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Abstract:
It is well-established that the realized returns of ?growth? stocks have been low relative to other stocks. We show that this phenomenon is explained by a large and asymmetric response to negative earnings surprises for growth stocks. After controlling for this effect, there is no longer evidence of a stock return differential between growth stocks and other stocks. Our evidence is more consistent with investors having naively optimistic expectations about the prospects of growth stocks (e.g., Lakonishok, Shleifer, and Vishny, 1994) than with the existence of unidentified risk factors that are lower for growth stocks (e.g., Fama and French, 1992).

Abstract:
We address the fact that accounting academics often have very different perceptions of earnings management than do practitioners and regulators. Practitioners and regulators often see earnings management as pervasive and problematic, and in the need of immediate action to remedy. Academics are more sanguine, unwilling to believe that earnings management is being actively practiced by most firms or that the earnings management that does exist should necessarily concern investors. We explore the reasons for these different perceptions, and argue that each of these groups may benefit from some rethinking of their views about earnings management.

Abstract:
This paper provides evidence on firms that report long "strings" of consecutive increases in earnings per share (EPS). First, we find 746 firms that report earnings strings of at least 20 quarters since 1962, and show that this frequency is much larger than would be expected by chance. We interpret this as prima facie evidence of earnings management. Next, we document that these firms enjoy abnormal returns that average over 20 percent per year during the first five years of these strings, and these returns are larger than those of firms reporting at least five years of consecutive increases in annual (but not quarterly) EPS. We argue that these market premia, and the rapidity with which they disappear once the strings end, provide managers with incentives to maintain and extend the strings. Finally, we present several tests that document how managers of these firms use various earnings management tools to help their firms sustain and extend these strings.

Earnings momentum, earnings management, accruals, management incentives

Abstract:
This paper provides evidence on firms that report long "strings" of consecutive increases in earnings per share (EPS). First, we find 746 firms that report earnings strings of at least 20 quarters since 1962, and show that this frequency is much larger than would be expected by chance. We interpret this as prima facie evidence of earnings management. Next, we document that these firms enjoy abnormal returns that average over 20 percent per year during the first five years of these strings, and these returns are larger than those of firms reporting at least five years of consecutive increases in annual (but not quarterly) EPS. We argue that these market premia, and the rapidity with which they disappear once the strings end, provide managers with incentives to maintain and extend the strings. Finally, we present several tests that document how managers of these firms use various earnings management tools to help their firms sustain and extend these strings.

earnings momentum, earnings management, accruals, management incentives

Abstract:
Although the number of dividend paying industrials declines by more than 50% over the last two decades (Fama and French (2001a)), aggregate real dividends paid by industrials increase over the same period. Dividends increase despite a precipitous decline in the number of payers because (i) the reduction in payers occurs almost entirely among firms that pay very small dividends, and (ii) increased real dividends from the top payers swamp the modest dividend reduction associated with the loss of many small payers. These secular changes reflect high and increasing concentration in the supply of dividends which, in turn, reflect high and increasing earnings concentration. For example, 26 firms with real earnings of $1 billion-plus account for 63.4% and 46.8% of aggregate industrial earnings and dividends in 2000. Our findings on dividend concentration cast doubt on the empirical validity of the dividend clientele and signaling hypotheses.

Dividends, earnings, concentration

Abstract:
This paper documents that (1) special dividends were once commonly paid by NYSE firms, but are now a rare phenomenon; (2) firms typically paid specials almost as predictably as they paid regulars; and (3) despite the dramatic decline in specials as a whole, the incidence of very large specials increased in recent years. Most plausibly, small specials disappeared because their predictability made them close substitutes for regular dividend signals, while large specials survived because their sheer size automatically differentiates them from regulars. Firms that stop paying specials substitute into more frequent regular increases but do not alter the pattern of total dividends (per the Lintner (1956) model). Firms that reduce specials tend to increase regulars, effectively making the two types of dividends closer substitutes (and this tendency is more pronounced in recent years). The stock market typically reacts favorably to the declaration of a special, but does not systematically differentiate between special increases and decreases to a still-positive level. The latter regularities give managers incentives to pay specials more frequently than they otherwise would which, in turn, makes specials more closely resemble regulars. Firms that continue to pay specials have lower institutional ownership, suggesting that the long-term trend to a more sophisticated stockholder clientele contributed to the demise of poorly differentiated dividend signals. Finally, special dividends were not displaced by stock repurchases, indicating that most specials failed to survive on their own accord and not because managers discovered the tax advantages of repurchases.

