• Selected
• Entire List

Abstract:
In this paper we review the academic evidence on earnings management and its implications for accounting standard setters and regulators. We structure our review around questions likely to be of interest to standard setters. Specifically, we review the empirical evidence on which particular accruals are used to manage earnings, the magnitude and frequency of any earnings management, and whether earnings management affects resource allocation in the economy. Our review identifies a number of important opportunities for future research on earnings management.

Abstract:
We will assess how governance and incentive problems contributed to Enron's rise and fall. A well-functioning capital market creates appropriate linkages of information, incentives, and governance between managers and investors. This process is supposed to be carried out through a network of intermediaries.

We show that despite this elaborate corporate governance and intermediation network, Enron was able to attract large sums of capital to fund a questionable business model, conceal its true performance through a series of accounting and financing maneuvers, and hype its stock to unsustainable levels. While Enron presents an extreme example, it is also a useful test case for potential weaknesses in the U.S. capital market system. We believe that the problems of governance and incentives that emerged at Enron can also surface at many other firms, and may potentially affect the entire capital market. We will begin by discussing the evolution of Enron's business model in the late 1990s, the stresses that this business model created for Enron's financial reporting, and how key capital market intermediaries played a role in the company's rise and fall.

Corporate Governance, Enron, Accounting, Capital Markets, Capital Market Intermediaries, Board of Directors, Analysts

Abstract:
Financial reporting and disclosure are potentially important means for management to communicate firm performance and governance to outside investors. We provide a framework for analyzing managers' reporting and disclosure decisions in a capital markets setting, and identify key research questions. We then review current empirical research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure. Our survey concludes that current research has generated a number of useful insights. We identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.

Reporting decisions; Voluntary disclosure

Abstract:
Corporate disclosure is critical for the functioning of an efficient capital market. Firms provide disclosure through regulated financial reports, including the financial statements, footnotes, management discussion and analysis, and other regulatory filings. In addition, some firms engage in voluntary communication, such as management forecasts, analysts? presentations and conference calls, press releases, internet sites, and other corporate reports. Finally, there are disclosures about firms by information intermediaries, such as financial analysts, industry experts, and the financial press.

Abstract:
The financial reporting and disclosure problems at Enron, as well as the high market valuations for its stock raise troubling questions about the performance of capital market intermediaries, regulators and governance experts whose are supposed to ensure the effective functioning of the stock market. This paper examines the functions of key capital market intermediaries and analyzes how their own governance and incentive problems may have contributed to Enron's rise and fall. We conclude by proposing system modifications to resolve the observed problems.

Enron, Corporate Governance, Financial Reporting, Auditors, Financial Analysts, Standard Setters, Audit Committees, Management Compensation

Abstract:
This paper examines the usefulness of International Accounting Standards (IAS) in a transitional economy, the People's Republic of China (PRC). Using a sample of firms that provide financial reports under both IAS and more rigid local PRC standards, we conclude that information produced using IAS is no more useful than that prepared using Chinese standards. First, there is no difference in the explanatory power of IAS and PRC accruals for future cash flows. Second, for stocks that can only be owned by international investors, IAS and PRC earnings and accruals have a similar association with annual stock returns. Finally, for stocks that can be owned only by domestic investors, PRC earnings have a higher relation with annual stock returns than IAS earnings. We argue that one explanation for the failure of IAS data to dominate PRC data is the absence of effective controls and infrastructure in China to monitor the additional reporting judgment available to managers under IAS.

Abstract:
This paper investigates whether a spin-off, equity carve-out, or targeted stock offering results in making the operating performance of a firm's business segments more transparent. Using a sample of 146 spin-offs, equity carve-outs, and targeted stock offerings between 1990-1995, we document significant decreases in analyst earnings forecast errors as well as divergence among individual analyst earnings forecasts following these transactions. Moreover, we find that the levels of analyst and brokerage house coverage increase significantly following these transactions. Tracking the identity of individual analysts, we find that there is substantial analyst turnover around the sample deals, and the decrease in analyst earnings forecast errors following the sample deals is greatest when firms are able to attract new analysts. Taken together, these findings suggest that firms experience improvements in the quality of analyst coverage around spin-offs, equity carve-outs, and targeted stock offerings, and these improvements are at least partially driven by changes in the composition of analyst coverage.


See also the related papers "Valuation of Bankrupt Firms" by Stuart Gilson, Edith Hotchkiss, and Richard Ruback; and "Junk Bonds, Bank Debt, and Financing Corporate Growth" by Stuart Gilson and Jerold Warner

Abstract:
This paper develops a simulation model for a pharmaceutical firm to provide evidence on the tradeoff between objectivity and relevance for several methods of reporting R&D outlays. The findings indicate that a simple capitalization rule, analogous to the successful efforts method of capitalizing oil and gas exploration costs, provides a significantly higher relation between accounting information and economic values than immediate expensing of R&D outlays or capitalizing the full cost of outlays. More importantly, our findings show that the relevance of successful efforts data persists even when there is widespread earnings management.

