DANIEL A. COHEN, New York University - Department of Accounting, Taxation & Business Law
Email: dcohen@stern.nyu.edu
PAUL ZAROWIN, New York University - Department of Accounting, Taxation & Business Law
Email: pzarowin@stern.nyu.edu

We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation, and how this behavior varies over time and cross-sectionally. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual-based, earnings management tools around SEOs. Second, consistent with the expectation that the Sarbanes-Oxley Act (SOX) has made accrual-based earnings management more costly, we find that firms have substituted from accrual to real earnings management after SOX. Finally, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEOs varies cross-sectionally. We find that firms choices vary predictably as a function of the firm s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms trade-off between real versus accrual methods of earnings management.

HAIM DOV FRIED, New York University
Email: HFRIED@STERN.NYU.EDU
NISHI SINHA, Boston University - School of Management
Email: nishi@bu.edu

In some industries firms schedule their disclosure at about the same time, usually around the end of the business cycle, whereas in others such disclosures are more dispersed over time. This paper examines a firm s choice of a fiscal year-end (and hence of disclosure timing) relative to the business cycle and to the timing chosen by other firms in the industry. We model a stochastic setting in which the periodic closing of books yields information that is relevant for subsequent managerial decisions. The results show that while it is business seasonality that is the primary determinant of reporting period choice, competitive forces in the form of information transfer effects and proprietary disclosure costs have the ability to make firms' fiscal years deviate from the business cycle. Such deviations are more likely when auto-correlation in firms' annual costs is low, when within-season variations in business conditions are low, when uncertainty is primarily about industry-wide rather than firm-specific factors, and/or when affordable opportunities exist for collecting information that the year-end closing of books typically provides. Further, if incumbent firms are already reporting at the end of the business season, newer firms may have a greater inclination to make a different choice. The results also offer a novel rationale for why the end of the business cycle is an attractive fiscal year-end. The desire to receive information at an opportune time, rather than the ease of collecting information or any other factors, makes the end of business cycle an attractive year-end in our setting.

RENEE B. ADAMS, UQ Business School, University of Queensland, European Corporate Governance Institute (ECGI)
Email: r.adams@business.uq.edu.au
DANIEL FERREIRA, London School of Economics & Political Science (LSE) - Department of Management, European Corporate Governance Institute (ECGI), Centre for Economic Policy Research (CEPR)
Email: d.ferreira@lse.ac.uk

We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that CEO turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.

MARI PAANANEN, University of Hertfordshire
Email: m.paananen@herts.ac.uk
NIMITA PARMAR, University of Hertfordshire - Business School
Email: n.1.parmar@herts.ac.uk

There are two approaches which investors can exercise when using accounting information, either to use financial reporting to value or to assess the management's stewardship of the company. Despite the fact that US GAAP, IFRS, and UK GAAP are all market oriented sets of accounting standards, both FASB and IASB are more inclined to require fair value accounting with regards to assets and liabilities compared to UK GAAP, which tend to encourage a stewardship approach. We examine whether investors' shift their focus from earnings to book value of shareholders' equity after the adoption of IFRS in the United Kingdom. As predicted we find that indeed investors seem to rely more on the book value of shareholders' equity and less on earnings information after the adoption of IFRS. We predicted and found no change in the overall increase accounting information's ability to predict future equity values.

MING-CHE LU, Chaoyang University of Technology
Email: mclu@cyut.edu.tw
YI-HUA CHEN, affiliation not provided to SSRN
Email: fichen@gmail.com

This study links the conservatism principal and earnings persistence. Following Lev's framework (Lev, Sarath, and Sougiannis 2005), we further estimate the R&D reporting biases of earnings, derived from the immediate expensing of research and development (R&D) expenditures, under current generally accepted accounting principles. It makes negative R&D reporting biases to report earnings conservatively, while reporting aggressively makes positive R&D reporting biases. Since the R&D reporting biases are a component of earnings, we can decompose the earnings into the real earnings component and the R&D reporting biases component. We find that the R&D reporting biases component is more persistent than the real earnings component. The R&D reporting biases of earnings serve as a pivot to punish/reward for low/high earnings persistence due to high/low R&D growth rate relative to profitability. This evidence conforms to conservatism principal arguments about the high level of uncertainty associated with the payoff of R&D investments.

However, stock market fails to rationally reflect the implication of the R&D reporting biases with respect to one-year-ahead earnings and consequently underprices the R&D reporting biases. Our findings are consistent with investors' lack of the reporting biases information, which is generally not provided by financial statements themselves.

FREDERICK W. LINDAHL, George Washington University - Department of Accountancy
Email: lindahl@gwu.edu
HANNU SCHADEWITZ, Turku School of Economics & Business Administration - Department of Accounting & Finance
Email: Hannu.Schadewitz@tukkk.fi

Financial transparency is a critical factor in global financial markets. Recently, international studies of accounting quality have flourished. Guided by the conclusion in La Porta et al. (1998) that there is a fundamental difference in investor protections that that are afforded by civil vs. common law systems, accounting researchers always include the country's legal system as an explanatory variable. Usually they conclude that legal systems matter for the quality of financial disclosure.

Because this research is new and institutional details of legal systems' effect on accounting have not been studied, we evaluate the conclusion that legal family is an important determinant of quality. We review the legal scholarship about the two families, the work on the reliability of the pivotal analysis of La Porta et al. (1998), and finally the accounting research studies themselves.

We conclude that the importance of legal family on accounting quality is very weakly supported.