Charitable CEOs and Earnings Management

CEOs of public companies may serve of boards of non-profit organizations out of intrinsic motivation, reflecting a preference for the well-being of others.  Alternatively, CEOs may serve on non-profit boards to increase moral reputation or manage their public image. We find that firms with CEOs serving on boards of non-profit organizations are associated with higher discretionary accruals, consistent with these firms engaging in more income-increasing earnings management.  We also find these firms engage in more tax avoidance activities.  Our findings suggest that on average, CEOs service on non-profit boards is driven by public image concerns and not intrinsic motivation.

Sponsors: Oklahoma State University, Northeastern University

PI/PDs: Bryan G. Brockbank

Northeastern University: Jaehan Ahn

 

Do Non-GAAP Exclusions Impact the Extent to Which Current Returns Reflect Future Earnings Information?

Motivated by regulators’ concerns about non-GAAP financial measures and building on research that finds more informative disclosures allow current stock returns to better reflect future earnings, I examine whether non-GAAP earnings exclusions enhance or garble the future earnings news captured in current stock returns.  Utilizing Amazon Mechanical Turk (MTurk), I collect non-GAAP earnings data from 2003 to 2012 and measure managers’ non-GAAP exclusions relative to three comparable earnings:  1) GAAP earnings before extraordinary items,  2) GAAP earnings from operations, and  3) analyst-adjusted “street earnings. Finally, I find that consistent non-GAAP reporting is associated with more future earnings information reflected in current stock returns.

Sponsor: Oklahoma State University

PI/PD: Bryan G. Brockbank

 

Cutting R&D to Meet Earnings Benchmarks: The Effect of Firm-Level Innovation

This study examines whether innovation affects the likelihood of firms cutting research and development (R&D) spending to meet earnings benchmarks. We find that more innovative firms are less likely to cut R&D in order to meet earnings benchmarks. Consistent with R&D cuts being used to signal stronger future performance, we find that innovative firms that cut R&D to meet benchmarks have higher future earnings and operating cash flows. Results are concentrated among firms with greater R&D intensity and for firms operating in poor information environments. Overall, results suggest that managers of innovative firms have a long-term focus and are unwilling to sacrifice long-term performance to meet short-term benchmarks.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Kent Hu

 

The Effect of Analyst Conservatism on Meeting the Consensus Via Earnings Management

Conservative analysts react more to negative news than positive news. Consequently, firms followed by more conservative analysts should have a lower consensus earnings forecast. We find that firms followed by more conservative analysts engage in less earnings management in order to meet the consensus forecast. Results are stronger in settings where an individual analyst has more influence on the consensus forecast. Our findings suggest that management’s reporting behavior is impacted by the conservatism of the firm’s analyst following.

Sponsors: Oklahoma State University, University of Nebraska-Kearney
PI/PDs: Bryan Brockbank, Jaclyn Prentice

University of Nebraska-Kearney: Matt Bjornsen

 

Audit Market Structure and Audit Quality: Evidence from Financial Analysts’ Information Environment

Audit market structure remains a concern for both regulators and academics due to the potential impact of competition (or lack thereof) on audit quality. We find that audit market concentration improves analysts’ forecast accuracy and decreases dispersion, which is consistent with studies suggesting that higher audit market concentration improves audit quality. Additionally, we find that despite being associated with decreased auditor independence (consistent with regulators’ concerns), audit market concentration appears to benefit analysts’ information environment. Our results further our understanding of audit market structure and its impact on financial disclosure quality.

Sponsors: Oklahoma State University, University of Nevada, Reno

PI/PDs: Bryan Brockbank, Bradley P. Lawson

University of Nevada, Reno: Chuong Do

 

Bridging the Gap: Responding to a Reduction of Accounting Principles in the Business Core

We use the natural experiment provided by a curriculum change to analyze assessments of students’ financial accounting understanding. A new “bridge” course was created for accounting and finance majors in response to the reduction in principles of accounting courses from two courses to one. Compared to students who had completed the traditional two principles courses, students who completed this new course sequence scored higher on a financial accounting assessment than their peers who completed a traditional financial accounting and managerial accounting course sequence. We also find that the combination of adaptive learning software and live instruction is superior to adaptive learning software alone.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

 

