and idiosyncratic risk. This suggests that the quality of accounting information cannot be characterized as an additional systematic priced risk factor, but rather as an idiosyncratic one, once the firm-specific characteristics determining information quality are controlled for. These results demonstrate the importance of explicitly controlling for the determinants of financial reporting quality when investigating the associated economic consequences and question recent empirical evidence on the association between reporting quality and the cost of equity capital.

Financial reporting quality, Earnings quality, cost of capital, systematic risk, idiosyncratic risk

Abstract:
This paper asks two questions. First, has the prevalence of expectations management to meet/beat analyst expectations changed in the aftermath of the 2001-2002 accounting scandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mix among the three mechanisms used for meeting earnings targets: accrual earnings management, real earnings management, and earnings expectations management shifted in the Post-SOX Period? We document that the propensity to meet/beat analyst expectations has declined significantly in the Post-SOX Period. Our primary findings explain this pattern. In particular, we find a decline in the use of expectations management and accrual management, and no change in real earnings management in the Post-SOX Period relative to the preceding seven-year period. Our results are robust to controlling for varying macro economic conditions. These findings contribute to the academic literature, investors, and regulators.

Earnings expectations, Analysts' forecasts, Expectations management, Earnings management, Real Earnings Management, Sarbanes Oxley

Abstract:
This study investigates the association between proprietary costs and the quality offinancial reporting. Interpreting a firmâ¬"s financial reporting policy as a choice ofprecision (â¬Squalityâ¬?) for the disclosed accounting earnings, I find evidence that the higher the proprietary costs, the lower the precision (â¬Squalityâ¬?) of reported accounting earnings. This is consistent with analytical work in disclosure theory which suggests that, ceteris paribus, as the proprietary cost of disclosure increases, the quality of disclosure decreases.

Abstract:
This study investigates the association between proprietary costs and the quality of financial reporting. Interpreting a firm's financial reporting policy as a choice of precision ("quality") for the disclosed accounting earnings, I find evidence that the higher the proprietary costs, the lower the precision ("quality") of reported accounting earnings. This is consistent with analytical work in disclosure theory which suggests that, ceteris paribus, as the proprietary cost of disclosure increases, the quality of disclosure decreases.

Financial reporting quality, earnings quality, proprietary costs, disclosure, competition

Abstract:
Abarbanell and Lehavy provide evidence that analysts' forecast errors are not normally distributed exhibiting a high occurrence of extreme negative forecast errors (left-tail asymmetry) and a high occurrence of small positive forecast errors (middle asymmetry). This is important for researchers who rely on techniques that are sensitive to the distributional assumptions of analysts' forecast errors. Many of the conclusions drawn by Abarbanell and Lehavy, however, are based on visual impressions (as opposed to formal empirical tests) or based on methods that are very sensitive to the empirical methods used (e.g., whether the serial correlation of forecast errors is caused by the left-tail asymmetry).

Analysts forecasts, analysts bias, analysts under/overreaction to information, analysts loss function, discretionary accruals

Abstract:
Abarbanell and Lehavy provide evidence that analysts' forecast errors are not normally distributed exhibiting a high occurrence of extreme negative forecast errors (left-tail asymmetry) and a high occurrence of small positive forecast errors (middle asymmetry). This is important for researchers who rely on techniques that are sensitive to the distributional assumptions of analysts' forecast errors. Many of the conclusions drawn by Abarbanell and Lehavy, however, are based on visual impressions (as opposed to formal empirical tests) or based on methods that are very sensitive to the empirical methods used (e.g., whether the serial correlation of forecast errors is caused by the left-tail asymmetry).

Abstract:
Abarbanell and Lehavy provide evidence that analysts' forecast errors are not normally distributed exhibiting a high occurrence of extreme negative forecast errors (left-tail asymmetry) and a high occurrence of small positive forecast errors (middle asymmetry). This is important for researchers who rely on techniques that are sensitive to the distributional assumptions of analysts' forecast errors. Many of the conclusions drawn by Abarbanell and Lehavy, however, are based on visual impressions (as opposed to formal empirical tests) or based on methods that are very sensitive to the empirical methods used (e.g., whether the serial correlation of forecast errors is caused by the left-tail asymmetry).

Analysts' forecasts, analysts' bias, analysts' under/overreaction to information, analysts' loss function, discretionary accruals.

