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Abstract:
This paper provides evidence that insiders possess, and trade upon, knowledge of specific and economically-significant forthcoming accounting disclosures as long as two years prior to the disclosure. Stock sales by insiders increase three to nine quarters prior to a break in a string of consecutive increases in quarterly earnings. Insider stock sales are greater for growth firms, before a longer period of declining earnings, and when the earnings decline at the break is greater. Consistent with avoiding an established legal jeopardy, there is little abnormal selling in the two quarters immediately prior to the break.

Insider trading, Securities regulation

Abstract:
This paper provides evidence that insiders possess, and trade upon, knowledge of specific and economically-significant forthcoming accounting disclosures as long as two years prior to the disclosure. Stock sales by insiders increase three to nine quarters prior to a break in a string of consecutive increases in quarterly earnings. Insider stock sales are greater for growth firms, before a longer period of declining earnings, and when the earnings decline at the break is greater. Consistent with avoiding an established legal jeopardy, there is little abnormal selling in the two quarters immediately prior to the break.

Insider trading, Securities regulation

Abstract:
There is a documented empirical regularity that publicly-held firms report fewer small losses and fewer small declines in earnings than expected. This paper betters our understanding of this observed phenomenon by testing for this regularity on a sample of public and private banks during 1987-1998. We argue that the incentives to manage the earnings stream to achieve simple benchmarks such as positive earnings and increases in earnings should be higher for publicly-held banks. Consistent with our predictions we find that private banks with earnings near zero are significantly more likely to report losses than public banks with earnings near zero even after controlling for bank size, cash flows, and differences in the types of loans written. Similarly, private banks with changes in earnings that are near zero are significantly more likely than public banks to report a decline in earnings than an increase. In addition, we also find that the length of the string of consecutive earnings increases, even after controlling for the length of the string of consecutive increases in cash flows, is greater for public banks. These three tests all suggest that public banks face a greater incentive than private banks to achieve simple earnings benchmarks.

Abstract:
We investigate the relation between CEO compensation and accounting performance measures in a sample of publicly- and privately-held property-liability insurance companies. We find a significant positive association between return on assets and the level of compensation for publicly-held insurers. Consistent with optimal contracting theory, we find no such relationship for privately-held insurers. We also find that the change in compensation is significantly more sensitive to the change in return on assets for publicly-held insurers than privately-held insurers. Results suggest that within privately-held firms, CEO compensation is less based on objective measures like accounting information and more on subjective measures.

Abstract:
We investigate if the SEC's mandated disclosure of fees for audit and nonaudit services affected the market's perception of auditor independence and earnings quality. Following the initial fee disclosures, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) is significantly lower for firms with high levels of nonaudit fees than for firms with low levels of nonaudit fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information and was viewed by the market as lowering the perception of auditor independence and earnings quality.

nonaudit fees, auditor independence, earnings quality, earnings response coefficients

Abstract:
We investigate if the SEC's mandated disclosure of fees for audit and nonaudit services affected the market's perception of auditor independence and earnings quality. Following the initial fee disclosures, we find that the market valuation of quarterly earnings surprises (earnings response coefficient) is significantly lower for firms with high levels of nonaudit fees than for firms with low levels of nonaudit fees. In contrast, in the year prior to the new fee disclosures, there was no reduction in earnings response coefficients for firms that subsequently reported high nonaudit fees. Our evidence suggests that mandated fee disclosures provided new information and was viewed by the market as lowering the perception of auditor independence and earnings quality.

Abstract:
We investigate the relationship between insider trading and candidate measures for the degree of information asymmetry between insiders and other market participants. The coefficient estimates on certain of the candidate measures assume a sign that is inconsistent with the predicted relationship between the measure and the degree of information asymmetry. For those measures, either the measures are poor proxies for asymmetry or models of informed trade are not descriptive. Overall, the median absolute abnormal return over past earnings announcements (MAG_AR) and whether the firm reports R\&D expenditures perform consistently with predictions for measures of information asymmetry in a price-taking theory of informed trade. Insider profits are significantly higher when MAG_AR is greater.

Accounting, Disclosure, Informed trade, Returns, Securities regulation

Abstract:
We provide evidence that transient institutional investors (i.e., those actively trading to maximize short term profits) trade to exploit the post-earnings announcement drift (PEAD). We estimate that transient institutions' arbitrage generates an abnormal return of 5.1 percent (or 22 percent annualized) after transaction costs. In addition, their arbitrage trades accelerate the speed that stock prices reflect the implications of current earnings for future earnings. However, transient institutions trade less aggressively to exploit PEAD in firms with high transaction costs. Our results contribute to understanding the role of transient institutional investors in explaining the persistence of PEAD.

