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Abstract:
Statements in the financial press and recent research suggest that controversy exists as to which accounting measure is more value-relevant: earnings or cash flows. This study examines the relative value-relevance of earnings and cash flow measures in the context of the firm life-cycle. Earnings are predicted to be more value-relevant in mature stages. Cash flows are expected to be more value relevant in stages characterized by growth and/or uncertainty. In general the hypotheses are supported using Wald chi-square tests (Biddle, Seow, and Siegel 1995) of the Edwards, Bell, Ohlson (1995) model. Evidence supports the hypothesis that earnings are more value-relevant than operating, investing, or financing cash flows in mature life-cycle stages. However, in the start-up stage investing cash flows are more value relevant than earnings. In growth and decline stages, operating cash flows are more value relevant than earnings.

Abstract:
Although there has been an exponential increase in the number and size of cross-border mergers during the past decade, there is little research that examines whether such deals are value-enhancing activities for shareholders of successful bidders. We investigate long-term abnormal returns to 361 successful U.S. bidders for foreign targets between 1985 and 1995. Employing a procedure recommended by Lyon et al. (1999) in order to minimize bias in calculating such returns, we find that abnormal returns are significantly negative over both a three- and a five-year window for successful bidders in cross-border mergers. We then divide the firms based upon categorizations employed by Ali and Hwang (2000), who examine country-specific factors related to the value relevance of accounting data. We hypothesize that factors which make accounting data less value-relevant (e.g., the level of alignment of financial and tax accounting) also will make it more difficult for bidding firms to price targets accurately in these countries. If this is true, bidder firms acquiring targets in these countries should realize larger negative abnormal returns. However, we find that negative abnormal returns are smaller in such countries. This may be due to a higher cost of capital for firms in these countries, resulting in a built-in discount to bidders.

Cross-border mergers and acquisitions, international accounting, long-run abnormal returns

Abstract:
We show that the intangible asset, firm reputation, has value-relevance as measured by its ability to explain part of the difference between BV and MV. Firm reputation is measured using the Fortune survey of "America's most admired companies." We allow the Fortune rankings to serve as a proxy for nonfinancial information, such as customer service and intellectual capital. We demonstrate this summary measure of nonfinancial information adds to market value, even after controlling for the financial performance halo effects on the Fortune ratings.

Abstract:
This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than standard GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. We document a significant difference between pro forma numbers reported by managers and earnings figures published by I/B/E/S, and conclude that it is problematic to use an income figure reported by I/B/E/S as a proxy for pro forma earnings. Our analyses of short-window abnormal returns and revisions in analysts' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income.

pro forma earnings, information content of earnings, persistence of earnings, analysts' forecasts

Abstract:
This study investigates whether market participants perceive pro forma earnings to be more informative and more persistent than GAAP operating income by analyzing a sample of 1,149 actual pro forma press releases. We find that pro forma announcers report frequent GAAP losses and are mostly concentrated in the service and high-tech industries. Our analyses of short-window abnormal returns and revisions in analyst' one-quarter-ahead earnings forecasts indicate that pro forma earnings are more informative and more permanent than GAAP operating earnings. Our evidence suggests that market participants believe pro forma earnings are more representative of "core earnings" than GAAP operating income.

pro forma earnings, information content of earnings, persistence of earnings, analysts' forecasts

Abstract:
This paper identifies the sources of conflicts between debtholders and stockholders in commercial banks, considering the potential influence of bank deposit insurance and regulations restricting bank capital ratios, merger activities, and dividend payments. We address the means by which debt covenants are used to reduce these costly conflicts by examining a period when change in capital regulations occurred. We advance a general Substitute Regulations Hypothesis: regulations that reduce the expected costs of bondholder-stockholder conflicts substitute for costly covenants. Our results support this hypothesis. We document variation in the choice of debt covenants, and hence debt structure, and relate that variation to bank regulations.

Abstract:
In recent years, many companies have emphasized adjusted-GAAP earnings numbers in their quarterly press releases. While managers use different names to describe these non-standard earnings metrics, the financial press frequently refers to them as "pro forma" earnings. Managers and other advocates of pro forma reporting argue that these disclosures provide a clearer picture of companies' core earnings. On the other hand, regulators, policymakers, and the financial press often allege that managers' pro forma earnings disclosures are opportunistic attempts to mislead investors. Recent evidence suggests that while many pro forma earnings disclosures are altruistically motivated, some may represent managers' attempts to portray overly-optimistic financial performance. If this is the case, less-wealthy, less-sophisticated, individual investors are arguably the most at risk of being misled. Consequently, this study investigates who trades on pro forma earnings information. Our intraday investigation of transactions around earnings announcements containing pro forma earnings information reveals that less-sophisticated investors' announcement-period abnormal trading is significantly positively associated with the magnitude and direction of the earnings surprise based on pro forma earnings. In contrast, we find no association between sophisticated investors' trading and manager-reported pro forma information. Overall, our analyses and numerous robustness tests suggest that the segment of the market that relies on pro forma earnings information is populated predominantly by less-sophisticated individual investors. This evidence is particularly relevant to standard setters and regulators given that Section 401(b) of the Sarbanes-Oxley Act of 2002 and subsequent SEC regulations are specifically designed to protect ordinary investors from misleading pro forma information.

