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Abstract:
This paper attempts to document the effects of accounting flexibility on managers' propensity to cut R&D expenditures. Using Barton and Simko's (2002) NOA/Sales variable as a proxy for accounting flexibility, we find that managers are more (less) likely to cut R&D when accounting flexibility is low (high), and that managers prefer the use of accrual to real earnings management given ample accounting flexibility. Our results are consistent with theoretical papers that posit substitution effects between accounting and real earnings management choices, with managers being more likely to cut R&D when the marginal costs of accounting manipulations are low relative to real earnings manipulations.

Accruals, Earnings Management, Real Operations, R&D, Research and Development, Intangibles, Benchmarks, Financial Reporting, Substitution

Abstract:
In recent years, many corporations have replaced their traditional defined benefit (DB) pension plans with "cash balance" (CB) plans, which share many of the characteristics of defined contribution plans. This study provides empirical evidence on the characteristics of CB converters and the behavior of pension costs and obligations pre- and post-conversion. We find that CB converters are larger than firms that retain traditional DB plans as well as those that terminate DB plans. They are less profitable than the former, but more profitable than the latter. CB conversions are not associated with proxies for greater labor mobility (e.g., firm-specific employee turnover rate). They are associated with a workforce that is closer to retirement, on average, lending credence to the breach of implicit contract rather than the labor market hypothesis as a motivator of CB conversions. Consistent with this intuition, we document that CB converters recognize a reduction of unrecognized prior service costs in the year of conversion, consistent with a negative plan amendment. Unlike pre-conversion, pension costs and obligations are significantly lower for CB firms post-conversion than for a matched sample of firms retaining traditional DB plans. We find some indications that the way pension expense is measured under SFAS 87 might have motivated CB conversions. CB conversions are more popular than DB plan terminations among firms with overfunded pension plan assets in periods when expected return on plan assets is likely to be high, with a consequent positive effect on reported income.

cash balance plans, pension plans, pension conversions, postretirement benefits, implicit contracts, SFAS 87

Abstract:
Theory suggests that voluntary disclosure decisions are a function of conflicting incentives vis-a-vis multiple audiences. However, few opportunities exist to investigate this issue empirically. We identify a setting that offers us such an opportunity: the electric utility industry as it transitions toward deregulation. We consider two types of voluntary disclosures: strategies to protect the firm's existing customer base and plans to exploit emerging opportunities under deregulation. We examine these particular disclosures since they are voluntary, relevant to all sample firms, and convey positive information about the firm's prospects in a deregulated environment. We consider three target audiences: industry regulators, capital market participants, and product market competitors. We find that our disclosure index is negatively associated with the magnitude of utilities' stranded costs in jurisdictions where the stranded cost recovery issue is unresolved, consistent with our predicted regulatory incentives. Further, our evidence indicates that capital market-related incentives are positively associated with our disclosure index. Finally, we find that product market-related incentives play a deterrent role in disclosure, but only after regulatory concerns have been resolved.

Voluntary disclosure, disclosure incentives, electric utilities, deregulation

Abstract:
We investigate the issue of voluntary disclosure in multi-audience settings by focusing on the electric utility industry as it transitions toward deregulation. We consider three target audiences: industry regulators, capital market participants, and product market competitors. As predicted, we find that utilities tend to disclose less strategic information in jurisdictions where the stranded cost recovery issue is unresolved, consistent with incentives to appear "weak" to regulators. Further, we find that utilities whose viability in a deregulated environment is more uncertain tend to provide more disclosures, unless they face greater threat from competitors. These results are consistent with prior theoretical research on conflicting disclosure incentives to capital markets versus product markets.

Key Words: Voluntary disclosure; Electric utilities; Deregulation

Abstract:
This study examines the interdependence between institutional ownership and the speed with which Standard & Poor’s disseminates corporate accounting information. From the demand-side perspective, we find that quasi-indexers, who rely on corporate accounting information as a low-cost monitoring system, are the key driver of the institutional demand for speedy information dissemination. In addition, dissemination speed increases substantially for stocks listed in major market indices but decreases with high arbitrage risk or transaction costs. From the consequences perspective, we find that both transient investors and quasi-indexers gravitate to stocks with faster information dissemination, consistent with the latter using accounting information as a low-cost performance monitoring mechanism, and the former being better enabled to implement their trading strategies in a richer information environment. Overall, this study provides new insights into the capital market information infrastructure by examining how information intermediaries and sophisticated investors impact each others’ resource allocation decisions.

institutional investors, data aggregators, information dissemination, capital markets