Abstract:
Institutional investors are often assumed better informed but settings in which they are better informed or the sources of their advantage are not identified. We examine a setting that demonstrates institutional investors' information advantage and their source. We show that transient institutions (i.e., those trading actively to maximize short-term profits) predict breaks in strings of consecutive quarterly earnings increases at least one quarter prior to the break quarter. We also provide evidence that one source of their advantage is private communications with management. We find no evidence that other types of institutional investors predict breaks.

Abstract:
Previous studies document that publicly traded firms report more small increases in earnings than small decreases in earnings and long strings of consecutive earnings increases. Although the two earnings properties have been partially attributed to earnings management, there is little consensus on why CEOs of publicly traded firms have incentives to do so. Using a sample of publicly traded firms from the EXECOMP database during 1992-98, the objective of this study is to analyze the determinants of the two properties of accounting earnings. Specifically, this study considers both direct CEO compensation incentives (i.e., bonus and equity incentives) and other earnings management incentives, including book-to-market ratio (a proxy for value vs. growth stock), financial leverage, and analyst following. Probit regression results indicate that the probability of reporting a small increase in earnings is increasing in CEO equity-based compensation incentives and decreasing in a firm's book-to-market ratio. Regression results from the event history analysis determine that the duration of consecutive earnings increases is increasing in both CEO bonus incentive and equity incentives but decreasing in a firm's book-to-market ratio. In addition, the event history analysis suggests that, as the duration of consecutive earnings increases becomes longer, firms with low book-to-market ratios (growth stocks) have a stronger incentive to report continuous increases in earnings than firms with high book-to-market ratios (value stocks). Interestingly, firms with high analyst following and high leverage are less likely to report either small increases in earnings or long duration of consecutive earnings increases. The above conclusions were obtained after controlling for changes in operating cash flows, changes in nondiscretionary accruals, and other control variables. The results in the paper contribute to our understanding of the determinants of accounting earnings for publicly traded firms.

Abstract:
Evidence contrasting U.S. insider trades in high- and low-jeopardy periods and across firms at high and low risk for 10b-5 litigation indicates that insiders condition their trades on foreknowledge of price-relevant public disclosures, but avoid profitable trades when the jeopardy associated with such trades is high, such as immediately before earnings announcements. Insiders avoid profitable trades before quarterly earnings are announced and sell (buy) after good (bad) news earnings announcements. Insiders trade most heavily after earnings announcements and profit from foreknowledge of price-relevant information in the forthcoming Form 10-K or 10-Q filing.

accounting standards, government regulation, insider trading, litigation risk, stock-based compensation

Abstract:
Evidence contrasting U.S. insider trades in high- and low-jeopardy periods and across firms at high and low risk for 10b-5 litigation indicates that insiders condition their trades on foreknowledge of price-relevant public disclosures, but avoid profitable trades when the jeopardy associated with such trades is high, such as immediately before earnings announcements. Insiders avoid profitable trades before quarterly earnings are announced and sell (buy) after good (bad) news earnings announcements. Insiders trade most heavily after earnings announcements and profit from foreknowledge of price-relevant information in the forthcoming Form 10-K or 10-Q filing.

accounting standards, government regulation, insider trading, litigation risk, stock-based compensation

Abstract:
This study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to Regulation Fair Disclosure. Analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers. The effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard-to-predict earnings. The above results hold regardless of whether a brokerage firm has investment banking business or not. These results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management's private information.

Abstract:
We examine the usefulness of SOX-mandated internal control deficiency (ICD) disclosure under Section 302 in assessing earnings quality for cross-listed firms relative to U.S. firms. Consistent with prior research, we find that U.S. firms' Section 302 ICD disclosure conveys useful information about earnings quality. However, cross-listed firms' Section 302 ICD disclosure is on average unrelated to earnings quality and significantly less informative about earnings quality than U.S. firms'. We provide evidence that the reduced usefulness of cross-listed firms' ICD disclosure is due to management's weaker incentive to detect and report existing ICDs. Specifically, the weaker association between the ICD disclosure and earnings quality for cross-listed firms relative to U.S. firms is primarily driven by cross-listed firms domiciled in weak investor protection countries. In addition, cross-listed firms' propensity to disclose ICDs declines with the degree of management's private control benefits and this effect is stronger for firms domiciled in weak investor protection countries.