Remediation of Knowledge Gaps for Underrepresented Minority Students: Insights from a Natural Experiment in Financial Accounting

A curriculum change from the traditional two semesters of accounting down to a one semester survey course leading to intermediate financial accounting provided a natural experimental setting to examine the efficacy of several methods of alleviating a significant gap in knowledge created by the change. Our results suggest that a “bridge” course combining an adaptive learning tool with traditional classroom instruction resulted in no significant differences in assessed performance between underrepresented minority students and the broader student population.  However, the adaptive learning tool alone resulted in significantly lower scores on assessed performance for the underrepresented minority students in this study.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

 

Mindsets as an enhancement of 21^st century accounting education

We propose complementing competency-based frameworks of accounting education with the cultivation of relevant mindsets. A mindset is a combination of cognitive filters and processes through which professionals interpret their professional environments and execute their professional responsibilities. We identify five key mindsets relevant for accounting graduates. We treat the "public interest mindset" (focus on "we" vs. "I," integrity, and professionalism) as foundational. The four other key mindsets include:  1) growth,  2) professional skepticism,        3) analytical/digital, and 4) global. We define and discuss each of these mindsets and suggest potential pedagogical approaches for integrating these mindsets into 21st-century accounting education.

Sponsors: Oklahoma State University, University of Dayton, University of Cincinnati

PI/PDs: Audrey Gramling

University of Dayton: Sridhar Ramamoorti

University of Cincinnati: Natalia Mintchik

 

The Relevance of non-income tax relief

Governments regularly offer non-income tax relief to attract business interests. However, it is unclear whether markets impound information about the relief into security prices. We use novel data from retrospective public records to examine the information content of non-income tax relief. We find that non-income tax relief is strongly associated with future accounting performance and future abnormal returns. Overall, our evidence suggests the receipt of non-income tax relief reflects relevant information but investors have difficulty impounding the information into security prices in a timely way.

Sponsors: Oklahoma State University, Brigham Young University, Iowa University, University of Texas at Austin

PI/PDs: Ryan Hess

Brigham Young University: Michael S. Drake

Iowa University: Jaron Wilde

University of Texas at Austin: Braden Williams

 

Government assistance: A growing, undisclosed financing source

We investigate whether firms treat government assistance as an additional source of external capital to provide standard setters evidence on a distinct impact of assistance on a firm’s financial statements. We find corporations in the highest decile of size-adjusted government assistance received have meaningfully lower leverage ratios than those in the bottom decile. We also find firms with lower debt ratios have higher investment commitments to governments, implying government assistance often creates off balance sheet obligations. These findings are relevant to the FASB as it deliberates requiring additional disclosure on government assistance under Topic 832.

Sponsors: Oklahoma State University, University of Texas at Austin

PI/PDs: Ryan Hess

University of Texas at Austin: Lillian F. Mills

 

Cash and Tax Evasion

Economists and public policy experts contend that paper currency facilitates tax evasion. However, due to the illicit nature of tax evasion, limited empirical evidence exists to document or quantify this claim. I use the staggered implementation of the Electronic Benefit Transfer (EBT) program to identify a decrease in local cash circulation that holds constant the level of income to provide empirical evidence on the role of cash in tax evasion and offer magnitude estimates. My results suggest that cash transactions are an economically significant means by which small businesses evade income taxes.

Sponsor: Oklahoma State University

PI/PD: Ryan Hess

 

The Feedback Loop of FDIC Insurance Premiums

There is a broad awareness about the potential for feedback effects in insurance premium pricing. Increasing (decreasing) deposit insurance premiums when a bank is performing poorly (well) has the potential to further constrain bank lending ability. We examine this feedback loop using confidential, archival bank data from the Federal Deposit Insurance Corporation (FDIC). Using credit unions as a suitable control group we estimate the impact of insurance premiums on bank lending. We empirically document a feedback loop between insurance premium and bank lending and further show that community banks are disproportionately affected by this feedback mechanism.

Sponsors: Oklahoma State University, Center for Financial Research Federal Deposit Insurance Corporation

PI/PDs: Ryan Hess

Federal Deposit Insurance Corporation: Jennifer S. Rhee

 

Does audit committee reporting need to be improved? Evidence from a large-scale textual analysis?