Abstract:
We provide new evidence on the disclosure in earnings announcements of financial statement line items prepared under Generally Accepted Accounting Principles (GAAP). First, we investigate the circumstances that might provide disincentives generally for GAAP line item disclosures. We find that managers who regularly intervene in the earnings reporting process limit disclosures at the aggregate level and in each of the financial statements so as to more effectively guide investor attention to summary financial information. Specifically, this disclosure behavior obtains when managers habitually cater to market expectations, engage in income smoothing, or use discretionary accruals to improve earnings informativeness. Second, we predict and find that the specific GAAP line items that firms choose to disclose are determined by the differential informational demands of their economic environment, consistent with incentives to facilitate investor valuation. However, these valuation-related disclosure incentives are muted when managers habitually intervene in the earnings reporting process.

disclosure incentives, financial statement information, valuation, earnings announcement

Abstract:
We analyze market reaction to targeted stock issuances and investigate possible motives for their use. We find a statistically significant abnormal return of 3.61% within a three-day window around the announcement of proposed targeted stock issuances, possibly attributable to greater information on targeted stock segments as well as monitoring and motivational advantages. We find lower tax-loss carry forwards among firms that issue targeted stock compared to those that spin off segments, suggesting that tax reasons motivate targeted stock use. The return and cash flows of targeted stocks are affected more by their common corporate affiliation, although industry influences remain strong.

Abstract:
We investigate whether managers' discretionary choices when adopting SFAS 106 are consistent with incentives to influence future labor negotiations and improve future reported income. We hypothesize that firms are more likely to opt for the immediate recognition method if i) they have large transition obligations and intend to reduce plan benefits subsequent to SFAS 106 adoption; and ii) they are more unionized. The magnitude of the transition obligation sets a ceiling on the opportunity to improve future earnings through a reduction in the already-recognized liability. Consequently, firms with relatively large transition obligations have greater incentives to be immediate recognizers if they intend to implement negative plan amendments after adopting SFAS 106. Also, if accounting numbers do play a role in labor negotiations, more unionized firms have greater incentives to use the immediate recognition method as a means of strengthening their bargaining power in subsequent negotiations to reduce plan benefits.

Our results are consistent with hypothesized incentives. Overall, our findings suggest that firms made discretionary SFAS 106 choices likely to reduce labor renegotiation costs and improve future reported income unless they were constrained by the prospect of potential debt covenant violations.

Accounting flexibility, Labor negotiations, Earnings management, Post-retirement benefits

Abstract:
This paper analyzes electric utility stock price reactions to events preceding the passage of the Energy Policy Act of 1992, a development that precipitated the onset of competition in the wholesale sector of the electric utility industry and accelerated the pace toward statelevel deregulation of the retail sector. For the industry as a whole, we find that at worst, investors had neutral reactions to events preceding wholesale deregulation. However, stock price reactions vary systematically with differences in incumbent utilities' marginal costs, though not with differences in fixed costs or purchased power costs. These results are consistent with the notion that new technologies have substantially reduced barriers to entry into the electric power generation industry, rendering capital cost advantages of incumbent utilities vulnerable to being neutralized by new entrants. However, marginal cost advantages are more likely to be sustainable because they are likely to be driven by inimitable locational advantages.

Abstract:
This paper investigates the reporting and contracting responses of electric utilities to SFAS 106. Expense-increasing accounting standards generally have no direct cash flow consequences for non-regulated firms, but they reduce these firms' reported net income and increase their reported liabilities. Past research documents that managers of non-regulated firms seek to avert potential contracting costs associated with such mandated accounting changes through operating financial or reporting decision that mitigate the financial statement impact of the accounting change. In contrast, expense-increasing accounting standards do not usually affect rate-regulated firms' net income, but do have a positive effect on their cash flows because the rate recovery mechanism is based on accounting numbers. Managers of rate-regulated firms therefore have incentives to respond to expense-increasing accounting standards in ways that enhance the financial statement impact of the accounting change. This study documents that managers of rate-regulated firms that face greater uncertainties about future rate recoveries have greater incentives to use discretionary choices that intensify the impact of expense-increasing accounting changes on current financial statements.

Abstract:
This paper assesses the quality of segment reporting using a measure based on the correlation between the performance of the segment and its industry. The findings show that the quality of segment information particularly earnings is lower than that of stand-alone firms. The difference is attributed both to measurement errors as well as to the operational structure of multi-segment firms. The results also suggest that stock market considerations and political costs play a role in segment reporting. Market tests indicate that the information content of segment information is inversely related to its quality.