Abstract:
This paper examines how the relation between earnings and payout policy has evolved over the last three decades. Three principal groups of payers have emerged: firms that pay dividends and make regular repurchases, firms that make regular repurchases, and firms that make occasional repurchases. Firms that only pay dividends are largely extinct. Repurchases are increasingly used in place of dividends, even for firms that continue to pay dividends. While other factors help explain the timing of repurchases, the overall level of repurchases is fundamentally determined by earnings. The results suggest that repurchases are now the dominant form of payout.

dividends, stock repurchases, payout policy, earnings

Abstract:
There have been fundamental changes in corporate dividend policy over the last several decades (Fama and French, 2001; DeAngelo, DeAngelo, and Skinner, 2000). To shed new light on the disappearance of dividends, this paper examines how the relation between earnings and corporate payout policy changes over the last 50 years. Since 1980, two groups of payers emerge: firms that both pay dividends and make repurchases and firms that only make repurchases. For firms that both pay dividends and make repurchases, managers increasingly coordinate dividend and repurchase decisions in a way that maps total payouts into earnings. Because managers use repurchases to pay out earnings increases, this helps to explain why dividend policy becomes increasingly conservative. The large majority of these firms have paid dividends for decades. Earnings do a good job of explaining payouts for firms that only make repurchases as well, suggesting that newer firms without a dividends history use repurchases in place of dividends. Overall, the evidence suggests that corporate earnings now drive total firm payouts - dividends and repurchases - and that repurchases play an increasingly important role, which helps to explain the disappearance of dividends.

Payout Policy, Dividends, Stock Repurchases, Earnings

Abstract:
Over the past 30 years, there have been significant changes in the distribution of earnings—cross-sectional variation has increased, with increasing left skewness—as well as in corporate payout policy, with many fewer firms paying dividends and the emergence of stock repurchases. We investigate whether the informativeness of payout policy with respect to earnings quality changes over this period. We find that the reported earnings of dividend-paying firms are more persistent than those of other firms and that this relation is remarkably stable over time. We also find that dividend payers are less likely to report losses and those losses that they do report tend to be transitory losses driven by special items. These results do not hold as strongly for stock repurchases, consistent with them representing less of a commitment than dividends.

Dividends, Earnings Quality, Payout policy, Stock repurchases

Abstract:
We use Dealscan, a database of private corporate lending agreements, to provide large-sample tests of the debt covenant hypothesis. Dealscan offers several advantages over the data available in previous debt covenant studies, principally through much larger sample sizes, more representative samples, and the availability of extensive actual covenant detail. These data advantages allow us to construct powerful tests, in which we find clear support for the debt covenant hypothesis. Apart from direct tests of the debt covenant hypothesis, we exploit these data to provide broad evidence on the economic role of debt covenants. Specifically, we find that private lenders use debt covenants as "trip wires" for borrowers, that private debt covenants are set tightly, and that technical violations occur relatively often, in about 30% of all loans. We also find that violations are not necessarily associated with financial distress, consistent with the idea that the consequences of violation vary considerably depending on the borrowers' economic circumstances, and that violations are often waived for healthy firms. Finally, since we measure covenant slack directly, we report evidence that the extensively-used leverage variable is a relatively poor proxy for closeness to covenants.

Debt covenants; Violations; Dealscan

Abstract:
We investigate managers' decisions to supplement their firms' management earnings forecasts. We classify these supplementary disclosures as either qualitative "soft talk" disclosures or verifiable forward-looking statements. We find that managers provide "soft talk" disclosures with similar frequency for good and bad news forecasts, but are more likely to supplement good news forecasts with verifiable forward-looking statements. We examine the market response to these forecasts and find that bad news earnings forecasts are always informative but that good news forecasts are informative only when supplemented by verifiable forward-looking statements, suggesting that these statements bolster the credibility of good news forecasts.

disclosure, earnings forecasts, forward-looking statements

Abstract:
We investigate managers' decisions to supplement their firms' management earnings forecasts. We classify these supplementary disclosures as either qualitative "soft talk" disclosures or verifiable forward-looking statements. We find that managers provide "soft talk" disclosures with similar frequency for good and bad news forecasts, but are more likely to supplement good news forecasts with verifiable forward-looking statements. We examine the market response to these forecasts and find that bad news earnings forecasts are always informative but that good news forecasts are informative only when supplemented by verifiable forward-looking statements, suggesting that these statements bolster the credibility of good news forecasts.

Abstract:
We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961). We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in Jensen (1986)) and security valuation problems (as in Myers and Majluf (1984)) does a good job of explaining the main features of observed payout policies - i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors' behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact.

