Private lenders’ demand for audit


Performance-based compensation in member-owned firms: An examination of medical group practices



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Performance-based compensation in member-owned firms: An examination of medical group practices

Ittner, Christopher D., Larcker, David F., Pizzini, Mina

Vol 44, Issue 3, 300-327 (2007)

Abstract: We examine the importance of agency considerations for the mix of salary and performance-based compensation in member-owned medical practices. Performance-based pay increases with the informativeness of clinical productivity measures, and declines with greater reimbursement from capitation contracts. Inexperienced physicians receive more compensation from salary, but compensation mix does not change as physicians near retirement. Larger practices and practices using outside management companies place more weight on performance-based compensation. However, when more physicians in the group practice the same specialty, less emphasis is placed on performance-based compensation. Finally, the presence of an executive partner has no influence on compensation mix. [Copyright &y& Elsevier]

A discussion of 'corporate disclosure by family firms'

Hutton, Amy P.

Vol 44, Issue 1/2, 287-297 (2007)

Using a unique empirical setting, family firms in the S&P 500, Ali et al. [Ali, A., Chen, T.-Y., Radhakrishnan, S., 2007. Corporate disclosures by family firms. Journal of Accounting and Economics, doi:10.1016/j.jacceco.2007.01.006] contribute to a growing body of research on the relation between corporate governance and corporate disclosure quality. Using an indicator variable for sub-sample membership as an instrument for differing agency costs, the authors interpret their findings as consistent with family firms facing lower overall agency costs and providing higher quality corporate disclosures. However, their empirical findings are open to alternative interpretations and in totality present relatively weak, indirect evidence of a relation between corporate governance and the quality of corporate disclosure. [Copyright &y& Elsevier]

Jeopardy, non-public information, and insider trading around SEC 10-K and 10-Q filings

Huddart, Steven, Ke, Bin, Shi, Charles

Vol 43, Issue 1, 3-36 (2007)

Evidence contrasting U.S. insider trades in high- and low-jeopardy periods and across firms at high and low risk for 10b-5 litigation indicates that insiders condition their trades on foreknowledge of price-relevant public disclosures, but avoid profitable trades when the jeopardy associated with such trades is high, such as immediately before earnings announcements. Insiders avoid profitable trades before quarterly earnings are announced and sell (buy) after good (bad) news earnings announcements. Insiders trade most heavily after earnings announcements and profit from foreknowledge of price-relevant information in the forthcoming Form 10-K or 10-Q filing. [Copyright &y& Elsevier]

Fair-value pension accounting

Hann, Rebecca N., Heflin, Frank, Subramanyam, K. R.

Vol 44, Issue 3, 328-358 (2007)

Abstract: We compare the value and credit relevance of financial statements under fair-value and smoothing (SFAS-87) models of pension accounting. While fair-value improves the credit relevance of the balance sheet, it does not improve its value relevance. Further, fair-value impairs both the value and credit relevance of the income statement and the combined financial statements unless transitory gains and losses (G&L) are separated from more persistent income components. Overall, our results suggest there are no informational benefits to adopting a fair-value pension accounting model. [Copyright &y& Elsevier]

The influence of large clients on office-level auditor oversight: Evidence from the property-casualty insurance industry

Gaver, Jennifer J., Paterson, Jeffrey S.

Vol 43, Issue 2/3, 299-320 (2007)

Abstract: We analyze the loss-reserving practices of 562 insurance companies in 1993 to assess the relation between client influence and auditor oversight. Consistent with Petroni [1992. Management''s response to the differential costs and benefits of optimistic reporting in the property-casualty insurance industry. Journal of Accounting and Economics 15, 485-508.], we find that financially struggling insurers tend to under-reserve. However, this behavior is attenuated when the weak insurer is important to the local practice office of the auditor. This result holds across various measures of client influence and supports the contention of Reynolds and Francis [2001. Does size matter? The influence of large clients on office-level auditor reporting divisions. Journal of Accounting and Economics 30, 375-400.] that auditors allow less accounting discretion to their larger clients. [Copyright &y& Elsevier]

The Sarbanes-Oxley Act and firms' going-private decisions

Engel, Ellen, Hayes, Rachel M., Wang, Xue

Vol 44, Issue 1/2, 116-145 (2007)

We investigate going-private decisions in response to the passage of the Sarbanes-Oxley Act of 2002 (SOX). We study firms that go private from 1998 to May 2005 and find: (1) the quarterly frequency of going-private transactions has increased after the passage of SOX, and (2) abnormal returns surrounding both the passage of SOX and the going-private announcement are significantly related to proxies for the costs and benefits of SOX and the net benefits of being a public firm. Our empirical evidence is broadly consistent with the notion that SOX has affected firms' going-private decisions. [Copyright &y& Elsevier]