Abstract:
We examine the performance of buy-side analysts relative to that of the sell-side. Our tests show that buy-side analysts at a large investment firm make less optimistic stock recommendations than sell-side analysts, consistent with their facing fewer conflicts of interest. However, their earnings forecasts are relatively optimistic and inaccurate and returns to their buy recommendations under-perform sell-side recommendations. Large sample tests that compare the performance of sell-side analyst recommendations and portfolio managers who rely exclusively on buy-side research confirm the sell-side's superiority. These performance differences appear to be partially explained by the buy-side's higher retention of poor-performing analysts and by differences in performance benchmarks used to evaluate buy- and sell-side analysts.

buy-side analysts, sell-side analysts, analyst forecasts, stock recommendations, forecast optimism, forecast accuracy, recommendation optimism, recommendation performance

Abstract:
Research optimism among securities analysts has been attributed to incentives provided by underwriting activities. We examine how analysts' forecast optimism varies with the business activities used to fund research. We find that analysts at firms with underwriting and trading businesses are actually less optimistic than those at pure brokerage houses, who perform no underwriting. The relatively less optimistic forecasts for underwriting firms are not fully explained by bank reputation. Nor is the relative optimism of brokerage firms explained by the types of clients they serve (retail or institutional). We conclude that sales and trading activities used to fund research create strong incentives for analyst optimism.

Analyst Forecast Optimism, Analysts' Incentives, Types of Security Firms, Earnings Forecasts, Target Prices

Abstract:
We examine the post-acquisition operating performance of merged firms using a sample of the 50 largest mergers between U.S. public industrial firms completed in the period 1979 to 1983. The results indicate that merged firms have significant improvement in asset productivity relative to their industries after the merger, leading to higher post-merger operating cash flow returns. Sample firms maintain their capital expenditure and R & D rates relative to their industries after the merger, indicating that merged firms do not reduce their long-term investments. There is a strong positive relation between post-merger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms.

Abstract:
This case examines the challenges in implementing fair value accounting for mortgage instruments, the role of accounting in the sub-prime crisis, and proposals for revising accounting standards given the crisis.

Abstract:
In February 2007, shareholders of Eddie Bauer, the specialty apparel retailer, were scheduled to vote on management's proposed sale of the company to two private equity firms. More than 50% of outstanding shares in Eddie Bauer needed to be voted in favor of the deal for it to be finalized. Shareholders needed to decide whether to vote for or against the proposed sale, which was fully endorsed by the board of Eddie Bauer.

Abstract:
The Eddie Bauer (B) case describes the events leading up to February 2007, when shareholders of Eddie Bauer, the specialty apparel retailer, were scheduled to vote on management's proposed sale of the company to two private equity firms. The Eddie Bauer (C) case describes what happened and the outlook for the retailer.

Abstract:
In June 2005, Eddie Bauer, the specialty apparel retailer, emerged from bankruptcy. Under the plan of reorganization former creditors converted their debt into common shares, taking 100% ownership in the reconstituted company. Large banks - including Bank of America and J.P. Morgan Chase - were among the former creditors. In October 2005, Eddie Bauer stock was selling for $24 per share. Analysts were projecting target prices ranging from $22 to $35 per share. Account managers at Bank of America and J.P. Morgan Chase needed to assess whether to hold or sell their shares in Eddie Bauer.

Abstract:
The study reported here is a comparison of the earnings-forecasting performance of analysts at a large buy-side firm with the performance of sell-side analysts in the 1997-2004 period. The tests show that the buy-side analysts made more optimistic and less accurate forecasts than their counterparts on the sell side. The performance differences appear to be partially explained by the buy-side firm's greater retention of poorly performing analysts and by differences in the performance benchmarks used to evaluate buy-side and sell-side analysts.

Equity Investments, Fundamental Analysis and Valuation Models, Performance Measurement and Evaluation, Performance Measurement, Investment Industry, Structure, Organization, and Demographics, Firm Management, Adapting to Change

Abstract:
The roots of recent American stock market and corporate governance failures are traced to regulatory changes that were intended to reduce the cost of financial information and increase market liquidity. In a textbook instance of the law of unintended consequences, policymakers' attempts to improve America's financial markets weakened the institutions that protect investors from abuse. Many of the current reforms, while well intended, do not attack the root causes of the problems. We argue that radical reform is needed.

Corporate Governance, Financial Markets, Intermediaries, Capital Markets

Abstract:
We examine investor communication issues faced by public corporations using the experience of CUC International. CUC had difficulty convincing investors that its new product marketing outlays were profitable investments, leading to stock mis-valution over an extended period. To resolve this problem, it adopted a series of accounting and financial policy measures, including a leveraged recapitalization, accelerated debt repayments, and a stock repurchase. CUC's experience suggests that accounting is not always effective in facilitating credible and timely communication. While financial signals are more effective, their impact is not as immediate as predicted by prior research. The CUC case suggests that investor communications is a rich area for future research.

Abstract:
This paper examines the causes and consequences of expanded disclosure for 90 firms with increased analyst disclosure ratings. Our evidence suggests that managers expand disclosure when they believe their firms are undervalued. Undervaluation is costly for the sample firms because it reduces their financial flexibility in making new public issues and lowers the value of outstanding management stock options. Following the increase in disclosure there is a reduction in undervaluation accompanied by an increase in stock liquidity analyst following and institutional holdings. This evidence suggests that for our sample firms expanded disclosure lowers their costs of capital.