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Abstract:
In this paper we investigate whether the accrual anomaly exists for profit and for loss firms. The study was motivated by the findings of Hayn (1995) that, because of a liquidation option, losses would be less informative about a firm's future prospects. Joos and Plesko (2005) build on Hayn's results and by examining the components of earnings for categories of loss firms, they provide evidence suggesting that for transitory loss firms, investors identify negative accruals as being transitory and therefore not value-relevant. We provide evidence that the persistence of accruals is significantly greater for profit firms than for loss firms and that the accruals mispricing anomaly documented in Sloan (1996) is restricted mostly to profit making firms. We also report results that indicate that the differential pricing of accruals across profit and loss firms is driven by loss firms with negative accruals. We further disaggregate loss firms with negative accruals and find that the differential mispricing of accruals across profit and loss firms is attributable to the pricing of accruals for sub-samples of transitory and persistent loss firms (based on our definitions of these sub-samples). The accruals for profit firms are overpriced, while accruals for transitory loss firms are not mispriced and accruals for persistent loss firms are underpriced. Hence, the pricing of accruals for transitory loss firms is also different than the pricing of accruals for persistent loss firms and the pricing of accruals for both these sub-samples is different than the pricing of accruals for profit firms.

Accruals, mispricing

Abstract:
Recent research results indicate a market premium for firms that met or beat analysts' forecasts. We find evidence consistent with these results. More important, however, we find a market premium for firms that met or beat time-series forecasts, and also the highest market premium for firms that met or beat both analysts' and time-series forecasts, relative to firms that met or beat one or neither forecast. In fact, there is no premium for firms that met or beat only analysts' or only time-series forecasts. Investors seem to consider both analysts' and time-series forecasts jointly, with the act of meeting or beating both forecasts providing the most credible signal of superior future financial performance. This 'credibility' premium to firms that met or beat time-series forecasts (as proxied for by the Foster model, 1977) is in addition to the premium for meeting or beating analysts' forecasts. The premium is supported by assessments of future financial performance over the two subsequent years and by tests of the predictability of earnings for the following quarter. Finally, we find that abnormal trading was greatest when both forecasts were met or beaten, compared to when only one or the other or neither forecast was met or beaten. This is further evidence that investors view the meeting or beating of both forecasts as the strongest signal of enhanced credibility in reported earnings.

analysts' forecasts, time-series expectations

Abstract:
The cross-sectional approach that is typically used to estimate accrual models implicitly assumes that firms within the same industry have a homogeneous accrual generating process. In this paper, we examine this implicit assumption along three dimensions. First, we argue that the relation between working capital accruals and changes in sales is more complex than portrayed by existing empirical accrual models. In addition to sales changes, accruals are also affected by accrual determinants such as firms' inventory and credit policies. Second, we provide evidence that the assumption of a uniform accrual-generating process is violated in industries whose firms' accrual determinants are highly dispersed. Third, we document some implications of violating the assumption of a uniform accrual-generating process. Firms in industries with high variations in accrual determinants are likely to have large absolute abnormal accruals. We show that the previously-documented increase in the absolute level of abnormal accruals over time could be attributed, in part, to the increased heterogeneity in industries with respect to their accrual-generating processes.

accrual models, earning management

Abstract:
This paper provides results of an experiment designed to investigate how mandatory rotation or retention of auditors may affect auditor reporting. Repeat audit engagements are believed to be a source of economic rents to auditors, and as such they are believed to pose a threat to auditor independence. Our study examines under controlled experimental conditions whether mandatory rotation would materially increase auditors' independence compared to similar settings in which the requirement is not imposed on auditor-client relationships. Our experimental design includes four settings. The first setting has neither mandatory retention nor mandatory rotation and is a benchmark for comparing the other three. The second setting has mandatory retention, without a rotation requirement. The third has mandatory rotation but not retention, and the fourth has both retention and rotation.

We find that in the setting without mandatory retention or rotation, managers made investments at levels higher than predicted by our model, and auditors issued a high frequency of reports that favored management. In the retention setting, auditors reported more conservatively than in the baseline setting. Once the retention period ended, however, auditors and managers converged to the same type of cooperative behavior observed in the base setting. In the setting with a rotation requirement, auditors reported more conservatively than they did in the previous two settings. The lower frequency of favorable reports was also observed in the non-rotation periods of the rotation setting. This outcome was not predicted by our model, and it suggests a spillover effect of the rotation requirement to non rotation periods. Our fourth setting included both retention and rotation requirements. We found that this setting had the highest level of conservative reporting but only nominally so relative to the setting with only mandatory rotation. Investment levels were also relatively high, but only in the retention periods and in the period of mandatory rotation; dropping materially in the one period in which the manager had the choice of dismissing the auditor. This result is consistent with the model's predictions since the manager could lower the investment in that one period and still expect the auditor to provide a favorable report.

Abstract:
The purpose of this study is to demonstrate how cross- sectional observations of expenditures by school districts within a particular state's jurisdiction may be used to estimate efficiency standards for public school expenditures. The standards are estimated using frontier regression techniques which adjust for the differential levels of efficiency of resource usage across different school districts. Based on these standards we estimated that inefficiencies in Missouri's school districts' actual expenditures cost the state an average of about $513.00 per student (or 17% of the current average total expenditure) for the fiscal year 1990-91.