Voluntary disclosure under uncertainty about the reporting objective

Einhorn, Eti

Vol 43, Issue 2/3, 245-274 (2007)

Abstract: The extensive research toward an understanding of corporate voluntary disclosure strategies has primarily aimed at explaining why firms do not fully disclose their private information in capital markets with rational expectations. Following a variety of theories that explain the withholding of information, this paper highlights the uncertainty of investors about the reporting objective of managers as another explanation. The paper also studies how uncertainty about the reporting objective interacts with other factors known to suppress disclosure, exploring that the common intuition regarding these factors does not always carry over to environments with an uncertain reporting objective. [Copyright &y& Elsevier]

The monitoring role of insiders

Drymiotes, George

Vol 44, Issue 3, 359-377 (2007)

Abstract: Conventional wisdom suggests that giving monitored agents an oversight role may blunt the effectiveness of the monitoring process. In contrast, I show that less independent boards can sometimes be more effective at monitoring. Fully independent boards have incentives to shirk monitoring ex post, after the agents' productive inputs are sunk, if the boards cannot commit ex ante to monitoring. However, boards with inside directors may have incentives to monitor the agents ex post. The demand for insiders thus arises endogenously as they allow boards to indirectly commit to monitoring and thereby facilitate the monitoring process. [Copyright &y& Elsevier]

Determinants of weaknesses in internal control over financial reporting

Doyle, Jeffrey, Ge, Weili, McVay, Sarah

Vol 44, Issue 1/2, 193-223 (2007)

We examine determinants of weaknesses in internal control for 779 firms disclosing material weaknesses from August 2002 to 2005. We find that these firms tend to be smaller, younger, financially weaker, more complex, growing rapidly, or undergoing restructuring. Firms with more serious entity-wide control problems are smaller, younger and weaker financially, while firms with less severe, account-specific problems are healthy financially but have complex, diversified, and rapidly changing operations. Finally, we find that the determinants also vary based on the specific reason for the material weakness, consistent with each firm facing their own unique set of internal control challenges. [Copyright &y& Elsevier]

Did the 2003 Tax Act reduce the cost of equity capital?

Dhaliwal, Dan, Krull, Linda, Li, Oliver Zhen

Vol 43, Issue 1, 121-150 (2007)

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced shareholder-level taxes on equity income. If shareholder-level taxation is a component of cost of equity capital, then the cost of equity capital should decrease after the Tax Act. We find that the cost of equity capital decreases by 1.02% and that the decline is smaller for firms largely held by institutional investors to whom the tax rate reduction does not apply. These results suggest that the Tax Act lowered the cost of equity capital and add further evidence to the question of whether taxes impact valuation. [Copyright &y& Elsevier]

Investor protection and the information content of annual earnings announcements: International evidence

DeFond, Mark, Hung, Mingyi, Trezevant, Robert

Vol 43, Issue 1, 37-67 (2007)

We draw on the investor protection literature to identify structural factors in the financial reporting environment that are likely to explain cross-country differences in the information content of annual earnings announcements. Using data from over 50,000 annual earnings announcements in 26 countries, we find that annual earnings announcements are more informative in countries with higher quality earnings or better enforced insider trading laws, and that annual earnings announcements are less informative in countries with more frequent interim financial reporting. We also find that, on average, earnings announcements are more informative in countries with strong investor protection institutions. [Copyright &y& Elsevier]

Earnings announcement premia and the limits to arbitrage

Cohen, Daniel A., Dey, Aiyesha, Lys, Thomas Z., Sunder, Shyam V.

Vol 43, Issue 2/3, 153-180 (2007)

Abstract: We examine the factors underlying the presence of earnings announcement premia. We find that the premia persist beyond the sample period examined in prior studies (ending in 1988), although they decline in magnitude after 1988. Further, premia are lower on the expected than the actual earnings announcement dates. We document that increases in voluntary disclosures result in lower premia, despite the increase in return volatility over time. Finally, our evidence suggests that the premia are not completely eliminated because of the costs of arbitrage. [Copyright &y& Elsevier]

The roles of task-specific forecasting experience and innate ability in understanding analyst forecasting performance

Clement, Michael B., Koonce, Lisa, Lopez, Thomas J.

