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Abstract:
This paper examines the informational role of short interest in the Nasdaq market. Using the population of monthly short interest data over the period of June 1988 through December 1994 we find that firms with high short interest experience significant negative abnormal returns ranging from -0.76% to -1.13% per month during the period over which they are heavily shorted. In contrast to results in Aitken et al. (1998) that show that information in short interest is incorporated quickly into prices for Australian stocks, we find that information in short interest is incorporated gradually into prices for Nasdaq stocks. The negative excess returns are increasing in the level of short interest indicating that a higher level of short interest is a stronger signal. Consistent with short interest being a bearish signal, we find that the heavily shorted firms get delisted with a higher frequency relative to their size and industry matched control firms.

Short interest, information, stock returns

Abstract:
In this paper we examine the ex-ante importance of accounting changes in debt contracts by examining how the exclusion of the flexibility to make voluntary and mandatory accounting changes from the calculation of covenant compliance affects the interest rate charged on the loan. After controlling for a selectivity correction and other factors known to affect loan spreads, we find that the interest rate charged on a loan is 40 basis points lower when mandatory accounting changes are excluded and is 104 basis points lower when voluntary accounting changes are excluded. Our results support findings in previous studies that accounting changes are important in debt contracts ex-post for borrowers who violate their accounting based covenants.

Abstract:
Using data from the EDGAR era, we find a significant market reaction surrounding quarterly periodic reports only when their filing coincides with the first public disclosure of earnings, although that for 10-K reports is not subsumed by earnings releases. However, after eliminating incidence of concurrent earnings releases, the 10-K market reaction is restricted to a quarter of the reports that are filed around calendar quarter-ends. The calendar quarter-end price and volume effects are unrelated to the filing of periodic reports and are not explained by self-selection. However, while the quarter-end volume reaction is indistinguishable between filers and non-filers, we find an incremental price reaction to 10-K filings at calendar quarter-ends in recent times. We provide evidence that the calendar-time effect is partially due to an intra-industry information transfer that is a function of the incidence of 10-K reports at quarter-ends. Finally, equity analyst reactions are muted around periodic filings, with no evidence that they contribute to quarter-end information transfer.

periodic SEC reports, market reaction, concurrent earnings release, calendar quarter-end effect

Abstract:
This study examines the interdependence between institutional ownership and the speed with which Standard & Poor’s disseminates corporate accounting information. From the demand-side perspective, we find that quasi-indexers, who rely on corporate accounting information as a low-cost monitoring system, are the key driver of the institutional demand for speedy information dissemination. In addition, dissemination speed increases substantially for stocks listed in major market indices but decreases with high arbitrage risk or transaction costs. From the consequences perspective, we find that both transient investors and quasi-indexers gravitate to stocks with faster information dissemination, consistent with the latter using accounting information as a low-cost performance monitoring mechanism, and the former being better enabled to implement their trading strategies in a richer information environment. Overall, this study provides new insights into the capital market information infrastructure by examining how information intermediaries and sophisticated investors impact each others’ resource allocation decisions.

institutional investors, data aggregators, information dissemination, capital markets

Abstract:
We provide new evidence on the disclosure in earnings announcements of financial statement line items prepared under Generally Accepted Accounting Principles (GAAP). First, we investigate the circumstances that might provide disincentives generally for GAAP line item disclosures. We find that managers who regularly intervene in the earnings reporting process limit disclosures at the aggregate level and in each of the financial statements so as to more effectively guide investor attention to summary financial information. Specifically, this disclosure behavior obtains when managers habitually cater to market expectations, engage in income smoothing, or use discretionary accruals to improve earnings informativeness. Second, we predict and find that the specific GAAP line items that firms choose to disclose are determined by the differential informational demands of their economic environment, consistent with incentives to facilitate investor valuation. However, these valuation-related disclosure incentives are muted when managers habitually intervene in the earnings reporting process.

disclosure incentives, financial statement information, valuation, earnings announcement

Abstract:
In this paper we examine how the exclusion of voluntary and mandatory accounting changes from the calculation of covenant compliance affects the interest rate charged on the loan. After controlling for self-selection bias and other factors known to affect loan spreads, we find that the rate charged is 84 basis points lower when voluntary accounting changes are excluded and 71 basis points lower when mandatory accounting changes are excluded. Our results suggest that borrowers are willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations and to avoid duplicate record keeping costs.

