When a franchisor offers to sell new franchises, disclosures relevant to the earnings of franchise units are optional. I find that the 26% percent of franchisors who volunteer earnings-related information tend to impose greater investment risk on new franchisees in the form of (1) higher contractual payments and (2) greater product demand uncertainty. I also observe that larger franchise systems, which collect data from more locations and therefore have more precise proprietary information, are less likely to disclose. This finding is contrary to what has been observed in the securities market, where large firms are associated with more voluntary disclosure. [ABSTRACT FROM AUTHOR]
Accounting-Based Constraints in Public and Private Debt Agreements
Press, Eric G., Weintrop, Joseph B.
Vol 12, Issue 1-3, 65-95 (1990)
For a random sample of 83 firms, we show that public and private debt agreements filed at the SEC yield a more comprehensive set of accounting constraints than annual reports or Moody's For firms with accounting constraints, measures of proximity to leverage, net worth, and working capital constraints are significantly correlated to leverage We incorporate constraint-related data into Zmijewski and Hagerman's (1981) income strategy model Both a leverage constraint indicator and leverage are significantly associated with accounting choice This suggests that leverage is proxying for factors in addition to the existence of accounting-based constraints [ABSTRACT FROM AUTHOR]
Earnings management and nonroutine executive changes
Vol 16, Issue 1-3, 317-336 (1993)
This paper examines evidence of earnings management associated with nonroutine executive changes. The empirical evidence is consistent with the hypothesis that incoming executives manage accruals in a way that decreases earnings in the year of the executive change and increases earnings the following year. Further, incoming executives record large write-offs and special items the year of the management change. Contrary to expectation, departing executives record accruals and writeoffs that decrease earnings during their last year of tenure. Several possible reasons for this result are suggested. [ABSTRACT FROM AUTHOR]
The London Stock Exchange's AIM experiment: Regulatory or market failure? A discussion of Gerakos, Lang and Maffett
Piotroski, Joseph D.
Vol 56, Issue NA, 216-NA (2013)
Abstract: The conference paper by Gerakos, Lang and Maffett (2013) provides reliable, descriptive evidence on the post-IPO performance of firms listing on the London Stock Exchange's Alternative Investment Market (AIM). Their findings are consistent with both a failure of private sector regulation and incorrect market expectations about AIM's investor protections. In this discussion of Gerakos et al. (2013), I highlight the strengths and limitations of their conference paper, summarize how various regulatory and market factors could produce the observed systematic under-performance of AIM offerings, and outline paths for future research on the topic. [Copyright &y& Elsevier]
Stock price effects of the allowance of LIFO for tax purposes
Vol 23, Issue 3, 283-308 (1997)
I investigate stock price behavior associated with the allowance of LIFO for tax purposes. The analysis is structured as an event study of the Revenue Acts of 1938 and 1939. The results indicate a positive net market reaction to legislative events leading to LIFO's incorporation into the US tax code for the sample firms having the largest estimated LIFO tax benefits. I conclude the market revised its probabilities that firms most likely to benefit would avail themselves of the opportunity to use LIFO and defer taxes on inventory profits. [ABSTRACT FROM AUTHOR]
Taxation, regulation, and the organizational structure of property-casualty insurers
Petroni, Kathy R., Shackelford, Douglas A.