Vol 44, Issue 3, 378-398 (2007)

Abstract: Considerable debate exists about what analyst experience measures and whether analysts learn from their experiences. Extant research has argued that once innate ability is considered, analysts' general and firm-specific experiences are not relevant to understanding their forecasting performance. We argue that measures of experience need to be expanded to also include task-specific experience. Our results reveal that analysts' forecast accuracy is associated with both their innate ability and task-specific experience. In addition, we find that forecast accuracy and task-specific experience are most highly correlated for those analysts who survive the longest and, thus, presumably have the greatest innate abilities. [Copyright &y& Elsevier]

How do accounting variables explain stock price movements? Theory and evidence

Chen, Peter, Zhang, Guochang

Vol 43, Issue 2/3, 219-244 (2007)

Abstract: This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang, G. [2000. Accounting information, capital investment decisions, and equity valuation: theory and empirical implications. Journal of Accounting Research 38, 271-295], who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and changes in profitability, growth opportunities, and discount rates. Empirical results confirm the predicted roles of all identified factors. The model explains about 20% of the cross-sectional return variation, with cash-flow-related factors (as opposed to changes in discount rates) accounting for most of the explanatory power. The properties of the model are robust across various subsamples and periods. [Copyright &y& Elsevier]

The effect of reporting frequency on the timeliness of earnings: The cases of voluntary and mandatory interim reports

Butler, Marty, Kraft, Arthur, Weiss, Ira S.

Vol 43, Issue 2/3, 181-217 (2007)

Abstract: We examine whether financial reporting frequency affects the speed with which accounting information is reflected in security prices. For a sample of 28,824 reporting-frequency observations from 1950 to 1973, we find little evidence of differences in timeliness between firms reporting quarterly and those reporting semiannually, even after controlling for self-selection. However, firms that voluntarily increased reporting frequency from semiannual to quarterly experienced increased timeliness, while firms whose increase was mandated by the SEC did not. We conclude that there is little evidence to support the claim that regulation forcing firms to report more frequently improves earnings timeliness. [Copyright &y& Elsevier]

Delisting returns and their effect on accounting-based market anomalies

Beaver, William, McNichols, Maureen, Price, Richard

Vol 43, Issue 2/3, 341-368 (2007)

Abstract: We show that tests of market efficiency are sensitive to the inclusion of delisting firm-years. When included, trading strategy returns based on anomaly variables can increase (for strategies based on earnings, cash flows and the book-to-market ratio) or decrease (for a strategy based on accruals). This is due to the disproportionate number of delisting firm-years in the lowest decile of these variables. Delisting firm-years are most often excluded because the researcher does not correctly incorporate delisting returns, because delisting return data are missing or because other research design choices implicitly exclude them. [Copyright &y& Elsevier]

Discussion of "Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting"

Beatty, Anne

Vol 44, Issue 1/2, 32-35 (2007)

Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. Journal of Accounting and Economics.] provide a thought-provoking discussion of an important topic and consider a controversial role of accounting inconsistent with the valuation perspective of accounting currently adopted by standard setters. The paper uses a contracts-based view of accounting to explain the empirical relation between two measures of conservatism, the market-to-book ratio and asymmetric timeliness. Although the predictions from their framework are consistent with the previously documented negative correlation between these measures, suggesting this criticism of asymmetric timeliness may be misguided, I will be surprised if their paper eliminates the controversy over these measures of conservatism. [Copyright &y& Elsevier]

The effect of equity compensation on voluntary executive turnover

Balsam, Steven, Miharjo, Setiyono

Vol 43, Issue 1, 95-119 (2007)

Equity compensation provides incentives for executives to remain with the firm to avoid forfeiture of restricted shares and some or all of the value of stock options held. Empirically we show that the intrinsic value of unexercisable in-the-money options, the time value of unexercised options, and the value of restricted shares are inversely related to voluntary executive turnover. These findings which are most pronounced for strong performers, hold for CEOs and non-CEOs alike. While paying excess cash compensation also reduces turnover, the effect is less pronounced than that of equity compensation. [Copyright &y& Elsevier]

The discovery and reporting of internal control deficiencies prior to SOX-mandated audits

Ashbaugh-Skaife, Hollis, Collins, Daniel W., Kinney, William R.

Vol 44, Issue 1/2, 166-192 (2007)

We use internal control deficiency (ICD) disclosures prior to mandated internal control audits to investigate economic factors that expose firms to control failures and managements' incentives to discover and report control problems. We find that, relative to non-disclosers, firms disclosing ICDs have more complex operations, recent organizational changes, greater accounting risk, more auditor resignations and have fewer resources available for internal control. Regarding incentives to discover and report internal control problems, ICD firms have more prior SEC enforcement actions and financial restatements, are more likely to use a dominant audit firm, and have more concentrated institutional ownership. [Copyright &y& Elsevier]

The interaction among disclosure, competition between firms, and analyst following

Arya, Anil, Mittendorf, Brian

Vol 43, Issue 2/3, 321-339 (2007)

Abstract: This paper considers the role of analyst following in coordinating mutually beneficial disclosure among competing firms. Though firms may benefit from industry-wide transparency, the urge to keep a competitive edge by withholding disclosures can be compelling. In such a case, the desire to attract analyst following can make a policy of joint disclosure viable. Knowing that keeping silent can deter analysts, no firm has incentives to unilaterally withhold disclosures. Further, coordinated disclosures can benefit firms and consumers alike by yielding circumstance-specific product offerings. [Copyright &y& Elsevier]

Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance

Anilowski, Carol, Feng, Mei, Skinner, Douglas J.