The SEC is considering expanding audit committee reporting requirements to include greater disclosure of the audit committee’s oversight of the external auditor. To provide insight into whether additional reporting requirements are needed we:  1) perform a large-scale textual examination of the characteristics and time trends of over 35,000 US firms’ audit committee report disclosures issued between 2004 and 2015 and,  2) explore whether investors find such reports useful. In sum, our findings suggest that there is a need to improve the usefulness of audit committee report disclosures.

Sponsors: Oklahoma State University, Colorado State University, University of Texas

PI/PDs: Bradley P. Lawson

Colorado State University: Michelle Draegar

University of Texas: Jaime J. Schmidt

 

The Consequences of Audit Market Structure on Financial Analysts’ Information Environment

Audit market structure remains a concern for both regulators and academics due to the potential impact of competition (or lack of) on audit and financial reporting quality. However, studies of audit market structure and financial reporting quality provide mixed results. Testing this association provides evidence on the topic without having to separate the constructs of financial reporting quality and audit quality. We find that concentration improves analysts’ forecast accuracy and decreases dispersion, which is consistent with studies suggesting that higher audit market concentration improves audit and financial reporting quality. Our results further our understanding of audit market structure and its impact on financial disclosure quality.

Sponsors: Oklahoma State University, Texas State University, University of Las Vegas, Nevada

PI/PDs: Bradley P. Lawson

Oklahoma State University: Bryan Brockbank

University of Las Vegas, Nevada: Chuong Do

 

Audit Partner Masculinity, Audit Pricing, and Audit Quality

Biology research finds that more masculine faced men are associated with greater ambition, a stronger desire to win, and less interpersonal trust. We examine the consequences of this trait for both audit pricing and audit quality. We find that audit partners with more masculine faces are associated with higher audit fees. We also find that partner facial masculinity is associated with higher fraud risk. Finally, we find that more masculine faced partners are associated with a lower likelihood of restatement announcements, but only for clients with high fraud risk. Therefore, masculine faced partners earn a fee premium, but are associated with lower audit quality. These results hold for only non-Big 4 partners, consistent with quality control mechanisms at the Big 4 mitigating individual auditor effects.

Sponsors: Oklahoma State University, Stoney Brook University, Rutgers, the State University of New Jersey

PI/PDs: Bradley P. Lawson

Stoney Brook University: Keval Amin

Rutgers, the State University of New Jersey: John Daniel Eshleman

 

Do Breaches of Public Trust Influence Nonprofessional Investors’ Perceptions of Auditor Credibility?

Audit quality is challenging to observe. Therefore, investors must rely on publicly available indicators such as PCAOB inspection reports. Source credibility theory suggests that the auditor’s inspection deficiency rate could signal perceived expertise, while an attempt to breach the inspection process could signal perceived trustworthiness. We find an interactive effect whereby participants were least likely to maintain their investment when the auditor had a higher deficiency rate and attempted to circumvent the inspection process. Supplemental analyses show that expertise influences the financial statements’ perceived accuracy, and trustworthiness influences the audit opinion’s perceived trustworthiness—and both influence investing decisions.

Sponsors: Oklahoma State University, University of Louisville, DePaul University                                                                                              

PI/PDs: Leah Muriel                                                                                                                                 University of Louisville: Dereck Barr-Pulliam                                                                                 DePaul University: Stephani A. Mason

 

Where to Whistleblow? The Consequences of Reward and Retaliation Provisions for Intrinsically Motivated Individuals

Differing provisions in the EU and US exist to encourage whistleblowing. We examine how individuals with self-reported high intrinsic motivation (financial audit experience), respond to retaliation protection measures and an external reward opportunity. We observe that only visible protection provided by the subjects’ organization was associated with higher internal reporting intentions and do not find evidence that external retaliation protection or external reward are associated with higher external reporting intentions. Furthermore, we find evidence of an unintended consequence within this setting of highly intrinsic motivated individuals. The presence of an external reward was associated with lower intent to report internally.

Sponsors: Oklahoma State University, Universidad Adolfo Ibanez, The University of Tennessee

PI/PDs: Leah Muriel

Universidad Adolfo Ibanez: Nelson Carrasco

The University of Tennessee: Robert M. Fuller

 

Is the reporting of critical audit matters associated with information overload and does that affect nonprofessional investors’ perceptions of audit quality and investment risk?