1 Introduction
2 Basic Theory: The Need to Distribute Free Cash Flow is Foundational
3 Security Valuation Problems, Agency Costs, and Optimal Payout Policy
4 Corporate Payouts: Scale, Concentration, and Earnings Linkage
5 Payouts and Earnings: A Closer Look
6 Are Dividends Disappearing'
7 Why Do Dividends Survive'
8 Signaling and the Information Content of Dividends
9 Behavioral Influences on Payout Policy
10 Clientele Effects: Transaction Costs, Institutional Ownership, and Payout Policy
11 Controlling Stockholders and Payout Policy
12 Taxes and Payout Policy
13 The Advantages of Stock Repurchases
14 Conclusion: What We Know About Payout Policy and Promising Avenues for Future Research

payout policy, dividends, stock repurchase

Abstract:
Based on extant literature, we articulate a positive theory of GAAP under the assumption that the objective is to facilitate the efficient allocation of capital within an economy. The theory predicts that GAAP’s principal focus, as shaped by the demand for and supply of financial information, is on the use of the income statement and balance sheet for performance measurement and control (stewardship). This is consistent with efficient contracting considerations guiding financial reporting. Financial reports produced under this model also generate information useful for equity valuation but this is not the primary objective. Thus, artificially imposing equity valuation as the primary objective of financial reporting standards will result in GAAP rules that are unlikely to serve stakeholders’ needs. The theory allows us to compare and contrast extant GAAP, as observed in a regulated setting, with GAAP that might arise endogenously as a result of market forces. Building on previous research, we argue that verifiability and conservatism, while detracting from accounting’s role in equity valuation, are critical features of GAAP under efficient contracting. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

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:
Although a great deal of research documents the information content of management earnings forecasts at the firm level, there is little research on the informativeness of aggregate earnings guidance. We argue that aggregate earnings guidance is potentially informative at the market/economy level through its effects on expectations about market-level expected future cash flows and expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We also find some evidence that guidance - again, largely downward guidance - is associated with market returns.

Earnings guidance, management earnings forecasts

Abstract:
We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.

earnings guidance, management forecasts, aggregate earnings, macroeconomic news

Abstract:
We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.

Abstract:
I review and critically evaluate the arguments in favor of reforming current accounting and disclosure practices related to intangibles. I argue that the case for reform is actually rather weak. Proponents of reform provide little cogent evidence in support of claims that current practice is having adverse capital market effects. In fact, theory and evidence from corporate finance suggest that capital markets perform well in financing investments in innovative, high-technology activities. I discuss why mandating additional disclosure in this area is unlikely to be successful and that proposals to recognize intangibles are also flawed. In my view, private incentives are likely to be the most successful way of encouraging disclosure on intangibles, which means that little needs to be done on the part of accounting standard-setters.

Intangibles, Policy Recommendations, Disclosure

Abstract:
We study management forecasts in Japan, where forecasts are effectively mandated but managers have considerable latitude over the numbers they release. We find that managers’ initial earnings forecasts for a fiscal year are systematically upward-biased but that they revise their forecasts downward during the fiscal year so that most earnings surprises are non-negative. Managers’ initial forecast optimism is inversely related to firm performance, and is more pronounced for firms with higher levels of insider ownership, for smaller firms, and for firms with a history of forecast optimism. The fact that managers’ forecasts tend to be consistently optimistic suggests that reputation effects are insufficient to ensure managerial forecast accuracy. We also find that the information content of managers’ forecasts is related to proxies for whether market participants view the forecasts as credible.

Management Forecasts, Disclosure, Litigation, Japan

Abstract:
This paper provides evidence on the relation between the timeliness of voluntary earnings disclosures and the outcomes of related stockholder litigation. Like Francis Philbrick and Schipper (1994a) I find that many lawsuits result from voluntary disclosures of adverse earnings news. However I also document that: (1) many voluntary earnings disclosures are not made on a timely basis; (2) less timely voluntary disclosures result in more costly lawsuit outcomes; (3) a simple model that predicts that lawsuits occur if large firms release adverse earnings news on earnings announcement dates works well in predicting stockholder litigation. Overall it seems lawsuit outcomes depend at least to some degree on the "merits" of stockholders' claims so that managers can benefit by making more timely earnings disclosures.

Abstract:
We study the effect of disclosure on uncertainty by examining how management earnings forecasts affect stock market volatility. Using implied volatilities from exchange-traded options prices, we find that management earnings forecasts, on average, increase short-term volatility. This effect is attributable to forecasts that convey bad news, especially when firms release forecasts sporadically (as opposed to on a routine basis). In the longer run, market uncertainty declines after earnings are announced regardless of whether there is a preceding earnings forecast. This decline is mitigated when the firm issues a forecast that conveys negative news.

Abstract:
This paper describes the role that accounting for deferred taxes has played in the ongoing financial crisis among the major Japanese banks, as dramatized most vividly by the recent collapse of Resona Bank. I argue that deferred tax accounting: (1) has been used by the Japanese Government, including bank regulators, to help give the major banks collectively the appearance of financial well-being in spite of their economic difficulties, and (2) that managers of these banks have used deferred tax accounting to bolster their banks' regulatory capital levels when their economic circumstances deteriorate. I present evidence that is generally consistent with these arguments, supporting economists' views that accounting has played a role in helping the Japanese Government to postpone the politically difficult task of reforming the major banks.

