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Abstract:
This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that non-audit fees are positively associated with small positive earnings surprises, the magnitude of absolute discretionary accruals, and the magnitude of income-increasing and income-decreasing discretionary accruals. In contrast, audit fees are negatively associated with these earnings management indicators. These results are robust to a variety of alternative variable definitions and model specifications. Specifically, contrary to the claims of Ashbaugh et al. (2002), the results are robust to the use of performance-matched discretionary accruals. Moreover, contrary to the claims of Francis and Ke (2002), the results for small positive earnings surprises are robust regardless of whether the comparison group is all other earnings surprises or small negative earnings surprises. Our final set of results provide evidence of a significant negative association between non-audit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

auditor independence, auditor fees, earnings management, discretionary accruals

Abstract:
This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that non-audit fees are positively associated with small positive earnings surprises, the magnitude of absolute discretionary accruals, and the magnitude of income-increasing and income-decreasing discretionary accruals. In contrast, audit fees are negatively associated with these earnings management indicators. These results are robust to a variety of alternative variable definitions and model specifications. Specifically, contrary to the claims of Ashbaugh et al. (2002), the results are robust to the use of performance-matched discretionary accruals. Moreover, contrary to the claims of Francis and Ke (2002), the results for small positive earnings surprises are robust regardless of whether the comparison group is all other earnings surprises or small negative earnings surprises. Our final set of results provide evidence of a significant negative association between non-audit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

auditor independence, auditor fees, earnings management, discretionary accruals

Abstract:
We examine whether the recent public outcry over executive compensation has had an impact on the level of executive compensation and/or the sensitivity of cash compensation to firm performance. Cross-sectional analyses for a sample of 186 firms show that post-1993 compensation levels have risen despite increasing stakeholder pressure. Tests based on firm- specific, time series analyses indicate a post-1993 increase in the sensitivity of cash compensation to firm performance that cannot be completely explained by a rising stock market. In addition to examining overall changes in the structure of executive compensation, we also examine the impact of four specific sources of stakeholder pressure. We find no evidence that the receipt of a shareholder proposal on executive compensation or the redesign of short- term and long-term incentive plans in response to the $1 million pay cap is followed by significant changes in compensation levels or cash compensation performance sensitivities. However, our evidence does indicate that following negative financial press coverage of a firm?s executive compensation policies, there is both a smaller subsequent increase in total compensation and a larger subsequent increase in the sensitivity of cash compensation to firm performance than is experienced by firms that were not singled out by the media. Finally, we find that the targeting of a firm by institutional investors with concerns about the firm?s performance is associated with subsequent declines in both total compensation and cash compensation performance sensitivities.

Abstract:
This Essay examines the stock market's reaction to the Ninth Circuit's decision in re Silicon Graphics Securities Litigation. That decision adopted the most stringent interpretation of the Private Securities Litigation Reform Act's "strong inference" standard for pleading scienter in securities fraud cases. Studying the abnormal stock returns of a sample of high technology companies, the authors find a statistically significant positive return for shareholders of these companies to the Silicon Graphics decision. They also find that these positive stock price effects were strongest for those firms most likely to be sued in securities fraud class actions, but the results were less positive for those firms most likely to be sued for committing fraud. The authors conclude that the Silicon Graphics decision enhanced shareholder wealth on average. They argue that when the Supreme Court is called upon to interpret the Reform Act's pleading standard that it should adopt the Silicon Graphics standard.

Abstract:
This paper provides evidence on the characteristics of firms that hold conference calls and on whether these calls provide information to market participants. We find that firms that hold conference calls are larger, more profitable, go to the capital markets more often, and are growing more rapidly than other firms. We also find that conference calls provide information to market participants over and above the information contained in the accompanying press release. We find that trading volume and, to a lesser degree, return variance, are elevated during the time of conference calls and that average trade size is higher during the time of conference calls. We believe that this evidence is important because it suggests that material information is being released during conference calls and that a subset of large investors trade on this information in real time.

Abstract:
Recent studies have investigated the assertion that accounting information has become less value-relevant over time. This paper provides additional evidence on this issue by examining the effect of ongoing deregulation in the electric utility industry on the relation between market value, book value, and earnings. This setting allows us to use economic theory to make ex ante predictions about changes in the relation between accounting information and firm value. We predict that deregulation decreases (increases) the relative importance of book value (earnings) in explaining price. We test this prediction by examining changes in the value-relevance of book value and earnings during the 1988-1996 time period for a sample of large, investor-owned electric utilities. We find that the regression coefficients and incremental explanatory power related to book value (earnings) have decreased (increased) over this time period. In addition, our results are robust to sensitivity analyses that (1) include controls for factors affecting the demand for and supply of electricity; (2) test the predictions using a "changes," as opposed to "levels," methodology; and (3) isolate regulatory assets from other components of book value.