Pro forma earnings; corporate disclosure; The Sarbanes-Oxley Act of 2002; SEC regulations

Abstract:
A dynamic steady-state model of financial reporting subject to ongoing earnings management strategies is presented. We show that, even in the absence of researcher measurement error, discretionary accruals and non-discretionary accruals are always negatively correlated. The negative correlation becomes weaker (less negative) as earnings persistence increases and, counter-intuitively, as the ability to engage in earnings management increases. Our theoretical results provide building blocks for improving the technology for empirical investigation, which we employ to provide an empirical estimation technique to improve the technology for investigating earnings management using discretionary accruals. We find empirical evidence of strategic multi-period earnings management, in general. And, our accruals model compares favorably against other models.

discretionary accruals, earnings management, multi-period setting

Abstract:
What characteristics do entrepreneurs believe make them successful? We interview entrepreneurs and venture capitalists (VCs) to determine traits that each of these groups perceive as necessary for entrepreneurial success. We show that entrepreneurs cite traits inherent to their nature (for example, hard working, persistent, risk-taker) significantly more than VCs. We also test to see if entrepreneurs are able to identify factors that VCs consider most important for the funding decision. We find that entrepreneurs who do not have previous VC funding experience differ significantly from VCs in what factors are important for VC funding; whereas, entrepreneurs with previous VC funding experience did not differ from VCs in identifying important funding-decision factors. Overall, our results demonstrate that even though entrepreneurs believe factors they are born with are most important to achieve success, they still learn through experience.

Entrepreneurial success, venture capital funding, traits for success

Abstract:
This study provides descriptive evidence on the controversial trend adopted by many firms in recent years of reporting earnings figures on a "pro forma" basis. Pro forma earnings exclude normal income statement items that managers deem to be nonrecurring or nonrepresentative of ongoing operations. We investigate various aspects of pro forma disclosure practice by examining a large sample of actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers tend to be relatively "young" firms that are concentrated primarily in the tech sector and business services industries. We also find that pro forma firms are significantly less profitable, more liquid, and have higher debt levels, P-E ratios, and book-to-market ratios than other firms in their own industries. Our results indicate that while firms commonly exclude multiple expenses in arriving at their pro forma earnings figure, they usually do not exclude the same items in subsequent pro forma announcements. We further find that pro forma announcers' earnings and sales are generally below market averages during our observation period. Interestingly, we also observe that the frequency of pro forma announcements appears to have exploded precisely when earnings and prices of these firms started to decline. Finally, our data provide evidence consistent with the criticism that pro forma announcements may often be motivated by managers' desires to meet or beat analysts' expectations or to avoid earnings decreases.

pro forma earnings, street earnings, corporate disclosure, analysts' expectations

Abstract:
This study provides descriptive evidence on the controversial trend adopted by many firms in recent years of reporting earnings figures on a "pro forma" basis. Pro forma earnings exclude normal income statement items that managers deem to be nonrecurring or nonrepresentative of ongoing operations. We investigate various aspects of pro forma disclosure practice by examining a large sample of actual pro forma press releases issued between January 1998 and December 2000. We find that pro forma announcers tend to be relatively "young" firms that are concentrated primarily in the tech sector and business services industries. We also find that pro forma firms are significantly less profitable, more liquid, and have higher debt levels, P-E ratios, and book-to-market ratios than other firms in their own industries. Our results indicate that while firms commonly exclude multiple expenses in arriving at their pro forma earnings figure, they usually do not exclude the same items in subsequent pro forma announcements. We further find that pro forma announcers' earnings and sales are generally below market averages during our observation period. Interestingly, we also observe that the frequency of pro forma announcements appears to have exploded precisely when earnings and prices of these firms started to decline. Finally, our data provide evidence consistent with the criticism that pro forma announcements may often be motivated by managers' desires to meet or beat analysts' expectations or to avoid earnings decreases.

