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Abstract:
We investigate whether the positive associations between discretionary accrual proxies and beating earnings benchmarks hold for comparisons of groups segregated at other points in the distributions of earnings, earnings changes, and analysts-based unexpected earnings. We refer to these points as "pseudo" targets. Results suggest that the positive association between discretionary accruals and beating the profit benchmark extends to pseudo targets throughout the earnings distribution. We find similar results for the earnings change distribution. In contrast, we find few positive associations between discretionary accruals and beating pseudo targets derived from analysts-based unexpected earnings. We develop an additional analysis that accounts for the systematic association between discretionary accruals and earnings and earnings changes. Results suggest that the positive association between discretionary accruals and earnings intensifies around the actual profit benchmark (i.e., where earnings management incentives may be more pronounced). We find similar effects around the actual earnings increase benchmark. However, analogous patterns exist for cash flows around the profit and earnings increase benchmarks. In sum, we are unable to eliminate other plausible explanations for the associations between discretionary accruals and beating the profit and earnings increase benchmarks.

Discretionary accruals, Earnings management, Earnings benchmarks

Abstract:
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies of actual industry concentration. These measures have correlations of only 13 percent with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat based industry concentration measures may lead to incorrect conclusions.

Abstract:
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies of actual industry concentration. These measures have correlations of only 13 percent with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat based industry concentration measures may lead to incorrect conclusions.

Industry concentration, product market competition, finance research

Abstract:
This study examines firm performance surrounding insiders' Prepaid Variable Forward (PVF) transactions to infer insiders' information when they enter these off-market contracts. PVFs allow insiders to hedge downside risk, share performance gains, and obtain immediate large-sum cash payments for investment or consumption. On average, PVF transactions cover 30% of a sample insider's firm-specific wealth ($22 million), which is substantially larger than a typical open-market sale. PVFs systematically follow strong firm performance and precede degraded stock and earnings performance. PVFs also precede periods of negative abnormal returns relative to potential alternative investments. The documented association between PVFs and performance declines does not appear to result from the market's response to transaction disclosure, participant self-selection, or general price reversals. Thus, evidence suggests that insiders use PVFs to diversify firm-specific holdings in anticipation of performance declines.

hedge, derivative, management incentives, insider trading, forward sale

Abstract:
We examine the relation between observable indications of a firm's commitment to monitoring financial decisions and reliance on incentive compensation for the Chief Financial Officer (CFO). We find that firms with a finance committee of the board of directors or a CEO who has a financial background tend to use lower levels of incentive-based compensation for their CFOs. Our results are consistent with the joint hypotheses that finance committees and CEOs with financial backgrounds provide stronger monitoring of the CFO's financial decisions, and that the additional monitoring substitutes for CFO contractual incentives to reduce agency costs. We also find evidence consistent with the presence of independent financial experts on the audit committee enhancing the usefulness of accounting earnings as a performance measure in compensating CFOs. Overall, our study provides insight into the determinants of CFO compensation and the role of technical expertise in reducing the firm's agency costs.

Corporate governance, CFO, chief financial officer, compensation, monitoring, financial expertise, equity incentives, finance committee

Abstract:
We provide evidence on the prediction that because in more concentrated industries firms have more interdependent investment strategies with rivals, incumbents in such industries prefer less informative disclosure policies to avoid providing competitors with strategically useful information. Supporting this prediction, we find that firms in more concentrated industries provide less frequent management earnings forecasts, are less likely to make long-term forecasts, receive lower disclosure ratings from analysts, and have more opaque information environments. Also, when such firms raise funds they prefer private placements, which have minimal SEC-mandated disclosure requirements, over seasoned equity offerings. Likewise, when these firms engage in takeovers they get around having to disclose significant details about their acquisitions by acquiring private targets. Finally, we document that our results are more pronounced in younger industries in which proprietary costs from disclosure are likely to be greater and less pronounced in industries with higher leverage in which product market competition is expected to be ‘softer’. Overall, our findings suggest that firms’ attempts to avoid providing rivals with strategically valuable information impacts corporate disclosure policy and other major corporate financial policy decisions.

Abstract:
We investigate whether there are systematic differences in a firm's financial reporting and disclosure policies associated with having a Chief Executive Officer who has previously served as a Chief Financial Officer (i.e., an ex-CFO). We find that firms run by ex-CFOs tend to have more income-decreasing (conservative) accruals and that analysts' forecasts for firms managed by ex-CFOs are more accurate, less dispersed, and less volatile. In addition, firms run by ex-CFOs issue fewer good news earnings forecasts, but the good news forecasts they issue tend to be more precise. We also find similar results when we examine changes in reporting and disclosure policies for firms that appoint CEOs with CFO experience relative to firms that appoint CEOs without such experience. Overall, our evidence is consistent with ex-CFOs utilizing more conservative accounting policies and providing more precise earnings guidance to analysts and suggests that the quality of a firm's financial disclosures is a function of the CEO's financial experience.

