The Economic Implications of Corporate Financial Reporting

72 Pages Posted: 25 Jan 2004

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Multiple version iconThere are 4 versions of this paper

Date Written: 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 Classification: G35, G32, G34

Suggested Citation

Graham, John Robert and Harvey, Campbell R. and Rajgopal, Shivaram, The Economic Implications of Corporate Financial Reporting (January 11, 2005). Available at SSRN: https://ssrn.com/abstract=491627 or http://dx.doi.org/10.2139/ssrn.491627

John Robert Graham

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Shivaram Rajgopal (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

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