Abstract:
This study examines the effect of ongoing deregulation in the electric utility industry on the relation between market value, book value, and earnings. We predict that deregulation decreases (increases) the relative importance of book value (earnings) in explaining price. We test this prediction by examining changes in the value-relevance of book value and earnings during the 1988-1996 time period for a sample of large, investor-owned electric utilities. We find that the regression coefficients and incremental explanatory power related to book value (earnings) have decreased (increased) over this time period. These results are generally robust in sensitivity analysis.

Abstract:
Congress passed the Private Securities Litigation Reform Act of 1995 in an attempt to discourage meritless securities fraud class actions. This paper uses damages, accounting, insider trading and governance variables to explain the incidence of securities fraud litigation both before and after the passage of the PSLRA. Using a matched sample of sued and non-sued firms from the computer hardware and software industries, we find that our accounting and insider trading variables, which do not correlate with the incidence of litigation prior to the passage of the PSLRA, are significant after the passage of the PSLRA. This finding is confirmed by our analysis of allegations and outcomes. Our accounting variables do not explain the incidence of pre-PSLRA accounting allegations, but they become significant after the passage of the PSLRA. Similarly, insider trading variables do not explain insider trading allegations before the PSLRA, but net sales by insiders correlate with such allegations after its enactment. Finally, we find no correlation between lawsuit outcomes and our accounting variables before the PSLRA, but accounting variables are significant after its enactment. Abnormal insider sales correlate with outcomes before the PSLRA, but not after. Overall, we interpret our findings as evidence that the PSLRA has furthered Congress's goal of discouraging frivolous securities fraud lawsuits.

Securities litigation, litigation risk, accounting fraud, insider trading

Abstract:
We examine 169 shareholder proposals on executive compensation filed against 106 firms by 74 sponsors over the period 1992-95. We find the probability of receiving a proposal is associated with the firm?s executive compensation policies, firm performance, and the composition of the shareholder base, but is unassociated with the existence of alternative monitoring mechanisms. Voting outcomes are associated with firm performance, the shareholder base, and the proposal sponsor, but are unassociated with the structure of executive compensation or the existence of alternative monitoring mechanisms. We find no evidence that proposals put to a vote trigger subsequent changes in executive compensation policies. However, 20% of proposals are withdrawn prior to a vote. Withdrawal occurs when the proposal sponsor and target firm reach an accomodation (IRRC 1996). A plurality (41%) of withdrawn proposals deal with the independence of the compensation committee. Additionally, two-thirds of the proposals on compensation committee independence are subsequently withdrawn. To the extent that shareholder proposals on executive compensation lead to changes in compensation policies, it is through the indirect mechanism of increased compensation committee independence.

Abstract:
This paper investigates the reaction of stock prices to enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA). Based on a sample of 489 high-technology firms, we find that the PSLRA was wealth-increasing, on average, and that the market reaction was more positive for firms at greatest risk of being sued in a securities class action. However, we also show that the PSLRA was less beneficial for firms likely to be the subject of a meritorious lawsuit. Collectively, our evidence implies that shareholders generally benefit from restrictions on private securities litigation, although these benefits are mitigated when other mechanisms for curbing fraudulent activity are inadequate.

Abstract:
This paper investigates the reaction of stock prices to enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA). Based on a sample of 489 high-technology firms, we find that the PSLRA was wealth-increasing, on average, and that the market reaction was more positive for firms at greatest risk of being sued in a securities class action. However, we also show that the PSLRA was less beneficial for firms likely to be the subject of a meritorious lawsuit. Collectively, our evidence implies that shareholders generally benefit from restrictions on private securities litigation, although these benefits are mitigated when other mechanisms for curbing fraudulent activity are inadequate.

Abstract:
This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Based on an analysis of earnings and sales forecasts issued by 523 computer hardware, computer software, and pharmaceutical firms, and controlling for other factors that may affect the disclosure decision, we find a significant increase in both the frequency of firms issuing forecasts and the mean number of forecasts issued following the Act's passage. To provide more direct evidence that our findings are attributable to the Act reducing firms' legal exposure, we develop a proxy for litigation risk and examine whether the increase in disclosure is more pronounced for firms at greatest risk of a lawsuit. As expected, we find that the change in disclosure is increasing in firms' ex ante risk of litigation. Finally, we report that the safe harbor had no adverse impact on the quality of forward-looking information released by management, contrary to claims made by opponents of the Act. In particular, our results indicate that forecast errors, whether directional or non-directional, were not significantly affected by the Act's passage.