CEO, CFO, Disclosure Quality

Abstract:
Bayesian theory predicts an increase in market participants' reliance on reported current earnings to revise their expectations of future earnings when the uncertainty in future earnings is higher. Prior studies focus on price reactions and find negative associations between measures of earnings uncertainty and investors' reliance on reported current earnings. This study examines analysts' forecast revisions (of future earnings) around the announcements of current period earnings and finds positive associations between measures of earnings uncertainty and analysts' reliance on reported current earnings. The findings suggest that uncertainty measures and discount rates are correlated, and cross-sectional differences in the discount rate taint the interpretation of price reactions as evidence of expectation revisions under uncertainty. This study sheds additional light on the complex relationships among earnings uncertainty measures, price reactions to earnings surprise, and cost of capital.

Analyst forecast revisions, Earnings uncertainty, Earnings announcements, Cost of capital, Price reactions

Abstract:
Recent research finds two distinct post earnings announcement drifts associated with seasonal random walk-based and analyst-based earnings surprises. We examine whether these two drifts are attributable to the trading activities of distinct sets of investors who exhibit systematic delayed trading to different forms of earnings innovations. We predict and find that small traders continue to trade in the direction of seasonal random walk-based earnings surprises after earnings announcements, whereas large traders continue to trade in the direction of analyst-based earnings surprises. We corroborate these findings with evidence that when small (large) traders react more thoroughly to seasonal random walk- (analyst-) based earnings surprises at the earnings announcements, the respective drift attenuates. In additional tests, we predict and find that the timing of delayed trading varies with trade size, i.e., large (and relatively more sophisticated) traders end their delayed trading more quickly than small (and relatively less sophisticated) traders and small trades (but not large trades) at earnings announcements are predictable based on prior earnings surprises. We also find that large traders' delayed trading is more pronounced when analyst-based earnings surprises are more difficult to interpret (i.e., when analysts' forecasts are more heterogeneous).

Investor Trading, Post Earnings Announcement Drift

Abstract:
Prior work shows that firms have incentives to manage earnings upward so that suppliers and corporate customers perceive a firm to be financially stronger and more capable of honoring implicit claims. We predict that this leads to an underlying demand from firms’ suppliers and customers for accounting conservatism to reduce the likelihood of basing terms of trade on inflated financial information and that firms meet this demand when these stakeholders have relative bargaining advantages that allow them to dictate terms of trade. Consistent with expectations, we document results suggesting that when a firm’s suppliers or customers have bargaining power over it the firm follows more conservative accounting practices. This effect is more pronounced when the underlying demand for conservatism from a firm’s suppliers and customers is likely to be greater. We also show that when a firm’s suppliers or customers have relative bargaining advantages over it they provide the firm with better terms of trade if it has greater conservatism in its financial reporting practices. Overall, our findings provide insights into how a firm’s suppliers and customers impact its accounting practices and also support the contracting explanation for accounting conservatism.

Abstract:
This study identifies a new systematic difference between managers’ predictions about the firm’s earnings performance and the firm’s ex post realized results. Over the period 1996 to 2004, nearly half of managers’ voluntarily-issued point forecasts of EPS end in nickel intervals, such as an “even” dollar, a half-dollar, a quarter, a dime, or a nickel amount, whereas only 20% of actual reported EPS end in nickel intervals. The psychology and demography literatures refer to this tendency to provide estimates ending in common intervals as heaping.

If managers’ propensity to heap at nickel intervals were simply a benign response to uncertainty, their nickel forecasts would be less accurate but unbiased. However, managers’ nickel forecasts are not only less accurate; they are also more optimistically biased than their nonnickel forecasts. Moreover, in addition to uncertainty, self-serving opportunism in response to managers’ economic incentives, and efforts to protect the firm’s proprietary information also play incremental roles in explaining managers’ propensity to issue forecasts heaped at nickel intervals.

We find that heaping in management forecasts helps explain the heaping in analysts’ forecasts documented in prior research - even among active analysts who follow the firm on a timely basis. Finally, we show that on balance, investors and analysts adjust for the predictable portion of the bias in managers’ nickel forecasts, and that even after controlling for the predictable bias, investors and analysts place less weight on managers’ nickel forecasts relative to nonnickel forecasts.

Abstract:
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions.

G10, G30, L10