The Public Company Accounting Oversight Board (PCAOB) recently adopted a new standard that requires the auditor to report critical audit matters (CAMs) within the audit report. We find that the presence of a CAM is associated with higher perceptions of auditor credibility, but also an increased in perceived information overload. Despite the perceived higher information load to process, the presence of a CAM is associated with an increased in perceived audit quality and a decrease in perceived investment risk. Increasing the readability of CAM’s may help reduce feelings of information overload for individuals utilizing audit reports.

Sponsors: Oklahoma State University, Clemson University, Iowa State University

PI/PDs: Leah Muriel

Clemson University: Brian T. Carver

Iowa State University: Brad S. Trinkle

 

A Cross-Language Analysis of Disclosure Properties: Evidence from Hong Kong Using the setting of Hong Kong, we examine how the linguistic properties of financial disclosure differ across languages. Firms listed on the Hong Kong Stock Exchange publish annual reports in both English and Chinese. We find that English reports are more positive, convey more uncertainty, and focus more on the past and present and less on the future, than Chinese reports. We also find that English (Chinese) reports are more likely to manage their tone by varying the frequency of positive (negative) words. Finally, the stock market only reacts positively to tone management in Chinese reports.

Sponsors: Oklahoma State University; University of Nevada, Reno

PI/PDs: Sandeep Nabar, Kent Hu

University of Nevada, Reno: Chuong Do

 

CFO Characteristics and Accruals Earnings Management

We examine the association between CFO characteristics and accruals earnings management (AEM).  We find that the CFO’s internal power and the CFO’s career horizon are both negatively related with AEM.

Sponsor: Oklahoma State University

PI/PDs: Sandeep Nabar, Yahya Abdullah

 

The Impact of Benefit Plan Audits on the Financial Statement Audit

We explore the implications of benefit plan audits for the financial statement audit. We find that performing a benefit plan audit increases the likelihood that the firm will be selected as a company’s financial statement auditor. Further, we find that companies that engage the same audit firm for both their benefit plan and financial statement audits have a lower likelihood of misstatements, shorter audit report lags, and a lower likelihood of switching the financial statement auditor. Our findings speak to the continued debate over effective market expansion of financial statement audit providers, audit quality determinants, and audit efficiencies.

Sponsors: Oklahoma State University, Michigan State University, University of Arkansas

PI/PDs: Jaclyn Prentice

Michigan State University: Kenneth L. Bills

University of Arkansas: Gary F. Peters

 

The Effect of Analyst Conservatism on Meeting the Consensus Via Earnings Management

Little is known about the impact of conservative analysts on firm management. We examine the effect of analyst conservatism on firms meeting the consensus via accrual-based earnings management. We find that firms with a more conservative analyst following engage in less accrual-based earnings management to meet the consensus, with this effect being strongest in poor information environments. We also find that firms followed by more conservative analysts are more likely to meet the consensus forecast via accruals-based earnings management. Collectively, our results suggest that management’s reporting behavior is impacted by the conservatism of the firm’s analyst following.

Sponsors: Oklahoma State University, University of Nebraska-Kearney
PI/PDs: Matt Bjornsen, Bryan Brockbank, Jaclyn Prentice

University of Nebraska-Kearney: Matt Bjornsen

 

Does Insider Trading Affect Auditors’ Risk Assessments? Evidence from Audit Pricing

Audit regulations require auditors to consider insider trading as part of their risk assessment. Companies file Form 4 with the SEC when insiders trade. We find that the number of requests for Form 4 in the SEC EDGAR online system is positively associated with audit fees. In addition, audit fees are higher among companies with net insider selling, relative to companies with net insider buying. We find that officer net selling drives this relation. These results suggest that auditors’ risk assessments are sensitive to information reflected in insider trading, consistent with regulatory requirements for auditors to consider non-traditional risk characteristics.

