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Value Destruction and Financial Reporting Decisions

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


September 6, 2006


Abstract:     
We recently conducted a comprehensive survey that analyzes how senior financial executives make decisions related to performance measurement and voluntary disclosure. In particular, we ask CFOs what earnings benchmarks they care about and which factors motivate executives to exercise discretion, and even sacrifice economic value, to deliver earnings. These issues are crucially linked to stock market performance. Much of the media attention is focused on a small number of high profile firms that have engaged in earnings fraud. Our results show that the destruction of shareholder value through legal means is pervasive, if not a routine way of doing business. Indeed, we assert that the amount of value destroyed by firms striving to hit earnings targets exceeds the value lost in these high profile fraud cases.

Keywords: Earnings management, earnings smoothing, consensus earnings, meeting benchmarks, value destruction, agency problems, real earnings management, unexpected earnings, earnings surprise, net present value

JEL Classifications: G14, G30, G32, M41, M43, M49, G38

Working Paper Series

Date posted: December 20, 2005 ; Last revised: September 07, 2006

Suggested Citation

Graham, John R., Harvey, Campbell R. and Rajgopal, Shivaram, Value Destruction and Financial Reporting Decisions (September 6, 2006). Available at SSRN: http://ssrn.com/abstract=871215


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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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