Vol 20, Issue 3, 229-253 (1995)
This study investigates the effects of state taxes and regulation on an organizational structure decision for expanding property-casualty insurers (subsidiary versus license). Tests are conducted of the relation between the organizational structure of 2,335 property-casualty insurers and state tax and regulatory conditions in 1991. Evidence is provided that property-casualty insurers structure their cross-state expansion to mitigate both state tax and regulatory costs. [ABSTRACT FROM AUTHOR]
Optimistic reporting in the property-casualty insurance industry
This paper examines the response of managers of property-casualty insurers to the differential costs and benefits of underestimate the liability for outstanding claim losses The primary hypothesis is that the incentive to underestimate the liability is a decreasing function of the insurer's actual financial position Empirical tests suggest that managers of financially weak insurers bias downward their estimates of claim loss reserves relative to other insurers after controlling for exogenous economic factors Evidence also reveals that managers of insurers 'close' to receiving regulatory attention understate reserve estimates to an even larger degree [ABSTRACT FROM AUTHOR]
There are frequent expressions of concern in the accounting, economics, and legal literature about managers' conflicting duties and incentives in management buyouts. This study is motivated by a concern about the managerial incentive to reduce reported earnings prior to the announcement of the buyout proposal. Our analysis of a sample of 175 management buyouts during 1981-88 provides evidence of manipulation of discretionary accruals in the predicted direction in the year preceding the public announcement of management's intention to bid for control of the company. [ABSTRACT FROM AUTHOR]
Abnormal Returns to Investment Strategies Based on the Timing of Earnings Reports
Penman, Stephen H.
Vol 6, Issue 3, 165-183 (1984)
Discusses the evidence on market inefficiency in processing information in earnings reports. Documentation on short positions in sample stocks of 1971-1976; Magnitude of the average abnormal returns; Generation of abnormal returns from long position in stocks.
Anticipated Information Releases Reflected in Call Option Prices
Patell, James M., Wolfson, Mark A.
Vol 1, Issue 2, 117-140 (1979)
Examines the behavior of call option prices through anticipated information in financial reporting. Effect of annual earnings on security prices; Determination of changes in variance rates implied by the Black-Scholes option model; Demonstration of financial accounting disclosures.
Accounting and Business Research
Parker, R. H., Nobes, C. W.
Vol 11, Issue 2/3, 293-293 (1989)
The table of contents for the winter 1988 issue of the Journal of Accounting & Economics" is presented.
Predicting Takeover Targets
Palepu, Krishna G.
Vol 8, Issue 1, 3-35 (1986)
Focuses on the construction of statistical models using publicly available financial information to predict acquisition targets. Number of methodological flaws; Difficulty in predicting targets; Involvement of binary state prediction models with skewed distribution of the two states of interest.
Financial Statement Analysis and the Prediction of Stock Returns
Ou, Jane A., Penman, Stephen H.
Vol 11, Issue 4, 295-329 (1989)
This paper performs a financial statement analysis that combines a large ~et of financial statement items into one summary measure which indicates the direction of one-year-ahead earnings changes Positions are taken in stocks on the basis of this measure during the period 1973-1983, which involve canceling long and short positions with zero net investment The two-year holding-period return to the long and short positrons is tn the order of 125% After adjustment for 'size effects the return is about 70% These returns cannot be explained by nominated firm risk characteristics [ABSTRACT FROM AUTHOR]
On Financial Disclosure and the Behavior of Security Prices
Ohlson, James A.
Vol 1, Issue 3, 211-232 (1979)
Examines the impact of financial disclosure on stock price behavior. Effects of disclosure on production financing programs; Use of equilibrium analysis to determine the value and behavior of macro-variables; Identification of risk and return parameters.
Ungarbled Earnings and Dividends
Ohlson, James A.
Vol 11, Issue 2/3, 109-115 (1989)
This paper examines the Beaver, Lambert and Morse (1980 valuation model that capitalizes 'ungarbled' earnings The analysis identifies the model's unspecified capitalization factor, and it emphasizes that a complete model of ungarbled earnings must focus on the joint stochastic behavior of earnings and dividends It is shown that expected ungarbled earnings, scaled for a constant, equal expected dividends Except for the scale factor, no apparent economic reasons suggest that ungarbled earnings are any different from dividends [ABSTRACT FROM AUTHOR]
I examine three composite analyst forecasts of earnings per share as proxies for expected earnings The most current forecast weakly dominates the mean and media forecasts in accuracy This is evidence that forecast dates are more relevant for determining accuracy than individual error Consistent with previous research, I find analysts more accurate than time-series models However prior knowledge of forecast errors from a quarterly autoregressive model predicts excess stock returns better than prior knowledge of analysts' errors This is inconsistent with previous research and is anomalous given analysts' greater accuracy [ABSTRACT FROM AUTHOR]
Are overhead costs strictly proportional to activity?