Abstract:
This study evaluates corporate voluntary disclosure of forward-looking information under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Using data on earnings and sales forecasts issued by 547 computer, software, and drug firms, we find that there was a significant increase in both the frequency of firms issuing forecasts and the number of forecasts issued following enactment of the Reform Act. The increased level of disclosure is primarily attributable to managers issuing more long horizon forecasts of good news and short horizon forecasts of bad news. Moreover, there is some evidence that the forecasts issued after the safe harbor took effect specified a more precise estimate of expected future earnings performance. We also find that the increase in disclosure was not at the expense of forecast quality in that forecasts issued after passage of the Reform Act are no less accurate than those issued previously. In particular, there is no evidence to support critics' concern that the protection of the safe harbor would prompt managers to issue more overly optimistic statements to investors.

Abstract:
We examine H.R. 3574, the Stock Option Accounting Reform Act of 2004 (the Act), which sought to prevent the Financial Accounting Standards Board (FASB) from requiring the expensing of employee stock options at fair value. We find that employee stock option expense under the Act would be approximately two percent of what it would be under the FASB's preferred method. We also find that House members supporting the Act were more likely to be Republican, to be conservative, and to have received larger PAC contributions. Finally, the larger the impact of H.R. 3574 on the amount of stock option expense reported by the firm for employees who are not top five executives, the more contributions the firm's PAC made to House members and to members of the Committee that approved the Act. These results suggest that corporate opposition to the mandatory expensing of stock options at fair value is not driven solely by concerns of top five executives about the cost of recognizing their own options.

PAC, H.R. 3574, employee stock options, standard setting, lobbying

Abstract:
This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with our predictions, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and abnormal insider selling after the PSLRA. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements.

securities litigation, litigation risk, accounting fraud, insider trading

Abstract:
U.S. and international accounting standards have mandated recognition and/or disclosure of fair value information for an increasing number of items. One consequence of this shift has been the emergence of voluntary disclosures in audited financial statements that explicitly question the reliability of the mandated fair value information. We investigate whether these voluntary disclosures reflect legitimate concerns by examining whether the mandated fair value information is less reliable for firms that include such disclosures in the footnotes of their financial statements. We examine this issue in the context of the fair value estimate of employee stock options mandated by SFAS 123. After controlling for other motivations to disavow, we find that a firm is more likely to make a disavowal disclosure when inputs into its stock-option valuation model are less reliable. In contrast, we find little evidence that stock option disavowals are motivated by managers’ desires to hide abnormally high compensation or downplay the detrimental impact of stock option expense on performance metrics. These findings are consistent with the FASB’s view in SFAS 157 that supplemental disclosures related to fair value information are necessary for users to understand the information and limitations of fair value estimates. Surprisingly, we also find that disavowals are most common when Ernst and Young audited the financial statements. This result is interesting as it suggests that firms’ disclosure policies are impacted by both firm-specific costs and benefits of disclosure and the opinions of third parties (which presumably increase the perceived benefits of the disclosure).

Fair value; disclosure; reliability; stock options

Abstract:
U.S. and international accounting standards have mandated recognition and/or disclosure of fair value information for an increasing number of items. One consequence of this shift has been the emergence of voluntary disclosures in audited financial statements that explicitly question the reliability of the mandated fair value information. We investigate whether these voluntary disclosures reflect legitimate concerns by examining whether the mandated fair value information is less reliable for firms that include such disclosures in the footnotes of their financial statements. We examine this issue in the context of the fair value estimate of employee stock options mandated by SFAS 123. After controlling for other motivations to disavow, we find that a firm is more likely to make a disavowal disclosure when inputs into its stock-option valuation model are less reliable. In contrast, we find little evidence that stock option disavowals are motivated by managers' desires to hide abnormally high compensation or downplay the detrimental impact of stock option expense on performance metrics. These findings are consistent with the FASB's view in SFAS 157 that supplemental disclosures related to fair value information are necessary for users to understand the information and limitations of fair value estimates. Surprisingly, we also find that disavowals are most common when Ernst and Young audited the financial statements. This result is interesting as it suggests that firms' disclosure policies are impacted by both firm-specific costs and benefits of disclosure and the opinions of third parties (which presumably increase the perceived benefits of the disclosure).