pro forma earnings, street earnings, corporate disclosure, analysts' expectations

Abstract:
Insights on how ordinary, less-sophisticated investors interpret and process management-issued pro forma earnings numbers are useful to regulators because of concerns that pro forma disclosures are misleading to ordinary investors. Two recent experimental studies (Frederickson and Miller, 2004 and Elliott, 2006) find that the existence of a pro forma number in the earnings press release as well as the relative placement of the pro forma and GAAP earnings figures within the press release affect the judgments of less-sophisticated investors but not those of more-sophisticated investors. Experimental and archival methodologies complement one another and results that persist in both settings are likely to be robust to both internal and external validity concerns. Therefore, we complement experimental evidence using trade-size-based proxies constructed from intraday transactions data to distinguish the trading activities of less-sophisticated investors from more-sophisticated investors. Our results suggest that less-sophisticated investors rely significantly more on quarterly earnings press releases that include a pro forma number than on those that do not, while more-sophisticated investors exhibit the opposite behavior. This result is consistent with Frederickson and Miller's experimental evidence. Further, consistent with Elliott's results, we find that less-sophisticated investors rely more on the pro forma figure when it is placed before the GAAP earnings number in the press release, while more-sophisticated investors' trading behavior is unaffected by the relative placement of the two earnings metrics. We conclude that the existence of a pro forma number as well as its strategic placement in the press release generally affect the judgments of less-sophisticated (but not more-sophisticated) investors and these inferences are robust because they persist in both experimental and archival settings.

Pro forma earnings, investor sophistication, Sarbanes-Oxley Act of 2002, complementary research methodologies

Abstract:
Insights on how ordinary, less-sophisticated investors interpret and process management-issued pro forma earnings numbers are useful to regulators because of concerns that pro forma disclosures are misleading to ordinary investors. Two recent experimental studies (Frederickson and Miller, 2004 and Elliott, 2006) find that the existence of a pro forma number in the earnings press release as well as the relative placement of the pro forma and GAAP earnings figures within the press release affect the judgments of less-sophisticated investors but not those of more-sophisticated investors. Experimental and archival methodologies complement one another and results that persist in both settings are likely to be robust to both internal and external validity concerns. Therefore, we complement experimental evidence using trade-size-based proxies constructed from intraday transactions data to distinguish the trading activities of less-sophisticated investors from more-sophisticated investors. Our results suggest that less-sophisticated investors rely significantly more on quarterly earnings press releases that include a pro forma number than on those that do not, while more-sophisticated investors exhibit the opposite behavior. This result is consistent with Frederickson and Miller's experimental evidence. Further, consistent with Elliott's results, we find that less-sophisticated investors rely more on the pro forma figure when it is placed before the GAAP earnings number in the press release, while more-sophisticated investors' trading behavior is unaffected by the relative placement of the two earnings metrics. We conclude that the existence of a pro forma number as well as its strategic placement in the press release generally affect the judgments of less-sophisticated (but not more-sophisticated) investors and these inferences are robust because they persist in both experimental and archival settings.

Pro forma earnings, investor sophistication, Sarbanes-Oxley Act of 2002, complementary research methodologies

Abstract:
The strategy adopted by a company can be understood as the result of mechanisms and practices of corporate governance. In turn, the performance of a firm depends directly on the decisions made by its administrators. However, managers can incorporate their own personal interests in strategic decisions, creating a level of corporate diversification, according to the operation of the corporate government. Thus, the objective of this study is to investigate, empirically, if the structure of governance is different between focused and diversified firms and, furthermore, if differences in corporate governance are associated with some loss of value for the firm from the diversification. This study consists of a multiple cross section extending from 1997 to 2001. Data from 176 companies with open capital listed on the São Paulo Stock Exchange (Bovespa) were used, representing 14 industry segments. The results of the multivariable analysis reveal that the size of the board of directors (InTAMC) and the participation of the executives in the profit (profit sharing) of the company (PART) are positively associated with the diversification of the firm (HPROD). Moreover, the companies with private national capital (CNTR) appeared more diversified than those with government capital; however it is important to recognize that these associations were not constant for the entire length of the study period.