Abstract:
This paper examines banks' choice of accounting methods in a new regulatory environment that more closely ties regulatory monitoring to GAAP numbers. The study finds that banks' choice of the implementation method for SFAS 106 is consistent with an attempt to balance the increased regulatory costs with earnings management benefits. Moreover, banks strategically chose the adoption timing of both SFAS 106 and SFAS 109 to further reduce regulatory costs. The implementation method choice is consistent with a portfolio approach where managers simultaneously consider the existing discretionary accrual levels vis-a-vis the financial reporting effects of impending accounting standards.

Accounting methods choice, bank regulatory capital, earnings management, FDICIA

Abstract:
We investigate whether managers' discretionary choices when adopting SFAS 106 are consistent with incentives to influence future labor negotiations and improve future reported income. We hypothesize that firms are more likely to opt for the immediate recognition method if i) they have large transition obligations and intend to reduce plan benefits subsequent to SFAS 106 adoption; and ii) they are more unionized. The magnitude of the transition obligation sets a ceiling on the opportunity to improve future earnings through a reduction in the already-recognized liability. Consequently, firms with relatively large transition obligations have greater incentives to be immediate recognizers if they intend to implement negative plan amendments after adopting SFAS 106. Also, if accounting numbers do play a role in labor negotiations, more unionized firms have greater incentives to use the immediate recognition method as a means of strengthening their bargaining power in subsequent negotiations to reduce plan benefits.

Our results are consistent with hypothesized incentives. Overall, our findings suggest that firms made discretionary SFAS 106 choices likely to reduce labor renegotiation costs and improve future reported income unless they were constrained by the prospect of potential debt covenant violations.

Accounting flexibility, Labor negotiations, Earnings management, Post-retirement benefits

Abstract:
This paper derives a theoretical relation between firm value and earnings persistence using a dividend-based valuation model. We show that the theoretical measure of ERC derived using this model is associated with both earnings persistence and the stochastic properties of dividends. More importantly, we show that earnings persistence is reflected in expected returns as well. We empirically test this prediction and document a positive association between earnings persistence and expected returns using three different approaches.

Abstract:
We develop a research approach to analyze the conditions under which earnings levels versus earnings changes better explain long-window stock returns. Using a general model of the earnings-return relation, we show that the choice between earnings levels versus changes depends on whether earnings are transitory or permanent. Further, we show that the apparent empirical success of the levels model is due to the statistical property that earnings levels over long windows are highly correlated with the theoretically correct measures of unexpected earnings. Finally, our analysis also has implications for studies of the relative information content of accounting earnings and other measures of performance such as Economic Value Added and residual income.

Abstract:
This paper examines the conceptual and empirical implications of the two major research paradigms that underlie earnings-returns studies -- the earnings persistence paradigm and Ohlson's book value model. Although the motivation for the persistence paradigm arises from the income-consumption models the paper demonstrates the equivalence instead between the accounting book value model and the macroeconomic model of rational consumer. Within the book value model our analysis indicates that the accounting entry implicit in the clean surplus relation subsumes the notion of dividend irrelevance which is instrumental in relating unexpected returns to abnormal earnings. Under the earnings persistence paradigm our results indicate that a one-to-one relation between earnings persistence and ERC obtains only under restrictive conditions when the earnings-return relation is derived using a dividend-based valuation model. Moreover in such a scenario unexpected dividends are shown to be value relevant over and above unexpected earnings and therefore the earnings persistence model only partially explains unexpected returns. The paper also examines the contexts in which the earnings persistence and the book value models provide suitable specifications for examining the earnings- return relation.

Abstract:
This paper analyzes the fair value data disclosed by bank holding companies under SFAS 107 and addresses some of the issues raised in the debate on the relevance of fair value accounting. The paper finds that most banks reported fair value estimates that exceeded their book values as of December 31 1992. Although the book value of securities and loans combined is similar in magnitude to deposits the effect of these two assets on the fair value of equity is five times greater than that of deposits. In addition to any real economic reasons that may apply the larger effect on the asset side of the balance sheet could be due to ignoring the core deposit intangible in valuing deposit obligations. In addition the paper provides evidence on the value-relevance of fair disclosures over and above the information already disclosed in banks' financial statements. The historical cost financial signals that represent profitability loan quality growth capital size etc. explain about 48% of the cross-sectional variation in the market-to-book ratio whereas the fair value disclosures add another 13% to the regression R- squared. With respect to off-balance sheet hedging behavior the excess of fair value of book value of on- balance sheet items is found to be significantly negatively associated with the unrealized gains/losses on off-balance sheet instruments only when the fair value of net loans are excluded. This suggests that it is difficult to make inferences about effect hedging based on fair value disclosures.