Abstract:
We document that earnings announcement-day premia persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcementday. A portfolio of announcing firms yields returns in excess of the corresponding risk.Excluding announcers from a well-diversified portfolio, while reducing the standarddeviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategyresults in a less favorable risk-return trade-off. Finally, we provide evidence that the premia are dramatically reduced when the announcement risk is reduced through preannouncements. In addition, we document that the continued presence of this premia islikely to result from limits to arbitrage. These findings are consistent with the view that the announcement period returns are likely to represent compensation for announcement risk.

Abstract:
We examine the factors underlying the presence of earnings announcement premia. We find that the premia persist beyond the sample period examined in prior studies (ending in 1988), although they decline in magnitude after 1988. Further, premia are lower on the expected than the actual earnings announcement dates. We document that increases in voluntary disclosures result in lower premia, despite the increase in return volatility over time. Finally, our evidence suggests that the premia are not completely eliminated because of the costs of arbitrage.

Earnings Announcements, Announcement Premium, Preannouncements

Abstract:
We document that earnings announcement-day premia persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcement day. A portfolio of announcing firms yields returns in excess of the corresponding risk. Excluding announcers from a well-diversified portfolio, while reducing the standard deviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategy results in a less favorable risk-return trade-off. Finally, we provide evidence that the premia are dramatically reduced when the announcement risk is reduced through preannouncements. In addition, we document that the continued presence of this premia is likely to result from limits to arbitrage. These findings are consistent with the view that the announcement period returns are likely to represent compensation for announcement risk.

Earnings announcements, risk, diversification, risk-return tradeoff, limits to arbitrage

Abstract:
Modern economies are characterized by a separation of ownership and control. The information asymmetry between investors and entrepreneurs and the agency problems that result from the separation of ownership and control cause corporate information environments to develop endogenously. We discuss and provide a framework for analyzing the three main decisions that shape the corporate information environment in a capital markets setting: (1) managers’ voluntary reporting and disclosure decisions, (2) reporting and disclosures mandated by regulators, and (3) reporting decisions by third-party intermediaries (analysts). We review and critique current research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure and financial reporting decisions. We conclude that in the last ten years, research has generated a number of useful insights. Despite this progress, we call for researchers to consider interdependencies between the various decisions that shape the corporate information environment and highlight changes in the economic financial environment that raise new and interesting issues for researchers to address.

Financial Reporting, Information Environment, Disclosure, Analyst Forecasts

Abstract:
Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the 'external financing anomaly' documented by BRS and the 'accrual anomaly' first documented by Sloan (1996). We show that once controlling for total accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan (2003).

External financing, Analysts' forecasts, Accruals, Capital Markets, Market Efficiency

Abstract:
Using a unique database of monthly advertising spending in media outlets, we examine whether managers engage in real earnings management to meet quarterly financial reporting benchmarks. We extend prior literature by: (1) separately analyzing advertising activities, allowing us to explore novel issues such as the possibility that managers could either reduce or boost advertising to meet an earnings benchmark; (2) analyzing actual activities as opposed to inferring them from reported expenses, which are also subject to accrual choices; (3) investigating the timing, within a fiscal quarter, of altered advertising spending; and (4) examining quarterly as opposed to annual earnings benchmarks. Overall, we find that managers reduce their advertising spending to avoid losses and avoid earnings decreases. However, we also provide evidence that firms in the late stages of their life cycle choose to increase advertising to meet earnings benchmarks. Finally, we find some evidence that firms increase their advertising activities in the third month of a fiscal quarter and in the fourth quarter to meet or beat prior year’s earnings.

Real earnings management, advertising, earnings benchmarks

Abstract:
Utilizing a database that became available due to the requirements of FIN 45, we examine the informational role of accounting disclosures on warranties. First, since firms use warranty policies as a business strategy to promote their products, a warranty reserve may serve two roles: an informational signal regarding product quality as well as a contingent liability. Consistent with this view, we find that the stock market recognizes that: (1) the warranty reserve contains information about firms' future performance, and (2) the reserve is a liability. Second, since warranty accruals require estimation of future claims, they can also be used as a tool of earnings management. Our evidence indicates that managers use warranty accruals to manage earnings opportunistically to meet their earnings targets. Finally, we find that the stock market recognizes that warranty liabilities of firms that managed earnings are underestimated.