Corporate Governance, Firm diversification, Agency Problem, Brazilian Firms, Emerging Markets

Abstract:
Prior research suggests that managers may report adjusted earnings numbers, frequently called pro forma earnings, in their quarterly earnings press releases for various reasons. Many managers arguably report adjusted earnings metrics to better reflect persistent core earnings. On the other hand, others may be motivated by the incentive to divert investors' attention from poor operating performance. The difficulty lies in distinguishing between those with altruistic versus opportunistic motives. We investigate two potential deterrents of opportunistic reporting decisions. First, we argue that the design of compensation contracts can encourage managers to adopt either a short- or long-term focus. While compensation contracts are not usually tied directly to pro forma earnings numbers, we posit that managers with a short-term horizon are more likely to engage in opportunistic pro forma reporting than managers with a long-term focus. Second, we contend that auditor effort can discourage potentially misleading pro forma earnings adjustments. Consistent with our predictions, we find that when compensation contracts include a long-term performance plan to give managers a long-term focus, managers are less likely to engage in potentially opportunistic pro forma earnings adjustments. Similarly, we find a some evidence of a negative association between auditor effort (as proxied by audit fees) and potentially misleading earnings adjustments. Taken together, this evidence is consistent with the notion that the design of compensation contracts and auditor effort can significantly influence managers' pro forma reporting decisions. Finally, the results suggest that investors discount earnings information when opportunism is likely to motivate managers' earnings adjustments. Nevertheless, auditor effort appears to give investors some comfort when pro forma earnings adjustments help firms to meet earnings expectations that they miss based on GAAP operating earnings.

Pro forma earnings, compensation contracts, long-term performance plans, audit fees, earnings benchmarks, opportunistic financial reporting

Abstract:
We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999), we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.

Abstract:
We investigate a sample of cross-border mergers involving US firms that acquired foreign targets between 1985 and 1995. Our general interest is in the long-term success of the acquisitions, measured by the post-merger abnormal returns to the US acquirers. Our primary focus is the relationship between the quality of the foreign target's accounting disclosures and the acquisition's long-term success. Employing a procedure recommended by Lyon et al. (1999), we find that US acquirers in cross-border mergers experience significantly negative long-term abnormal returns post-merger. These returns also are significantly more negative than those realized by a matched sample of US acquirers that acquired US targets. To investigate the potential association between the US acquirers' post-acquisition returns and target firms' accounting disclosures, we classify the merger transactions by target firm home country. We define variables to reflect the quality of accounting disclosures and control for other important country-specific features. The results reveal that post-merger abnormal returns are less negative for acquirers of targets based in countries where accounting data is less value relevant. This may be due to a higher cost of capital for target firms in these countries, resulting in a built-in discount in the pricing of targets. An examination of the premiums paid in a subset of 79 cross-border mergers reveals evidence consistent with this contention: premiums are lower for target firms based in countries where accounting data is less value relevant. These results suggest that shareholders of targets from such countries pay a price for their country's institutional framework that makes accounting information less value relevant.

Abstract:
In this study, we describe determinants of accuracy/bias of analysts' forecasts in 13 economies of the Asian-Pacific region. Examination of the accuracy of analysts' earnings forecasts allows us to judge how accounting systems and macroeconomic distinctions in this region affect earnings predictability. As many investors rely on analysts' earnings forecasts instead of producing their own, the growth of international investment means forecasts in non-US markets will become increasingly important to investors worldwide. Using a sample of firms with data available on Global Vantage and I/B/E/S International, we find that the analysts on average have a pessimistic bias in Asian-Pacific markets. We examine whether macroeconomic factors explain part of the difference in the size of analyst forecast errors, using the global competitiveness rankings of the World Economic Forum (WEF). We expect that those nations which are more open to foreign trade and investment and are ranked more highly by the WEF in its Global Competitiveness Index will also have more accurate analyst forecasts, as increased global competitiveness demands greater integration into the world economy, and such integration should lead to more transparent financial statements and more accurate earnings forecasts. Our findings are consistent with this prediction. We also find that countries with low book-tax conformity have more accurate earnings forecasts.

Abstract:
Recently, increased competition has prompted companies to enhance their organizational efficiency. One of the areas most influenced by this pressure is supply management, which uses a large percentage of corporate assets and has the potential to negatively affect customer service. Another central area of organizational efficiency is corporate governance, which is regarded as a determining factor for administrative excellence. This paper examines whether the corporate governance structures of firms with diversified suppliers differ from those of firms with more specialized or concentrated suppliers. This study consists of multiple cross sections that cover the period between 1997 and 2001 and incorporates data collected from 176 industrial companies from fourteen industrial segments that listed stocks in Bovespa, the São Paulo Stock Exchange. This study based its exploration on the premise that minimized inventory and minimized days' sales in inventory ratios define the best-performing supply management. The two following propositions summarize the principal results of this study. First, increased independence of the chairman of the board of directors tends to result in less efficient supply management. This conclusion is drawn from the following two findings: (i) an independent chairman of the board uses more diversified suppliers than an internal chairman and (ii) greater supplier diversification is directly associated with a larger inventory. Second, an independent board of directors correlates with less efficient results due to its significant and positive association with day's sales in inventory ratio. These results collectively suggest that strategies utilized by independent corporate governance structures tend to result in less efficient supply management.