Japanese banks, Earnings management, Deferred taxes, Regulatory Capital, BIS Rules

Abstract:
Ramanna (2007) provides interesting and novel evidence on how firms use contributions from their political action committees (PACs) to members of Congress as a means of lobbying for preferred positions on the two exposure drafts that led to SFAS-141 and SFAS-142. My discussion raises some concerns about his main conclusion: that pooling firms lobbied the FASB to obtain a fair value based impairment rule to facilitate their ability to manipulate financial statements. I offer a more benign explanation and make some other observations about how this line of research could proceed in the future.

Lobbying, Fair value, Accounting Standards

Abstract:
We investigate whether corporate managers' stock repurchase decisions are affected by their incentives to manage diluted earning-per-share (EPS). We find that managers increase the level of their firms' stock repurchases when: (1) the dilutive effect of outstanding employee stock options (ESOs) on diluted EPS increases, and (2) earnings are below the level required to achieve the desired rate of EPS growth. We also find that managers' repurchase decisions are not associated with actual ESO exercises, suggesting that they are driven by incentives to manage diluted but not basic EPS, and strengthening our earnings management interpretation.

earnings dilution, earnings management, earnings-per-share (EPS), employee stock options, stock buybacks, stock repurchases

Abstract:
Aggregate real dividends paid by industrial firms increased over the past two decades even though, as Fama and French (2001, JFE) document, the number of dividend payers decreased by over 50%. The reason is that (i) the reduction in payers occurs almost entirely among firms that paid very small dividends, and (ii) increased real dividends from the top payers swamp the modest dividend reduction from the loss of many small payers. These trends reflect high and increasing concentration in the supply of dividends which, in turn, reflects high and increasing earnings concentration. For example, the 25 firms that paid the largest dividends in 2000 account for a majority of the aggregate dividends and earnings of industrial firms. Industrial firms exhibit a two-tier structure in which a small number of firms with very high earnings collectively generates the majority of earnings and dominates the dividend supply, while the vast majority of firms has at best a modest collective impact on aggregate earnings and dividends.

Abstract:
Bushee, Matsumoto, and Miller (2002) is a timely study in an area Ð corporate disclosure policy Ð that is increasingly important to regulators, corporate managers, and academics. The authors report several results that will be of interest to these groups. I describe the corporate disclosure issues that make the authors' research questions of broader relevance than their specific topic might suggest. I then provide comments on theoretical and empirical aspects of the study. Overall, the study is likely to be useful in helping us understand some of the forces at work as corporate disclosure becomes more rapid, more comprehensive, and more open.

conference calls, disclosure, selective disclosure

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:
Managers of more than two-thirds of 145 NYSE firms responded to stalled earnings growth by increasing dividends, with most increases at least as large as the dividend increase in the peak earnings year. These dividend increases are difficult to reconcile with signalling models since (i) most firms' prior sustained earnings growth evaporated, and (ii) there is essentially no relation between favorable dividend signals and future earnings. The stock market recognized the reduced growth earnings, with average abnormal returns of - 17.65 percent in the year of the initial earnings decline and -41.40 percent cumulated over that and the next three years. We find some evidence that sample firms' dividend policies reflect behavioral biases that lead managers to send overly optimistic signals.

Abstract:
This paper explores the determinants of the valuation allowance for deferred tax assets under SFAS No. 109. We find that, consistent with SFAS No. 109, the allowance is larger for firms with relatively more deferred tax assets and smaller for firms with higher levels of expected future taxable income. The most important explanatory variable for the valuation allowance is the level of firms' tax credit and tax loss carryforwards, consistent with these items being more difficult to realize. We find little evidence that managers use the valuation allowance for earnings management purposes, although these tests may not be very powerful.

Abstract:
A long-standing issue in the accounting literature is whether corporate managers exercise their accounting discretion to influence reported earnings. This paper extends this research by investigating whether managers manipulate the 'valuation allowance' for deferred tax assets. This account has several features that recommend it as a good place to look for earnings management. First, since this account is fairly 'new' (1992), there are no well-established formulae, or even any clear guidelines, for deciding on the appropriate level for this allowance. Second, the appropriate level of the allowance depends on managers' expectations about future earnings. For both of these reasons managers must exercise an unusual amount of discretion in choosing the appropriate level for this account. Finally, for many firms this provision is large enough to effect material adjustments to accounting earnings. We find that there is a good deal of variation across firms in the level of the valuation allowance. Part of this variation is explained by factors that appropriately reflect managers' expectations about whether their firms' deferred tax assets will be realized. In addition, after controlling for these factors, we find support for two earnings-management hypotheses: both the debt/equity hypothesis and income-smoothing have empirical support.