Warranty, Contigent Liaiblity, Signaling, Earnings Management

Abstract:
Are there long-term costs to obtaining venture capital financing? We explore the hypothesis that venture capital backed firms do not efficiently transform to the corporate structure of public firms and have difficulties publicly communicating with arm’s length investors. Our results are three-fold. First, we find that, on average, reported accounting earnings are less informative for venture capital backed firms. Second, the informativeness of reported earnings is a decreasing function of venture capitalists’ ownership of firm equity and a decreasing function of venture capitalists’ board representation. Third, stock prices of venture capital backed firms reflect future earnings to a lesser extent relative to non-venture capital backed firms. Our findings support the hypothesis that venture capitalists manage the flow of public information to capital markets and preserve short-term interests arising from specific investment and ownership horizons. This evidence suggests that the benefits of receiving venture capital financing are not without costs.

Venture capital, earnings informativeness, ownership structure, investment horizon

Abstract:
Do venture capital backed firms efficiently transform from closely held private ventures to public corporations? Are there long-term costs to obtaining venture capital financing? We explore the hypothesis, formally derived in the paper, that venture capital backed firms do not efficiently transform to the corporate structure of public firms and have difficulties publicly communicating with arm's length investors. Our results are three fold. First, we find that, on average, reported accounting earnings are less informative for venture capital backed firms. Second, the informativeness of reported earnings is a decreasing function of venture capitalists' ownership of firm equity and a decreasing function of venture capitalists' board representation. Third, stock prices of venture capital backed firms reflect future earnings to a lesser extent relative to non-venture capital backed firms. Our findings support the hypothesis that venture capitalists manage the flow of public information to capital markets and preserve short term interests arising from specific investment and ownership horizons. This evidence suggests that the benefits of receiving venture capital financing are not without costs.

Venture capital, earnings informativeness, ownership structure, investment horizon

Abstract:
Bradshaw and Sloan (2002) document a significant increase in the difference between the earnings response coefficients (ERCs) for GAAP and Street (I/B/E/S) earnings over the 1990s, suggesting that the market has become increasingly reliant or fixated on Street earnings. In this study we investigate whether, alternatively, an errors in variables problem caused by a mismatch between the definitions of realized and expected earnings drives the ERC divergence. Our findings suggest that results from conventional analyses of GAAP and Street ERCs, including the ERC divergence pattern, are significantly contaminated by measurement errors in earnings surprises.

capital markets, analyst forecasts, earnings response coefficients, GAAP earnings, Street earnings, measurement error

Abstract:
Bradshaw and Sloan (2002) document a significant increase in the difference between the earnings response coefficients (ERCs) for GAAP and Street (I/B/E/S) earnings over the 1990s, suggesting that the market has become increasingly reliant or fixated on Street earnings. In this study we investigate whether, alternatively, an "errors in variables" problem caused by a mismatch between the definitions of realized and expected earnings drives the ERC divergence. Our findings suggest that results from conventional analyses of GAAP and Street ERCs, including the ERC divergence pattern, are significantly contaminated by measurement errors in earnings surprises.

capital markets, analyst forecasts, earnings response coefficients, GAAP earnings, Street earnings, measurement error

Abstract:
Bradshaw and Sloan (2002) document a significant increase in the difference between the earnings response coefficients (ERCs) for GAAP and Street (I/B/E/S) earnings over the 1990s, suggesting that the market has become increasingly reliant or fixated on Street earnings. In this study we investigate whether, alternatively, an "errors in variables" problem caused by a mismatch between the definitions of realized and expected earnings drives the ERC divergence. Our findings suggest that results from conventional analyses of GAAP and Street ERCs, including the ERC divergence pattern, are significantly contaminated by measurement errors in earnings surprises.

capital markets, analyst forecasts, earnings response coefficients, GAAP earnings, Street earnings, measurement error

Abstract:
This paper asks two questions. First, has the prevalence of expectations management tomeet/beat analyst expectations changed in the aftermath of the 2001-2002 accountingscandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mixamong the three mechanisms used for meeting earnings targets: accrual earningsmanagement, real earnings management, and earnings expectations management shiftedin the Post-SOX Period? We document that the propensity to meet/beat analystexpectations has declined significantly in the Post-SOX Period. Our primary findingsexplain this pattern. In particular, we find a decline in the use of expectationsmanagement and accrual management, and no change in real earnings management in thePost-SOX Period relative to the preceding seven-year period. Our results are robust tocontrolling for varying macro economic conditions. These findings contribute to theacademic literature, investors, and regulators.