Noreen, Eric, Soderstrom, Naomi
Vol 17, Issue 1/2, 255-278 (1994)
Using cross-sectional data from hospitals in Washington State, we test whether overhead costs are proportional to overhead activities. This assumption is at the heart of nearly all cost accounting systems, which implicitly assume that marginal cost is equal to average cost. Empirically, the proportionality hypothesis can be rejected for most of the overhead accounts. On average across the accounts, the average cost per unit of activity overstates marginal costs by about 40% and in some departments by over 100%. Thus, the average cost per activity should be used with a great deal of caution in decisions. [ABSTRACT FROM AUTHOR]
Voluntary disclosures and insider transactions
Noe, Christopher F.
Vol 27, Issue 3, 305-326 (1999)
This paper investigates the association between voluntary disclosures and insider transactions (i.e., transactions by managers in their own firms' shares). The findings suggest that managers do not make insider transactions to profit from news about their own firms just before it becomes publicly available. However, managers appear to employ other strategies for exploiting private information when making insider transactions. Managers cluster insider transactions after voluntary disclosures when doing so results in more favorable stock prices for them. Also, managers take advantage of knowledge about their own firms' long-term prospects while utilizing voluntary disclosures to shield themselves against profiteering allegations. [ABSTRACT FROM AUTHOR]
How should we think about earnings quality? A discussion of "Earnings quality: Evidence from the field"
Nelson, Mark W., Skinner, Douglas J.
Vol 56, Issue NA, 34-NA (2013)
Abstract: Dichev, Graham, Harvey and Rajgopal (DGHR, in this issue) survey chief financial officers (CFOs) to elicit their views on earnings quality, broader trends in financial reporting, and the prevalence of earnings management. They provide some interesting insights on these issues. We discuss how CFOs' incentives in the financial reporting process are likely to affect what we can learn from them about earnings quality. We also discuss how DGHR's methodological choices regarding survey sample and question design affect their inferences, including what we can infer about the prevalence and magnitude of earnings management. [Copyright &y& Elsevier]
Using delegation and control systems to mitigate the trade-off between the performance-evaluation and belief-revision uses of accounting signals
Narayanan, V. G., Davila, Antonio
Vol 25, Issue 3, 255-282 (1998)
Two trade-offs arise in an agency relationship when the same accounting signal is used for both performance evaluation and investment evaluation. Using the signal for performance evaluation, (1) directly influences the informativeness of the signal for investment evaluation, and (2) induces manipulation, which, in turn, lowers the informativeness of the signal for investment evaluation. The principal can increase her welfare by delegating the investment decision to the agent, setting up multiple control systems, or using the outcome of the investment for performance evaluation. We show the implications of using each alternative on incentive contracts, equilibrium effort, and manipulation levels. [ABSTRACT FROM AUTHOR]
Corporate responses to segment disclosure requirements
Nagarajan, Nandu J., Sridhar, Sri S.
