• Selected
• Entire List

Abstract:
Prior studies examine trends in accounting conservatism using a variety of measures and find strong evidence that conservatism has increased over time. This trend could arise from more prompt recognition of losses or more delayed recognition of gains, but the contribution of loss versus gain recognition to the increased conservatism has received little attention. This difference is important, because loss and gains conservatism play distinct but complementary roles in contracting and stewardship. In this study, we propose a new conditional measure of conservatism based on the association of negative versus positive accruals with future changes in cash flows. We find that both gains recognition and loss recognition generally contribute to trends in conservatism. We also compare trends in conservatism in high-technology versus other industries. Differences in accounting rules and the use of stock option plans suggest that gains recognition could contribute to a rapid increase in high-tech firms’ conservatism. We find that conservatism has increased more rapidly in high-technology industries than in other industries, and that gains recognition indeed contributes more to this trend than loss recognition.

conservatism, accruals, accruals quality, asymmetric recognition, conservatism measure, trend in conservatism, cointegration, accounting conservatism, quality of earnings, agency costs, contracting, stock options, compensation, financial reporting, accounting standard-setting

Abstract:
Managers exercise considerable discretion over how they announce an accounting restatement in a press release. Some firms issue a press release that discloses the restatement in the headline (high prominence). Others provide a press release with a headline on a different subject (for example, earnings news) but describe the restatement in the body of the release (medium prominence). The remaining firms discuss the restatement at the end of the press release in a footnote to operating results (low prominence). Mean three-day returns differ considerably across these three categories of prominence (-8.3, -4.0, and -1.5 percent, respectively). We find that disclosure prominence is significantly negatively associated with returns in a model that controls for the seriousness of the GAAP violation, restatement magnitude, other restatement characteristics, and potential endogeneity. Similarly, we find the likelihood of class action lawsuits is significantly reduced with less prominent disclosure.

accounting restatements, press release disclosure, voluntary disclosure

Abstract:
Prior studies document that firms using a Big 4 auditor have a lower cost of capital than other firms. We extend this literature by examining whether using an industry specialist auditor reduces cost of capital for clients of Big 4 audit firms. We document that firms that use Big 4 auditors that are industry specialists have significantly lower cost of both equity and debt than firms that use non-specialist Big 4 auditors. We further investigate whether the benefits of using an industry specialist auditor vary with the strength of alternative monitoring mechanisms. We show that using an industry specialist auditor is especially important when alternative monitoring mechanisms, such as boards of directors or institutional shareholders, are relatively weak. In other words, the benefits of using an industry specialist auditor dissipate when alternative monitoring mechanisms are strong. This evidence suggests some degree of substitutability between audit quality and alternative monitoring mechanisms.

Audit quality, Industry specialization, Financial reporting credibility, Cost of capital

Abstract:
An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors external to the firm. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms speed up their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (e.g., common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding behavior when they examine other determinants of managers’ disclosure decisions.

voluntary disclosure, earnings warnings, herding, information transfer

Abstract:
An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors external to the firm. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms speed up their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (e.g., common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding behavior when they examine other determinants of managers’ disclosure decisions.

voluntary disclosure, herding, bad-news disclosure, intra-industry information transfer

Abstract:
Some firms issue a press release that discloses their restatement in a headline (high prominence); others provide a headline on a different subject (for example, earnings news) but discuss the misstatement in the press release (medium prominence); and most of the remaining firms simply change the comparative-period amounts reported in an earnings release, with no direct mention of the restatement (low prominence). Mean three-day returns are negative and differ substantially across these categories of disclosure prominence (-8.3%, -4.0%, and -1.5% for high, medium, and low prominence, respectively). Our tests indicate this pattern is due to differences in the transparency of the three press release formats, rather than in the severity of the accounting irregularity. We also find that companies providing less prominent press release disclosure of their restatement are less likely to be sued for securities fraud. In sum, both return and litigation tests indicate that "silence can be golden."