Sponsors: Oklahoma State University, Texas Tech

PI/PDs: Jaclyn Prentice

Texas Tech: Sabrina Chi

 

Tax Aggressiveness and the Tax Risk Disclosure

We examine the variation of the Tax Risk disclosure that companies include in their 10K (Item 1A - risk factors). We examine the influences and determinates for disclosing taxes as a business risk and investigate the relation between the Tax Risk disclosure and tax aggressiveness. In addition, we analyze whether management adds this disclosure in response to an event such as, Tax Cuts and Jobs Act, a tax-related restatement, or material weakness.  Also, we examine whether companies that employ their auditors as their tax provider are more likely to disclose less than if the company employs another firm. 
Sponsors: Oklahoma State University, San Francisco State University
PI/PDs: Jaclyn Prentice

San Francisco State University: Bing Luo

 

Goodbye and hello: audit quality, the Big 4, and acquiring consulting practices

The largest accounting firms have been acquiring consulting practices for the last decade. I find that the audit quality of the companies being audited by the accounting firm acquiring a large consulting practice decreases in the year of the acquisition, but this result reverses in the subsequent period. This finding suggests accounting firm management may be distracted in the year of the acquisition and then in the subsequent year audit quality improves as accounting firms are better able to utilize consulting practices’ specialized knowledge.

Sponsor: Oklahoma State University

PI/PD: Jaclyn Prentice

 

Are Analysts’ Forecast More Informative than a Random Walk Model of Earnings Before Extraordinary Items in the Presence of Special Items?

The purpose of this study is to determine whether analysts’ forecasts outperform a simple random walk model in the presence of special items, both positive and negative.  Prior research shows that special items have market and future earnings implications on their own as well as affect the implications of adjusted (for special items) earnings.  We test this by comparing the strength of association between these constructs and cumulative abnormal returns at earnings announcement dates.

Sponsor: Oklahoma State University

PI/PDs: William C. Schwartz, Jr. and Craig A. Sisneros

 

Multiemployer Pension Plans: Disclosure and Recognition Requirements, Recent Legislation, and Firm Responses

Multiemployer pension plans provide retirement benefits to retired employees of all firms that contribute. However, the assets in the fund are combined and the obligation to pay an employee remains even if that specific employee’s former employer leaves the plan. If all other firms withdraw, the last remaining firm could be left with the obligation to fund the benefits for all retirees, regardless of their former employer. Firms are consistently withdrawing from these

plans to avoid being the last firm standing and a significant portion of these multiemployer plans do not have the funds to pay current and future retirees.

Sponsor: Oklahoma State University

PI/PDs: Bryan Brockbank, William C. Schwartz, Jr., Craig A. Sisneros

 

Empirical Implications of Incorrect Tax Rate Assumptions

The objective of this study is to explore the empirical consequences of assuming an incorrect tax rate in adjusting special items. Our evidence suggests extreme tax rate assumptions, in particular the highest statutory rate, are especially problematic and yield dramatically biased estimates. Our review of the tax consequences of special items suggests that in almost all circumstances the marginal tax rate is the theoretically correct rate to apply to these items when adjusting for tax. Consistent with this view, our empirical evidence, with a limited exception, suggests that marginal tax rates represent the best estimate of the “true” tax rate.

Sponsors: Oklahoma State University, University of Texas at Dallas, University of Alabama

PI/PDs: Craig A. Sisneros

University of Texas at Dallas: William M. Cready

University of Alabama: Thomas J. Lopez, Shane R. Stinson

 

Bridging the Gap: Responding to a Reduction of Accounting Principles in the Business Core

We use the natural experiment provided by curriculum change to analyze assessments of students’ financial accounting understanding given alternate paths into the first intermediate financial course.  A new “bridge” course was created for accounting majors in response to the reduction in principles of accounting courses from two courses (six semester hours) to one (three semester hours).  As compared to students who had completed the traditional six hours of principles courses, the students who completed this new course sequence scored higher on a financial accounting assessment than their peers who completed a traditional financial accounting and introductory managerial accounting course sequence. 

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

 

Toward Equitable Remediation: Insights from a Natural Experiment in Financial Accounting

A curriculum change provided a natural experimental setting to examine the efficacy of several methods of alleviating a significant gap in knowledge created by the change. Students were given three options: Self-study and a "gateway" examination; a self-paced adaptive learning software and examination, or opting into a "bridge" course combining the adaptive learning software and proctored exams.  Our results suggest the latter method resulted in no significant differences in assessed performance between underrepresented minority students and the broader population.  However, the adaptive learning tool alone resulted in significantly lower scores on assessed performance for underrepresented minority students in this study.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

 

An Analysis of the Historical Analysis and Future Outlook for Sustainability Reporting

Sustainability reporting holds the promise to significantly improve the decision-relevant information set available to capital providers and other stakeholders of firms and organizations. However, the current set of sustainability information is often unstandardized, lacking comparability, and potentially lacking reliability. In this paper, we explore the history of sustainability reporting, examine the need for reporting about sustainability issues, and examine shortcomings in the current sustainability landscape. Drawing upon the historical and theoretical underpinnings of financial reporting, we conclude with recommendations about the prospects for the accounting profession to provide value-added information related to sustainability issues.