Cross listing, Internal control, Sarbanes-Oxley, Disclosure

Abstract:
We examine whether listing state-controlled Chinese firms in Hong Kong in the form of H share or Red Chip share helps improve the managerial pay-for-performance sensitivity. We find no evidence that the pay-for-performance sensitivity is stronger in H shares than in A shares, but the cash pay-for-performance sensitivity and the level of long term incentives are higher in Red Chip shares than in A shares. However, the sensitivity of CEO turnover to firm performance is insignificant for all three types of firms. Our study demonstrates the complexity in the relation between the Chinese Government as a controlling shareholder and the listed firms.

cross listing, executive compensation, government ownership, Hong Kong, China

Abstract:
We investigate the relationship of candidate information asymmetry measures to aspects of insiders' trades. For two of the measures, the median absolute abnormal return over past earnings announcements (MAG_AR) and whether the firm reports R&D expenditures, associations are consistent with the predictions of a price-taking theory of informed trade. Also, insiders' profits are significantly higher when MAG_AR is greater. For the other measures we consider, associations are inconsistent with the predicted relationships, suggesting that either those measures are poor proxies for information asymmetry or models of informed trade are not descriptive.

Accounting, Disclosure, Securities, Regulation

Abstract:
This study provides empirical evidence that equity-based incentives (stock and stock options) encourage CEOs to manage earnings to increase short run stock prices so that they can cash out a portion of their equity holdings at inflated prices. CEOs who hold high equity-based incentives are more likely to manage earnings to report strings of consecutive earnings increases and sell stocks in approximately two to six quarters prior to a break in a string of consecutive earnings increases. These effects are stronger for firms whose stock prices are very sensitive to earnings. Consistent with avoiding the perception of illegal insider trading, CEOs with high equity-based incentives do not sell shares in the quarter immediately prior to the break.

Abstract:
We assess the impact of Reg FD on the trading behavior of transient institutional investors in the quarter prior to a bad news break in a string of consecutive earnings increases. Bad news breaks are defined as breaks that are by growth firms, preceded by longer strings of consecutive earnings increases, followed by longer strings of consecutive earnings decreases, and associated with larger declines in earnings. Pre Reg FD transient institutions have abnormal selling of stocks in the quarter immediately preceding a bad news break. This abnormal selling is confined to firms that held conference calls in the pre Reg FD period. However, in the post Reg FD period transient institutions do not exhibit similar abnormal selling of stocks in the quarter before a bad news break. Furthermore, after Reg FD transient institutions allocate less of their stock portfolios to conference call firms relative to non-conference call firms in the quarters prior to a bad news break. These results demonstrate that Reg FD has had an impact on management's selective disclosure behavior and significantly changed the trading behavior of transient institutions.

Regulation FD, earnings strings, transient institutional investors

Abstract:
This study uses Reg FD to determine the relative importance of analysts' private information from firm management versus independent research. Using earnings-related closed conference calls as a proxy for the private communication between management and analysts and the informativeness of stock recommendation revisions as a proxy for analysts' total private information, we find the informativeness of analysts' recommendation downgrades but not upgrades issued following the earnings announcement declines significantly from the pre-Reg FD period to the post-Reg FD period for closed conference call firms relative to non-conference call firms. We do not find a similar decline in the recommendation informativeness for open conference call firms relative to non-conference call firms. In addition, the bad news from closed conference calls reflected in downgrades represents only one third of analysts' total private information reflected in downgrades. Our empirical results do not suggest that analysts merely serve as a conduit for management's private information.

Abstract:
The existing literature of equity-based compensation is largely limited to the U.S. We contribute to this literature by providing a comprehensive analysis of equity-based compensation in mainland Chinese controlled firms that are incorporated outside China and trade on the Hong Kong Stock Exchange (referred to as Red Chip firms) over 1990-2005. Stock option is the dominant form of equity-based compensation and is widely used among Red Chip firms. However, Red Chip firms differ from U.S. firms on many dimensions with regard to the grant and exercise of stock options. In addition, there is no evidence that Red Chip firms' managerial equity ownership increases over time.

