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Abstract:
There are two widely held views in the literature regarding management's motivations to manage earnings, and each has quite different implications for the resulting numbers' ability to predict future firm operating cash flows. One view is that earnings management is motivated by mangers' attempt to sustain the overvaluation of the firm's stock price and to enhance managers' personal welfare by disguising the true underlying economic performance of the firm (opportunistic perspective). An alternative view is that managers manage earnings to reveal private value-relevant information about the future prospects of a firm (informational perspective). Using a sample of firms that have restated earnings, we show that originally reported (managed) earnings of firms classified as managing earnings for opportunistic reasons are less predictive of future cash flows relative to the restated (unmanaged) numbers. Conversely, we find that originally reported (managed) earnings of firms classified as managing earnings for informational reasons exhibit greater predictive ability with respect to future cash flows relative to restated (unmanaged) numbers. Returns analysis corroborates our classification of firms into opportunistic and informational subsamples and provides evidence that supports Jensen's (2005) conjecture that overvaluation leads to value-destroying opportunistic earnings management. To the best of our knowledge, this study is the first to show that managed earnings exhibit different predictive ability of future cash flows depending on the apparent motivation behind the earnings management.

Overvaluation, Earnings Management, Restatements, Cash Flows, Accruals

Abstract:
This study examines the tax implications of pretax earnings management. Prior research has examined pretax earnings management activities that have current income tax consequences (book-tax 'conforming earnings management') and earnings management activities that do not have current income tax consequences (book-tax 'nonconforming earnings management'). Our study investigates the prevalence of, and firm-specific characteristics that impact the choice between, these earnings management strategies. This investigation leads to a better understanding of the book-tax trade-offs managers face when managing earnings upward.

We utilize a sample of firms that restated their earnings downward due to accounting irregularities and thus can be presumed to have managed their earnings upward. We find that nonconforming earnings management is more prevalent than conforming earnings management. Using the Heckman (1979) two-step estimation approach to control for sample selection bias, we predict and find that firms trade off the net present value of tax benefits against the net expected detection costs associated with nonconforming earnings management. In particular, the presence of NOL carryforwards, high free cash flow, a Big 4/5/6 auditor, or fraud mitigate the general reliance on nonconforming earnings management strategies.

Earnings management, book-tax differences, earnings restatements, deferred tax expense, current tax expense

Abstract:
Prior research has separately examined pretax earnings management activities that have current taxable income consequences (book-tax 'conforming earnings management') and those that do not have current taxable income consequences (book-tax 'nonconforming earnings management'). Our study documents the prevalence of, and then investigates the firm-specific characteristics that impact the choice between, these earnings management strategies. We utilize a sample of firms that restated their earnings downward due to accounting irregularities and thus can be presumed to have managed earnings upward. We find that nonconforming earnings management is more prevalent and that firms trade off the net present value of tax benefits against the net expected detection costs associated with nonconforming earnings management. In particular, firms having NOL carryforwards, using a high quality auditor, or engaging in the most egregious misstatements rely less on nonconforming earnings management strategies. We also find that book-tax differences are useful in predicting restatements.

earnings management, earnings restatements, book-tax differences, deferred tax expense, current tax expense

Abstract:
Prior research has separately examined pretax earnings management activities that have current taxable income consequences (book-tax 'conforming earnings management') and those that do not have current taxable income consequences (book-tax 'nonconforming earnings management'). Our study documents the prevalence of, and then investigates the firm-specific characteristics that impact the choice between, these earnings management strategies. We utilize a sample of firms that restated their earnings downward due to accounting irregularities and thus can be presumed to have managed earnings upward. We find that nonconforming earnings management is more prevalent and that firms trade off the net present value of tax benefits against the net expected detection costs associated with nonconforming earnings management. In particular, firms having NOL carryforwards, using a high quality auditor, or engaging in the most egregious misstatements rely less on nonconforming earnings management strategies. We also find that book-tax differences are useful in predicting restatements.

Earnings management, earnings restatements, book-tax differences, deferred tax expense, current tax expense

Abstract:
We analyze a set of firms that restated earnings upward because of accounting irregularities and thus presumably had managed earnings downward. Our results are consistent with the restatement sample firms having managed earnings downward in their original financial statements to create cookie jar reserves, to depress share prices prior to corporate and insider stock purchases, and to minimize political costs. There is no evidence these firms managed earnings downward to reduce income taxes, which is consistent with tax-motivated downward earnings management being accomplished via real transactions that typically do not give rise to accounting irregularities. We estimate that taxable firms (i.e., profitable restatement sample firms without NOL carryforwards) left an average of 23 cents per dollar of pre-tax earnings management on the table by engaging in book-tax nonconforming downward earnings management. The forgone tax savings represent a lower bound on the incremental costs associated with real transactions management.

