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The Economic Implications of Corporate Financial Reporting

John R. Graham
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Shivaram Rajgopal
University of Washington - Michael G. Foster School of Business


January 11, 2005


Abstract:     
We survey 401 financial executives, and conduct in-depth interviews with an additional 20, to determine the key factors that drive decisions related to performance measurement and voluntary disclosure. The majority of firms view earnings, especially EPS, as the key metric for an external audience, more so than cash flows. We find that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter's consensus earnings. Similarly, more than three-fourths of the surveyed executives would give up economic value in exchange for smooth earnings. Managers believe that missing an earnings target or reporting volatile earnings reduces the predictability of earnings, which in turn reduces stock price because investors and analysts dislike uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but at the same time, try to avoid setting a disclosure precedent that will be difficult to maintain. In general, management's views support stock price motivations for earnings management and voluntary disclosure, but provide only modest evidence consistent with other theories of these phenomena (such as debt, political cost and bonus plan based hypotheses).

Keywords: financial statement, earnings management, earnings benchmark, voluntary disclosure, information risk

JEL Classifications: G35, G32, G34

Working Paper Series

Date posted: January 25, 2004 ; Last revised: January 12, 2005

Suggested Citation

Graham, John R., Harvey, Campbell R. and Rajgopal, Shivaram, The Economic Implications of Corporate Financial Reporting (January 11, 2005). Available at SSRN: http://ssrn.com/abstract=491627


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Contact Information

Shivaram Rajgopal (Contact Author)
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
206-543-7913 (Phone)
206-685-9392 (Fax)
HOME PAGE: http://faculty.washington.edu/rajgopal/
John Robert Graham
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Campbell R. Harvey
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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