Sponsors: Oklahoma State University, The University of Mississippi

PI/PDs: Angela Wheeler Spencer

University of Mississippi: Zach Webb

 

Special Purpose Vehicles and Audit Fees

In this paper, we investigate the relationship between audit fees and special purpose vehicles (SPVs). SPVs are separate entities that inherently increase the underlying complexity of firm operations. Further, during the period examined here (2000-2009), many of these structures were reported off-balance sheet. Overall, our results suggest that auditors price the additional work and risk associated with client utilization of these structures. Evidence provided here is essential to understand better the total costs related to SPVs and the effects of unique forms of complexity on audit fees.

Sponsors: Oklahoma State University, The University of Mississippi

PI/PDs: Angela Wheeler Spencer

University of Mississippi: Zach Webb

 

Remediation of Knowledge Gaps for Underrepresented Minority Students:

Insights from a Natural Experiment in Financial Accounting

A curriculum change from the traditional two semesters of introductory accounting to a one semester survey course provided a natural experimental setting to examine the efficacy of several methods of alleviating a significant gap in knowledge created by the change. Our results suggest that a bridge course combining the adaptive learning tool with traditional classroom instruction resulted in no significant differences in assessed performance between underrepresented minority students and the broader student population.  However, use of the adaptive learning tool alone resulted in significantly lower scores on assessed performance for the underrepresented minority students in this study.

Sponsor: Oklahoma State University

PI/PDs: Bryan G. Brockbank, Craig A. Sisneros, Angela Wheeler Spencer

 

The Impact of Increased Managerial Discretion and of Adoption Disclosure Transparency on the Usefulness of Reported Revenues: Evidence from Accounting Standard Updates for Multiple-Deliverable Sales Arrangements

Research suggests that revenue recognition accounting standards which restrict management discretion resulted in improved faithful representation but reduced relevance of revenues. We use the adoption of Accounting Standards Updates 2009-13 and 2009-14 to examine the effects of increased management discretion to accelerate revenue recognition. We find that this increased discretion results in an increase in the relevance of reported revenues without reducing faithful representation. These results provide evidence in assessing whether standards that allow greater discretion affect the usefulness of financial statement information. 

Sponsors: Oklahoma State University, University of Tennessee, Brigham Young University

PI/PDs: Michael Stuart

University of Tennessee: Linda Myers, Roy Schmardebeck

Brigham Young University: Timothy Seidel

 

CEO Partisan Bias and Management Earnings Forecast Bias

Political science research finds individuals exhibit overly favorable economic expectations when their partisanship aligns with that of the US president. We examine whether this partisan bias is present in management earnings forecasts. We find that firms with CEOs whose partisanship aligns with that of the US president issue more optimistically biased forecasts than firms with CEOs who are not aligned. Our results suggest CEOs fall prey to partisan bias, resulting in suboptimal forecasting behavior. Additionally, we find that investors fail to discount the news in forecasts issued by partisan-aligned CEOs and that post-forecast abnormal returns are lower for these firms.

Sponsors: Oklahoma State University, Queen’s University, Vanderbilt University

PI/PDs: Michael Stuart

Queens University: Jing Wang

Vanderbilt University: Richard Willis

 

The Effect of Voluntary Accounting Policy Changes on Earnings Informativeness

While voluntary accounting policy changes (VAPCs) enable managers to better present the firm’s financial position and results as circumstances change, they may be used to opportunistically influence earnings. We examine the impact of the method of accounting for VACPs (retrospective and modified retrospective methods) on earnings informativeness. While the retrospective method arguably improves comparability over time, it allows firms to record the same earnings twice or avoid reporting expenses. We find that earnings informativeness is lower and opportunism is greater for VACPs accounted for using the retrospective method compared with those accounted for under the modified-retrospective method.

