The Economic Implications of Corporate Financial Reporting

72 Pages Posted: 22 Jun 2004 Last revised: 1 May 2022

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: June 2004

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 reported earnings and voluntary disclosure. The majority of firms view earnings, especially EPS, as the key metric for outsiders, even more so than cash flows. Because of the severe market reaction to missing an earnings target, we find that firms are willing to sacrifice economic value in order to meet a short-run earnings target. The preference for smooth earnings is so strong that 78% of the surveyed executives would give up economic value in exchange for smooth earnings. We find that 55% of managers would avoid initiating a very positive NPV project if it meant falling short of the current quarter's consensus earnings. Missing an earnings target or reporting volatile earnings is thought to reduce the predictability of earnings, which in turn reduces stock price because investors and analysts hate uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but try to avoid setting a disclosure precedent that will be difficult to maintain. In general, management's views provide support for stock price motivations for earnings management and voluntary disclosure, but provide only modest evidence in support of other theories of these phenomena (such as debt, political cost and bonus plan based hypotheses).

Suggested Citation

Graham, John Robert and Harvey, Campbell R. and Rajgopal, Shivaram, The Economic Implications of Corporate Financial Reporting (June 2004). NBER Working Paper No. w10550, Available at SSRN: https://ssrn.com/abstract=556537

John Robert Graham

Duke University ( email )

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Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

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

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Shivaram Rajgopal

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

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New York, NY 10027
United States

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