Vol 21, Issue 2, 253-275 (1996)
This paper shows through increasing disclosure requirements may induce firms to reduce their value-relevant disclosures. In the absence of segment reporting requirements, an incumbent firm may voluntarily disclose value-relevant information because it can use other, value-irrelevant, information to jam proprietary disclosures. However, when required to disclose segment data, the incumbent may aggregate proprietary information with other value-relevant information to deter entry by a rival. Hence, the firm does not disclose value-relevant information it would have revealed voluntarily in the absence of segment disclosure requirements. In such situations, requiring more disaggregate disclosures can actually decrease price efficiency. [ABSTRACT FROM AUTHOR]
The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs
Myung-Sun, Kim, Kross, William
Vol 25, Issue 1, 69-99 (1998)
We investigate whether banks with low capital ratios use accounting accruals for capital ratio management. We focus on a time where we expect a change in bank managers behavior regarding certain accruals. In 1989 regulatory changes created (removed) incentives to depress loan loss provisions (write-offs) after (before) 1989. Our results show that banks with low capital ratios reduced their loan loss provisions and increased write-offs during the 1990-1992 period compared to the 1985-1988 period. Banks with high capital ratios exhibited no difference in loss provisions, but did significantly increase loan write-offs during 1990-92. [ABSTRACT FROM AUTHOR]
Financial performance surrounding CEO turnover
Murphy, Kevin J., Zimmerman, Jerold L.
Vol 16, Issue 1-3, 273-315 (1993)
We document the behavior of a variety of financial variables surrounding CEO departures, and estimate the extent to which changes in potentially discretionary variables are explained by poor economic performance rather than direct managerial discretion. We conclude that turnover-related changes in R&D, advertising, capital expenditures, and accounting accruals are due mostly to poor performance. To the extent that outgoing or incoming managers exercise discretion over these variables, the discretion appears to be limited to firms where the CEO's departure is preceded by poor performance. We find no evidence of managerial discretion in strongly performing firms where the CEO retires as part of the normal succession process. [ABSTRACT FROM AUTHOR]
CORPORATE PERFORMANCE AND MANAGERIAL REMUNERATION An Empirical Analysis
Murphy, Kevin J.
Vol 7, Issue 1/2/3, 11-42 (1985)
Discusses the relationship between executive compensation and corporate performance United States. Measurement of shareholder return and growth in sales; Basis for managerial remuneration; Utilization of stock market performance measure.
An examination of the voluntary recognition of acquired brand names in the United Kingdom
Muller Iii, Karl A.
Vol 26, Issue 1-3, 179-191 (1999)
This study examines UK firms' contracting cost incentives for capitalizing estimates of brand value. Results indicate that firms' decisions to capitalize acquired brands were influenced by the impact that the immediate write-off of goodwill to equity has on the London Stock Exchange's shareholder approval requirement for future acquisitions and disposals. These findings provide evidence of contracting costs that result from stock exchange mandated shareholder approval rules for planned transactions. [ABSTRACT FROM AUTHOR]
Capital Adequacy Ratio Regulations and Accounting Choices in Commercial Banks
Moyer, Susan E.
Vol 13, Issue 2, 123-154 (1990)
This study examines a commercial bank manager's incentives to reduce regulatory costs imposed when the bank's capital adequacy ratio falls below its regulatory minimum It also tests the general political sensitivity hypothesis that a manager seeks to reduce political costs incurred when revenue is unusually large Tests of adjustments to the loan loss provision, loan charge-offs, and securities gems and losses attempt to control for exogenous economic conditions and previous investing decision Results are consistent with hypotheses associating accounting adjustments with capital adequacy ratio guidelines, but fail to support the political sensitivity hypothesis [ABSTRACT FROM AUTHOR]
An Empirical Analysis of the Factors Underlying the Decision to Remove Excess Assets from Overfunded Pension Plans
Mittelstaedt, H. Fred
Vol 11, Issue 4, 399-418 (1989)
This study empirically examines possible motivational factors leading to reductions in pension plan overfunding The results indicate that firms with severe financial weakening terminate pension plans Firms with less severe financial weakening change actuarial assumptions to reduce required cash contribution to pension plans Although decline in marginal tax rates and increased susceptibility to takeover are positively associated with overfunding reductions, increased financial weakening appears to be the most plausible explanation The results ate consistent with termination of pension plans being a costly source of financing [ABSTRACT FROM AUTHOR]
Complementarities and fit: Strategy, structure, and organizational change in manufacturing
Milgrom, Paul, Roberts, John
Vol 19, Issue 2/3, 179-208 (1995)
The theories of supermodular optimization and games provide a framework for the analysis of systems marked by complementarity. We summarize the principal results of these theories and indicate their usefulness by applying them to study the shift to 'modern manufacturing'. We also use them to analyze the characteristic features of the Lincoln Electric Company's strategy and structure. [ABSTRACT FROM AUTHOR]
TAKEOVERS AND MANAGERIAL COMPENSATION A Discussion
Mikkelson, Wayne H., Ruback, Richard S.