accounting restatements, press release disclosure, voluntary disclosure

Abstract:
This paper examines the effect of managerial stock option incentives on the accuracy and information content of firms' voluntary earnings guidance. Prior research suggests that managers manipulate earnings downwards before receiving stock option awards to increase the value of their grants. Similar incentives could lead managers to distort earnings guidance around stock option grants, but the effect of option incentives on the timeliness and usefulness of earnings guidance has received little attention. We show that managers provide more pessimistic guidance before stock option awards than afterwards, consistent with manipulation. However, pre-grant guidance improves upon existing consensus earnings forecasts and is similar to post-grant guidance in bias and accuracy, suggesting that option incentives do not lead managers to distort pre-grant guidance. Furthermore, investors and analysts react similarly to pre- versus post-grant guidance, suggesting that market participants view these two types of guidance as equally informative. Finally, firms that award stock options provide more frequent guidance and have lower absolute analyst forecast errors than other firms, consistent with stock options increasing managerial incentives to disclose information about earnings. Overall, our study indicates that although stock option plans may induce selective disclosure consistent with managers' self-interest, they contribute to an improved overall information environment for the firm.

Management disclosures, stock options, agency theory, analyst forecasts, information environment

Abstract:
The likelihood that earnings announcements meet or beat analyst expectations differs substantially and systematically across firms. Prior research explores managers incentives to meet analyst expectations. In this paper, we examine analysts incentives to issue systematically biased earnings forecasts and thereby influence the likelihood that firms report good earnings news. We first document that forecast biases are systematically different, as large firms and firms with low forecast dispersion - labeled high-information firms - are more likely to report positive earning surprises, while small firms and firms with large forecast dispersion - labeled low-information firms - tend to have optimistically biased forecasts that often lead to negative earnings surprises. We also show that potential financing needs induce more optimistic forecasts for low-information firms, but this effect is greatly mitigated for high-information firms. We find that career concerns help explain analysts' systematic forecast bias. An analyst's career longevity is enhanced by issuing pessimistic forecasts for high-information firms and optimistic forecasts for low-information firms. Optimistic forecast bias for high-financing-need firms has no consequence for an analyst's career longevity, but optimistic bias for low-financing-need firms hurts. Our results suggest that career concerns contribute to a systematic pattern of forecasting that aligns with managerial preferences.

forecast bias, forecast accuracy, firm characteristics, analyst attributes, career concerns

Abstract:
We investigate whether earnings guidance can reduce or eliminate post-earnings-announcement drift. We find that firms that provide earnings guidance simultaneously with their earnings announcements experience significantly less drift than other firms, consistent with our expectations. Furthermore, the reduction in drift is strongly related to current and prior guidance accuracy. Drift is eliminated for firms that provide accurate prior (or current) guidance, but is significant for low-guidance-accuracy firms. Finally, we find post-guidance-announcement drift for stand-alone earnings guidance, but not for guidance that is provided simultaneously with earnings. Our results suggest that simultaneous earnings and guidance announcements enhance analysts' and investors' ability to extract useful information about future earnings from both earnings and guidance announcements. More importantly, our results indicate that investors can use past guidance accuracy to identify firms whose post-earnings-announcement drift is unaffected, or eliminated, by the issuance of management earnings guidance.

management earnings guidance, earnings announcements, post-earnings-announcement drift, guidance accuracy

Abstract:
Managers exercise considerable discretion over how they announce an accounting restatement in a press release. Some firms issue a press release that discloses the restatement in the headline (high prominence). Others provide a press release with a headline on a different subject (for example, earnings news) but describe the restatement in the body of the release (medium prominence). The remaining firms discuss the restatement at the end of the press release in a footnote to operating results (low prominence). Mean three-day returns differ considerably across these three categories of prominence (-8.3, -4.0, and -1.5 percent, respectively). We find that disclosure prominence is significantly negatively associated with returns in a model that controls for the seriousness of the GAAP violation, restatement magnitude, other restatement characteristics, and potential endogeneity. Similarly, we find the likelihood of class action lawsuits is significantly reduced with less prominent disclosure.

accounting restatements, press release disclosure, voluntary disclosure

Abstract:
We provide evidence on the determinants of the choice of an industry specialist auditor and the effect of this choice on cost of equity for a sample of firms that are audited by Big N auditors. We find that firms with more severe conflicts of interest between managers and shareholders are more likely to use an industry specialist auditor. Furthermore, we document that firms that use an industry specialist auditor have a significantly lower cost of equity after controlling for firms' endogenous decision to use an industry specialist auditor.

Big N audits, ex ante cost of equity capital, financial reporting credibility, industry specialization