Corporate Governance, Brazilian Industries, Supply Management, Firm Diversification

Abstract:
As accounting regulators develop international standards, it is helpful for them to understand the use of financial statements by investors in different countries. In this study we compare the value relevance of earnings relative to book value of equity in Germany, Japan and the U.S due to the size of their capital markets and differences in accounting systems and institutional structures. Accounting in Germany and Japan is conservative, creditor-oriented and tax-based, with institutional structures that rely on bank financing and close relationships between capital providers and investee firms, while the U.S. is used as a basis for comparison. This study hypothesizes that book values are more value relevant than earnings in Germany and Japan while earnings are more value relevant in the U.S., because capital providers in Germany and Japan are more concerned with balance sheet measures such as liquidity. Also, accounting characteristics such as conservatism and tax conformity may lead to greater value relevance of the balance sheet compared to the income statement in those countries. Our results provide evidence that book value of equity is more value relevant than earnings particularly in Germany, with mixed results for Japan. In the U.S. positive earnings are more value relevant than book value of equity, but not negative earnings. In summary, we provide evidence concerning the relative value relevance of summary measures of the balance sheet versus the income statement. Standard setters can then look at potential causes for these differences and determine if proposed accounting standards will have a desired outcome.

international accounting, value relevance, earnings, book value of equity, Germany, Japan

Abstract:
Previous studies cross-sectionally pooled heterogeneous firms to examine the information content of earnings and cash flow measures. This study extends prior research; and is the first to examine the corporate life-cycle effects on the informativeness of earnings (NI), operating cash flows (CFO), financing cash flows (CFF), and investing cash flows (CFI). The life-cycle concept is an appealing economic context which allows for a relatively more homogenous study of these information content relationships. It is a concept used frequently in academic research and the financial press, because it captures a set of financial characteristics and strategies for firms in a particular life-cycle stage.This study examines both the informativeness of earnings and cash flow measures in each of four life-cycle stages: Start- up, Growth, Mature, and Decline. Hypotheses are developed predicting that earnings and operating cash flows contain incremental information content in life-cycle stages when a firm's assets in place are a major component of firm value. Financing cash flows and investing cash flows are expected to be incrementally informative during stages characterized by growth or uncertainty.The results are consistent with the hypothesis that neither NI, nor CFO are incrementally informative in the start-up stage, characterized by few assets in place. When there are relatively more assets in place in the growth, mature, and decline stages; however, the results support the hypothesis that NI and CFO contain incremental information. Hypotheses regarding CFF and CFI are generally supported. Results support the incremental informativeness of CFF in the growth, mature, and decline stages; but not in the start-up stage. CFI is informative in all life-cycle stages. These results provide support for the usefulness of the cash flow statement required by FAS 95.

Abstract:
This study investigates the informativeness of financial accounting variables for emerging growth firms using a model based on the theoretical work of Feltham and Ohlson (1995), and empirically adapted by Ou and Penman (1993) and Bernard (1995). The model tests the association between a measure of future performance (future return on equity) and earnings, cash flow variables, and other financial accounting variables. The robustness of the results are further tested through sensitivity analysis by excluding outliers and utilizing industry classification and the age of the firm as delineators.The results, when combined with the results of Amir and Lev (1995) and Black (1995), increase our knowledge of the usefulness of financial accounting for firms in this early life-cycle stage. This prior research provided evidence that financial accounting data is of limited informativeness for early stage growth firms in the telecommunications industry (Amir and Lev) and start-up firms (Black). The empirical results support the efficiency contracting theory and provide evidence that reported financial accounting data are informative about future performance of emerging growth firms. In addition, the results are stronger when outliers are excluded, and when industry and age associations are considered.

Abstract:
The focus of this study is on the incremental information content of earnings, operating cash flows, investing cash flows, and financing cash flows, within each of four life-cycle stages: start-up, growth, mature, and decline. As predicted earnings and operating cash flows are incrementally informative in life-cycle stages when assets in place are a major component of firm value. Investing and financing cash flows are incrementally informative in life- cycle stages characterized by relatively fewer assets in place and more growth opportunities. Overall, these results provide additional support for the usefulness of the cash flow statement required by FAS 95. However, the evidence suggests that the usefulness of the three components of the cash flow statement depends on the life-cycle stage of the firm, which has implications for users of financial statements.