fair value, disclosure, reliability, stock options

Abstract:
This paper examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with expectations, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and insider selling after the PSLRA. There is no evidence, however, of an association between litigation and abnormal insider selling either before or after the PSLRA, even though this measure conforms more closely with legal standards for assessing fraudulent intent. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements and abnormal insider selling. Thus, unlike lawsuit filings, the outcome of litigation does conform with judicial doctrine regarding insider trading. Consistent with Skinner (1997), there is no association between the likelihood of settlement and firms' forward-looking earnings disclosures.

stockholder litigation, restatements, earnings forecasts, insider trading

Abstract:
This article examines the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on stockholder lawsuits. We explore the role of restatements, earnings forecasts, and insider trading in the filing and resolution of lawsuits for a sample of high technology firms. Consistent with our predictions, there is a post-PSLRA shift away from litigation based on forward-looking earnings disclosures. Conversely, there is a significantly greater correlation between litigation and both earnings restatements and abnormal insider selling after the PSLRA. Finally, we find a post-PSLRA increase in the likelihood of settlement for cases involving earnings restatements.

Abstract:
Corporate conference calls are large-scale telephone conference calls during which managers make presentations to and answer questions from various market participants, usually about earnings. In this paper, we sample 1,056 corporate conference calls made by 808 firms during February-November 1995 to provide evidence on three questions: (1) whether conference calls provide information to stock market participants, (2) whether investors have equal access to the information provided during these calls, and (3) why managers of some firms hold conference calls while managers of other firms do not. We believe this research is important because managers? use of conference calls has grown enormously, yet we know little about how these calls affect investors.

Abstract:
This paper examines business cycle variation in the earnings-returns relation. Earnings are more persistent when growth rates are high (i.e., in an expansion) than when growth rates are low (i.e., in a recession). Earnings are more persistent when production is high (i.e., in a credit crunch period) than when production is low (i.e., in a reliquification period). Relatedly, earnings response coefficients are larger in expansions (credit crunch periods) than in recessions (reliquification periods). Thus, earnings persistence and earnings response coefficients are positively associated with the rate of growth in economic activity and the level of economic activity.

Abstract:
We examine how firms exercise reporting discretion when preparing the performance graph required under the SEC's new compensation disclosure rules. Results from a sample of 449 S&P 500 firms, 31.4% of whom self-constructed a peer group, indicate that three sets of factors -- the firm's visibility in the compensation debate, the level of monitoring, and the suitability of the public index for use in peer group comparisons -- explain both the decision to self-construct a peer group and the performance of the self-constructed peer group relative to the corresponding public industry index. We further find that self-constructed peer groups are "opportunistic" in that self-constructed indexes enhance the reporting companies' relative performance compared to performance measured relative to the company's S&P industry index. Paradoxically, self-constructed peer groups are also "informative" in that they explain cross-sectional variation in firm performance, firm size, and firm risk incremental to that explained by public indexes. Thus, a characterization of self-constructed peer groups as indicative of self-serving behavior on the part of managers is overly simplistic.

Abstract:
We study the link between firm value and quality management practices by examining stock price reactions to third party attestation that a firm's quality control process complies with ISO 9000 quality assurance standards. We find that ISO 9000 certification is motivated by international sales opportunities for attaining 'preferred supplier' status with manufacturing customers availability of alternatives for disclosing quality and costs of obtaining certification. Our analysis of wealth effects which addresses Lanen and Thompson's (1988) critique by controlling for investors' prior anticipation of certification indicates that factors which explain certification also explain cross-sectional variation in abnormal returns around the certification date. Additionally we find that firms voluntarily disclose information about ISO 9000 certification when certification is initiated by the firm but not when certification is in response to customer demands or regulatory requirements.

Abstract:
This paper examines the decision to disclose and the market valuation of environmental capital expenditures made by 250 S&P 500 manufacturing firms over the period 1989-91. Current accounting rules suggest that in general expenditures associated with abatement prevention and compliance activities should be capitalized while expenditures associated with remediation of hazardous waste should be expensed. I find no evidence that firms are improperly capitalizing remediation expenditures. However consistent with claims by institutional investors that environmental expenditure data is difficult to interpret in the absence of detailed information about a firm's environmental regulatory burden I find that not all expenditures associated with abatement prevention and compliance activities are valued by the market as providing future benefits. In particular expenditures by firms with an above-average (but legal) level of toxic releases are viewed as a current period expense. I also find that a firm's decision to disclose but not the amount it discloses is associated with its financial performance its political costs and the sensitivity of its stakeholder base to the creation of pollution externalities.