Abstract:
This paper asks two questions. First, has the prevalence of expectations management tomeet/beat analyst expectations changed in the aftermath of the 2001-2002 accountingscandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, has the mixamong the three mechanisms used for meeting earnings targets: accrual earningsmanagement, real earnings management, and earnings expectations management shiftedin the Post-SOX Period? We document that the propensity to meet/beat analyst expectations has declined significantly in the Post-SOX Period. Our primary findings explain this pattern. In particular, we find a decline in the use of expectations management and accrual management, and no change in real earnings management in the Post-SOX Period relative to the preceding seven-year period. Our results are robust to controlling for varying macro economic conditions. These findings contribute to the academic literature, investors, and regulators.

Abstract:
We document that accrual-based earnings management increased steadily from 1987 untilthe passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant declineafter the passage of SOX. Conversely, the level of real earnings management activitiesdeclined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent withincreases in the fraction of equity based compensation.

Abstract:
We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also document that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. In addition, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in equity-based compensation. Our results suggest that stock-option components provide a differential set of incentives with regards to accrual-based earnings management. We document that while new options granted during the current period are negatively associated with income-increasing accrual-based earnings management, unexercised options are positively associated with income-increasing accrual-based earnings management.

Earnings Management, Real Earnings Management, Sarbanes Oxley Act, Executive Compensation

Abstract:
The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms thatconsiderably increased the total risk exposure of CEOs. We examine the effects of these regulatory changes on compensation contracts of CEOs and their effect on risk taking subsequent to SOX. We find that while overall compensation did not change, salary and bonus compensation increased and option compensation decreased following the passageof SOX. The sensitivity of CEO s wealth to changes in shareholder wealth also decreasedafter SOX. These results indicate that the pay for performance sensitivity of CEOcompensation has declined following SOX. Our results indicate that these changesreduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs pay for performance sensitivities and theirrisky investments following SOX are associated with a reduction in stock returnvolatility. However, we do not find any evidence indicating that these changes areassociated with lower future operating performance.

Abstract:
We document that firms management of accounting earnings increased steadily from1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increaseduring the period prior to SOX, followed by a significant decline after passage of SOX.However, the increase in earnings management preceding SOX was primarily in poorlyperforming industries. We also show that the informativeness of earnings increasedsteadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX.

Abstract:
Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting accruals are increases in net operatingassets on a company s balance sheet, we question whether it is possible to distinguish between the external financing anomaly documented by BRS and the accrual anomaly first documented by Sloan (1996). We show that once controlling for total accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan (2003).

External financing, Analysts forecasts, Accruals, Capital Markets, Market Efficiency

Abstract:
Using a unique database of monthly advertising spending in media outlets, we examine whether managers engage in real earnings management to meet quarterly financial reporting benchmarks. We extend prior literature by: (1) separately analyzing advertising activities, allowing us to explore novel issues such as the possibility that managers could either reduce or boost advertising to meet an earnings benchmark; (2) analyzing actual activities as opposed to inferring them from reported expenses, which are also subject to accrual choices; (3) investigating the timing, within a fiscal quarter, of altered advertising spending; and (4) examining quarterly as opposed to annual earnings benchmarks. Overall, we find that managers reduce their advertising spending to avoid losses and avoid earnings decreases. However, we also provide evidence that firms in the late stages of their life cycle choose to increase advertising to meet earnings benchmarks. Finally, we find some evidence that firms increase their advertising activities in the third month of a fiscal quarter and in the fourth quarter to meet or beat prior year’s earnings.

Abstract:
We address two research questions in this study. First, is there a change in the prevalence of expectations management to meet or beat analysts' earnings expectations in the aftermath of the 2001-2002 accounting scandals and the passage of the 2002 Sarbanes-Oxley Act (SOX)? Second, did the mix among the three mechanisms used for meeting or beating analysts' earnings expectations: accrual-based earnings management, real earnings management, and expectations management change in the Post-SOX Period? We hypothesize and provide empirical evidence that the observed drop in the frequency of just meeting/beating analysts' earnings expectations is associated with both (1) a decline in the use of downward expectations management and upward accrual-based earnings management in the Post-SOX period relative to the preceding seven-year period and (2) an increase in upward real earnings management activities.

Earnings management, Real Earnings Management, Expectations Management, The Sarbanes Oxley Act