Vol 7, Issue 1/2/3, 233-238 (1985)
Discusses the relationship between managerial compensation and corporate takeovers in the United States. Improvement of cost of takeover bids by target managers; Emphasis on the separation of ownership and control of corporation; Elimination of conflicts of interest on investment decisions.
Incentives Associated with Changes in Consolidated Reporting Requirements
Mian, Shehzad L., Smith, Jr.
Vol 13, Issue 3, 249-266 (1990)
We examine the effects of mandated changes regarding consolidation. Analysis of FAS 94 submissions indicates: firms with unconsolidated subsidiaries lobby against FAS 94; strategic lobbying; accounting-data users lobby against FAS 94; and accounting firms support the proposal more than industrials. FAS 94 adoption produced negative returns in affected firms. In response to FAS 94, firms with unconsolidated financial subsidiaries were more likely to sell, close, or reorganize the subsidiary, retire debt, or securitize corporate assets Finally, Canadian firms switch to unconsolidated reporting after a 1978 amendment to Canadian GAAP eliminating limitations on its use Collectively this evidence suggests FAS 94 eliminated a valuable reporting alternative. [ABSTRACT FROM AUTHOR]
Option listing and the stock-price response to earnings announcements
Mendenhall, Richard R., Fehrs, Donald H.
Vol 27, Issue 1, 57-87 (1999)
We examine the effect of option listing on the immediate stock-price response to earnings announcements. Contrary to prior studies using earlier data, we find firms initiating option trading after 1986 fail to exhibit a significant decline in earnings response. We then examine 420 firms initiating option trading during 1973-1993. In a series of tests controlling for market-wide effects and changing firm size we find some evidence that option listing may actually increase the stock-price response to earnings, but no evidence listing reduces the response. Both longitudinal and cross-sectional tests produce similar results. [ABSTRACT FROM AUTHOR]
A theory of responsibility centers
Melumad, Nahum, Mookherjee, Dilip, Reichelstein, Stefan
Vol 15, Issue 4, 445-484 (1992)
We consider a principal-agent model to examine the effectiveness of responsibility centers, in particular cost or profit centers We show that rather than contracting with each agent directly, the principal can create equally powerful incentives by setting up a responsibility center structure The principal contracts with only the 'manager' of the center and delegates contracting with other agents and coordinating their activities The principal then must monitor some measure of financial performance such as the center's cost or profit We also find that responsibility centers dominate direct contracting with the agents when communication is limited [ABSTRACT FROM AUTHOR]
Three Reflections on Performance Rewards and Higher Education
Meckling, William H.
Vol 7, Issue 1/2/3, 247-251 (1985)
Presents reflections of several executives on performance rewards and higher education in the United States. Introduction of business policy to students; Emphasis on the development of economics; Solutions to management productivity problems.
Public disclosure, private information collection, and short-term trading
McNichols, Maureen, Trueman, Brett
Vol 17, Issue 1/2, 69-94 (1994)
This paper examines how public disclosure affects private information acquisition activity in a market economy. We analyze a setting where traders with short-term investment horizons are allowed to trade on their private information prior to a public disclosure. We demonstrate in this setting that public disclosure stimulates investment in private information acquisition. This result is shown to have implications for the magnitude of the pre-announcement and announcement price reactions to the disclosure. [ABSTRACT FROM AUTHOR]