Stock option compensation, Hong Kong, China, Red Chip firms

Abstract:
We study the effect of informed trading by U.S. executives on shareholder value. We develop a proxy of insider trading that is driven by management’s private information. We find that our proxy is negatively associated with future earnings performance and contemporaneous stock prices. Our proxy is also positively associated with a common indicator of managerial opportunism, earnings misstatements that result in subsequent restatements. Moreover, the level of our informed trading proxy declines significantly after announcements of earnings restatements, which are usually accompanied with significant corporate governance improvement. Overall, our results suggest that the types of informed trading we identify represent managerial opportunism that reduces shareholder value.

informed trading, Managerial Opportunism, shareholder value

Abstract:
While a large literature has examined analysts’ earnings forecasts or stock recommendations in isolation, there is little research on the effectiveness with which analysts translate their earnings forecasts into recommendations (referred to as translational effectiveness). This study provides a comprehensive analysis of the determinants of analysts’ translational effectiveness, including the investment banking pressure considered in prior research and four new factors (i.e., insider trading, trading commissions, institutional ownership and investor sentiment). Consistent with prior research, the influence of investment banking on translational effectiveness is reduced in the period subsequent to the 2002/2003 regulatory changes. However, the effect of insider trading, institutional ownership and investor sentiment on translational effectiveness remains as significant or becomes even stronger. In addition, the combined influence of these four new factors on translational effectiveness is as equally important as the influence of the investment banking pressure.

analysts, recommendation, earnings forecast

Abstract:
We test whether money managers (i.e., mutual funds and independent investment advisors) prefer investing in stocks that report long strings of consecutive earnings increases. We find that money managers purchase more shares in firms with a long string of consecutive earnings increases relative to firms with a short string of consecutive earnings increases, after controlling for common determinants of their trading decisions. In addition, we find that money managers do not decrease their holdings in firms with a long string of consecutive earnings increases until the quarter immediately preceding the announcement of the break. Importantly, most of the selling in the quarter prior to the break appears to be driven by management's preemptive voluntary disclosures of the break. The money managers' trading strategy does not appear to be rational because the length of a string of consecutive earnings increases is not associated with future positive abnormal returns and money managers trade in the opposite directions of corporate insiders over the earnings string. The observed money managers' trading strategy appears to be consistent with the trading behavior predicted by the representativeness heuristic documented in the psychology literature.

Abstract:
We use quarterly institutional ownership changes to test the effect of investment horizon on institutional investors' incentives to acquire private information on long term earnings. Short horizon institutions' ownership changes contain private information on long term earnings, but only to the extent that such private information will be reflected in near term stock prices. There is little evidence that long horizon institutions' ownership changes contain private information on long term earnings that will be revealed in near term stock prices, but long horizon institutions' ownership changes contain private information on long term earnings that will be reflected in longer term stock prices.

Abstract:
This paper assesses whether insurers' state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly-available, annual accounting reports for 1993, 1994, and 1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affet self-insurance.

Abstract:
We examine why many cross-listed firms voluntarily adopt Regulation Fair Disclosure (REG FD) from which they are explicitly exempt. We hypothesize and find that cross-listed firms’ voluntary REG FD adoption is due to externalities resulting from U.S. firms’ forced adoption of REG FD. First, following REG FD cross-listed firms that continue to use a selective disclosure policy become less attractive than U.S. firms to U.S. investors (especially retail investors) who were previously at a disadvantage in information access to corporate management. Second, U.S. firms’ forced adoption of REG FD creates an information spillover on cross-listed firms whose receipt of information is positively correlated with that of U.S. firms. These two effects induce many cross-listed firms to voluntarily follow REG FD. Relative to non-adopters, REG FD adopters enjoy a significant reduction in the information asymmetry component of cost of capital, suggesting that the voluntary adoption is a credible commitment to increased disclosure transparency.

Regulation Fair Disclosure, cross listing, voluntary disclosure

Abstract:
Using a sample of privately held C corporations and S corporations from the motor carrier industry during 1984-92, we assess the effect of the 1986 Tax Reform Act on the amount of corporate income shareholders of privately held C corporations shifted to their personal tax bases. We estimate that the C corporations shifted a mean of $130,587 taxable income each year to shareholders (representing 29 percent of their mean accounting earnings before income shifting) after the 1986 tax law change. The C corporations used deductible managerial compensation and rent expense, but not interest expense, to shift income to shareholders.

Abstract:
Using a sample of privately held C corporations and S corporations from the motor carrier industry during 1984-92, we assess the effect of the 1986 Tax Reform Act on the amount of corporate income shareholders of privately held C corporations shifted to their personal tax bases. We estimate that the C corporations shifted a mean of $130,587 taxable income each year to shareholders (representing 29 percent of their mean accounting earnings before income shifting) after the 1986 tax law change. The C corporations used deductible managerial compensation and rent expense, but not interest expense, to shift income to shareholders.