Earnings management, restatements, book-tax differences, book-tax conformity

Abstract:
In this study I test and extend several conjectures in Jensen's (2005) agency theory of overvalued equity. Specifically, I provide evidence on how varying degrees of overvalued equity affect managers' choice of alternative methods of managing earnings. I find compelling evidence that managers of firms that are more highly overvalued not only exhibit greater evidence of prior exploitation of within-GAAP earnings management relative to less overvalued firms, but also are more likely to be restricted in their ability to engage in further within-GAAP earnings management. Moreover, I find that highly overvalued firms are more likely to engage in more egregious forms of non-GAAP earnings management relative to less overvalued firms. Furthermore, I find that the choices management makes reflect an interaction between the relative degree of overvaluation and the relative costs of alternative earnings management mechanisms. The findings in this study provide evidence that overvaluation motivates managers to engage in a wide variety of earnings management choices in an effort to sustain their firms overvalued stock price.

earnings management, restatements, overvaluation

Abstract:
This study investigates how private equity ownership affects corporate tax avoidance. Private equity (PE) firms have been accused of aggressively managing their own tax liabilities and those of their portfolio firms. We investigate the latter assertion based on a sample of private firms for which there is financial statement data available. We first document that firms significantly alter their tax avoidance patterns in anticipation of ‘going public’ and ‘going private’ transactions. We then find that majority PE-backed private firms engage in less book-tax nonconforming tax planning than public years; nonetheless, they exhibit substantially lower marginal tax rates. We attribute these results to the larger debt tax shields of majority-owned PE-backed firms, which reduce their need for nonconforming (i.e., more aggressive) tax strategies. Lastly, we examine how different private ownership structures (e.g., majority PE ownership vs. management-owned) affect tax planning at private firms. Our results indicate that majority-owned PE-backed firms engage in more book-tax conforming and nonconforming tax planning than other private firms. We attribute these results to the managerial sophistication and resources available to majority-owned PE-backed firms.

Private equity, ownership structure, tax avoidance, tax planning, tax aggressiveness, book-tax differences, cash effective tax rates

Abstract:
Regulators are concerned that during the process of preparing accounting restatements firms fail to provide timely progress updates, and delay earnings announcements and regulatory filings. Regulators are considering ways to reduce these lags in disclosure, including controversial proposals to alter materiality guidance so that fewer accounting errors require restatements. We examine the length, causes, and effects of disclosure lags around restatements, finding that lengthy lags are uncommon and concentrated in restatements involving suspected or confirmed fraud. Furthermore, disclosure lags rarely result in stock delistings or debt covenant violations, but do appear to decrease market values and in some circumstances adversely affect stock liquidity and volatility. Although these negative capital market consequences are cause for concern, regulatory reforms are not likely to shorten disclosure lags substantially because lengthy lags are uncommon and appear to be largely unavoidable consequences of fraud investigations and other inherent constraints.

accounting restatements, disclosure lags, stock liquidity, return volatility, delistings, debt covenants

Abstract:
The topic of nonprofit commercialization has received increased attention from various groups including donors, regulators, and researchers. Perhaps the most commercial of all activities undertaken by nonprofits are those considered to be so far removed from an organization's exempt mission that the Internal Revenue Services (IRS) considers them to be taxable. Examination of these taxable activities can provide unique and valuable insights into the effects of purely commercial activities on nonprofit behavior. Nonprofits report their taxable activities on the confidential IRS 990-T. Although some information on taxable activities is reported on the publicly available IRS 990, unavailability of the IRS 990-T has prevented prior examination of its accuracy and reliability. Using a unique data set of otherwise confidential IRS 990-Ts, the authors calibrate the reliability of taxable activities as reported on the IRS 990, providing a roadmap for researchers to follow when examining nonprofits' taxable activities using publicly available data.

nonprofit commercialization; unrelated business activities; IRS 990; IRS

Abstract:
The topic of nonprofit commercialization has received increased attention from various groups including donors, regulators, and researchers. Perhaps the most commercial of all activities undertaken by nonprofits are those considered to be so far removed from an organization's exempt mission that the Internal Revenue Services (IRS) considers them to be taxable. Examination of these taxable activities can provide unique and valuable insights into the effects of purely commercial activities on nonprofit behavior. Nonprofits report their taxable activities on the confidential IRS 990-T. Although some information on taxable activities is reported on the publicly available IRS 990, unavailability of the IRS 990-T has prevented prior examination of its accuracy and reliability. Using a unique data set of otherwise confidential IRS 990-Ts, the authors calibrate the reliability of taxable activities as reported on the IRS 990, providing a roadmap for researchers to follow when examining nonprofits' taxable activities using publicly available data.

nonprofit commercialization, unrelated business activities, IRS 990, IRS