Vol 44, Issue 1/2, 36-63 (2007)

We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns--market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release. [Copyright &y& Elsevier]

Corporate disclosures by family firms

Ali, Ashiq, Chen, Tai-Yuan, Radhakrishnan, Suresh

Vol 44, Issue 1/2, 238-286 (2007)

Compared to non-family firms, family firms face less severe agency problems due to the separation of ownership and management, but more severe agency problems that arise between controlling and non-controlling shareholders. These characteristics of family firms affect their corporate disclosure practices. For S&P 500 firms, we show that family firms report better quality earnings, are more likely to warn for a given magnitude of bad news, but make fewer disclosures about their corporate governance practices. Consistent with family firms making better financial disclosures, we find that family firms have larger analyst following, more informative analysts' forecasts, and smaller bid-ask spreads. [Copyright &y& Elsevier]

Accounting conservatism and board of director characteristics: An empirical analysis

Ahmed, Anwer S., Duellman, Scott

Vol 43, Issue 2/3, 411-437 (2007)

Abstract: Using three different measures of conservatism, we document that (i) the percentage of inside directors is negatively related to conservatism, and (ii) the percentage of outside directors' shareholdings is positively related to conservatism. Our results hold after controlling for industry, firm size, leverage, growth opportunities, institutional ownership, inside director ownership, and unobservable firm characteristics that are stable over time. Overall, the evidence is consistent with accounting conservatism assisting directors in reducing agency costs of firms. [Copyright &y& Elsevier]

Golden handshakes: Separation pay for retired and dismissed CEOs

Yermack, David

Vol 41, Issue 3, 237-256 (2006)

Abstract: This paper studies separation payments made when CEOs leave their firms. In a sample of 179 exiting Fortune 500 CEOs, more than half receive severance pay and the mean separation package is worth

Discussion of the effects of corporate governance on firms' credit ratings

Weber, Joseph

Vol 42, Issue 1/2, 245-254 (2006)

Abstract: Ashbaugh-Skaife, Collins, and LaFond [2006. The effects of corporate governance on firms' credit ratings. Journal of Accounting and Economics (this issue)] find that better governed firms receive better credit ratings and poor governance costs the median speculative grade firm

Governing private foundations using the tax law

Sansing, Richard, Yetman, Robert

Vol 41, Issue 3, 363-384 (2006)

Abstract: This paper investigates two tax law provisions that act as governance instruments designed to regulate the behavior of private foundations. It examines tax return data from a sample of private foundations to determine the effects of the minimum distribution requirement and the dual tax rate regime. The minimum distribution requirement primarily affects the distribution behavior of foundations that are no longer receiving donations and are growing more slowly than the average foundation. The dual tax rate regime has countervailing effects on distributions by foundations, rewarding both higher levels of current distributions and lower levels of prior year distributions. [Copyright &y& Elsevier]

Earnings management through real activities manipulation

Roychowdhury, Sugata

Vol 42, Issue 3, 335-370 (2006)

Abstract: I find evidence consistent with managers manipulating real activities to avoid reporting annual losses. Specifically, I find evidence suggesting price discounts to temporarily increase sales, overproduction to report lower cost of goods sold, and reduction of discretionary expenditures to improve reported margins. Cross-sectional analysis reveals that these activities are less prevalent in the presence of sophisticated investors. Other factors that influence real activities manipulation include industry membership, the stock of inventories and receivables, and incentives to meet zero earnings. There is also some, though less robust, evidence of real activities manipulation to meet annual analyst forecasts. [Copyright &y& Elsevier]

Costly arbitrage and the myth of idiosyncratic risk

Pontiff, Jeffrey

Vol 42, Issue 1/2, 35-52 (2006)

Abstract: Transaction and holding costs make arbitrage costly. Mispricing exists to the extent that arbitrage costs prevent rational traders from fully eliminating inefficiencies. Although the relation between mispricing and transaction costs is well-known, the relation between mispricing and holding costs is misunderstood. One holding cost, idiosyncratic risk, is particularly misunderstood. Various myths are debunked, including the common myth that idiosyncratic risk matters because arbitrageurs only have access to a small number of projects [Shleifer and Vishny, 1997. The limits of arbitrage. The Journal of Finance 52, 35-55.]. The literature demonstrates that idiosyncratic risk is the single largest cost faced by arbitrageurs. [Copyright &y& Elsevier]



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