Abstract:
We use Regulation Fair Disclosure (REG FD) to study the causes and consequences of cross-listed firms' voluntary adoption of U.S. securities laws from which foreign firms are explicitly exempt. Using a survey methodology we find that 40 percent of the responding firms voluntarily followed REG FD. We show that cross-listed firms' voluntary adoption of REG FD is an externality resulting from a regulatory change that mandates U.S. firms' adoption of REG FD. However, cross-listed firms that benefit less from open disclosure are less likely to voluntarily follow REG FD, i.e., those firms that have a lower investment opportunity set, a lower demand for external financing, and greater managerial agency problems. Relative to non-adopters, REG FD adopters enjoy a significant reduction in the information asymmetry component of the cost of capital, suggesting that the voluntary adoption is a credible commitment to increased disclosure transparency.

Regulation Fair Disclosure, cross listing, voluntary disclosure

Abstract:
This paper assesses whether insurers' state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly-available, annual accounting reports for 1993, 1994, and 1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. The primary empirical estimates imply that a 1 percent increase in the state premium tax rate reduces non-automobile insured losses by 0.18 percent to 0.28 percent. These elasticities suggest that for the mean state, a standard deviation increase in the state tax rate (0.5 percent) would lower insured losses by approximately $140 million or 7.5 percent of current coverage. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affect self-insurance.

Abstract:
We use a proprietary database of institutional investors’ daily stock transactions to examine transient institutions’ trading behavior in response to announcements of small negative earnings surprises (defined as quarterly earnings that fall short of analysts’ consensus forecasts by one cent). Transient institutions’ average selling in response to small negative earnings surprises is significant and is greater than transient institutions’ average selling in response to large negative earnings surprises less than - 1 cent. Transient institutions’ selling in response to small negative earnings surprises is positively associated with the contemporaneous abnormal stock returns. However, transient institutions’ selling in response to small negative earnings surprises is positively associated with the abnormal returns in the three months subsequent to the earnings announcement window, suggesting that transient institutions’ trading response is informative. Our results do not support the common managerial allegation that transient institutions overreact to announcements of small negative earnings surprises.

institutional investors, small negative earnings surprises

Abstract:
Using a recently available database of institutional investors’ transaction by transaction trading records, we examine whether three types of institutional investors (denoted transient, dedicated, and quasi-indexing) overreact to the announcement of small negative earnings surprises, defined as quarterly earnings that fall short of analysts’ consensus forecasts by one cent. We find that transient (but not dedicated or quasi-indexing) institutions sell a significant amount of stocks on the day immediately following the announcement of small negative earnings surprises. Transient institutions’ trades on event day zero have a larger impact on contemporaneous stock prices than those of dedicated and quasi-indexing institutions. However, transient institutions’ trades (but not those of dedicated or quasi-indexing institutions) on event day zero correctly predict future abnormal stock returns. Our results are inconsistent with the common managerial allegation that institutional investors would dump company shares indiscriminatingly whenever there is a small shortfall of reported earnings versus analysts’ consensus forecasts.

Abstract:
This study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to Regulation Fair Disclosure. Analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers. The effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard-to-predict earnings. The above results hold regardless of whether a brokerage firm has investment banking business or not. These results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management's private information.

Abstract:
This study compares samples of publicly and privately held bank holding companies to examine whether the high frequency of small earnings increases relative to small earnings decreases reported by public firms is attributable to earnings management. We expect public banks' shareholders to be more likely than private banks' shareholders to rely on simple earnings-based heuristics in evaluating firm performance, so we expect public banks to have more incentives to report steadily increasing earnings. Consistent with this expectation, we find that relative to private banks, public banks: (1) report fewer small earnings declines, (2) are more likely to use the loan loss provision and security gain realizations to eliminate small earnings decreases, and (3) report longer strings of consecutive earnings increases. These results suggest that the asymmetric pattern of more small earnings increases than decreases, first documented by Burgstahler and Dichev (1997), is attributable to earnings management and is not simply a reflection of the underlying distribution of earnings changes.

Abstract:
In this paper we investigate the relation between CEO compensation and accounting performance measures in a sample of publicly- and privately-held property-liability insurance companies. We find a significant positive association between return on assets and the level of compensation for publicly-held insurers. Consistent with optimal contracting theory, we find no such relationship for privately-held insurers. We also find that the change in compensation is significantly more sensitive to the change in return on assets for publicly-held insurers than privately-held insurers. Results suggest that within privately-held firms, CEO compensation is less based on objective measures like accounting information and more on subjective measures.