Sponsors: Oklahoma State University, Queen’s University, Vanderbilt University

PI/PDs: Michael Stuart

Queens University: Jing Wang

Vanderbilt University: Paul Chaney, Rita Gunn

 

CEO Political Alignment and Corporate Tax Avoidance

We investigate the impact of CEOs’ sentiment towards the government on firms’ tax avoidance behavior. We proxy for CEOs’ attitudes toward the government using their political alignment with the US president, where a politically aligned CEO is expected to possess more favorable views of the government. We find that effective corporate tax rates are lower for firms with politically aligned CEOs, suggesting that CEOs who have more trust in the current administration engage in less tax avoidance behavior. Our research contributes to literature suggesting that top managers’ experiences, values, and personalities significantly influence a firm’s choices and actions.

Sponsors: Oklahoma State University, Queen’s University, University of Texas at El Paso

PI/PDs: Michael Stuart

Queens University: Jing Wang

University of Texas at El Paso: Yun Ke

 

The Substance of Enduring Relationships: Interpreting Auditor Tenure

A public company’s auditor must now disclose in the audit report the year it began serving as the company’s auditor. Yet the interpretation of auditor tenure is unclear. We address this gap in understanding by examining what characteristics of an auditor-client relationship affects its persistence. Using survival analysis, we find that enduring relationships are characterized by sustained conservative financial reporting choices, choices evident since the inception of a relationship.

Sponsors: Oklahoma State University, Vanderbilt University

PI/PDs: Michael Stuart

Vanderbilt University: Paul Chaney, Karl Hackenbrack, Catherine Lee

 

Does How Managers Answer an Analyst’s Questions during an Earnings Call Matter?

Earnings calls are quarterly interactive conference calls in which firm managers present corporate financial information and address questions from call participants. We examine whether, and, if so, in which direction, the tone of managers’ responses to an individual analyst’s questions during an earnings call are associated with the analyst’s subsequent earnings forecast revision for the company on whose call the analyst participated. We are analyzing data to study these relationships, and we believe that our research will be the first archival study to directly study the direct interchanges between analysts and managers on earnings calls.

Sponsors: Oklahoma State University, Vanderbilt University

PI/PDs: Michael Stuart

Vanderbilt University: Craig Lewis, Richard Willis

 

The Effects of Independent Director Litigation Risk

The unexpected In re Investors Bancorp decision in 2017 by the Delaware Supreme Court lowered the liability threshold only for directors in derivative litigation over their own equity grants, increasing their future litigation risk. Investors and firms reacted to the decision. Overall, results are consistent with director litigation concerns having a significant effect on firm value and firm and director behavior.

Sponsors: Oklahoma State University, University of Iowa, Texas A&M University

PI/PDs: Elizabeth Tori

University of Iowa: Dain C. Donelson

Texas A&M University: Christopher G. Yust

 

Rival Firms’ Response to a Competitor’s Bankruptcy: Can Press Releases

Facilitate a Competitive Advantage?

I investigate how rival firms alter their voluntary disclosures, specifically their press releases, following a competitor’s bankruptcy. I find that rival firms increase their product-related, but not their earnings-related press releases following a bankruptcy. I also investigate the change in market share for disclosing rivals and find that market share increases, consistent with press releases affecting product market conditions. The results suggest that bankruptcy provides an opportunity for rival firms to gain a competitive advantage through disclosure of product-related information, highlighting a benefit of voluntary disclosure.

Sponsors: Oklahoma State University, Texas A&M University

PI/PD: Elizabeth Tori

 

Non-Financial Government Violations and Financial Voluntary Disclosures

Non-financial violations are enforcement actions brought by government agencies relating to operational failures, such as environmental damages. In this study, we examine whether a non-financial violation affects managers’ voluntary disclosure decisions and the capital market’s perception of managerial credibility. We find that managers tend to reduce the likelihood, frequency, and precision of management forecasts and that investors respond less strongly to forecasting news following a non-financial violation. Although prior literature finds no reputation damage in the capital markets, our results suggest managers experience a loss of credibility that may reduce their incentives to provide management forecasts from non-financial violations.

Sponsors: Oklahoma State University, Texas A&M University, University of Connecticut

PI/PDs: Elizabeth Tori

Texas A&M University: Sean McGuire, Sarah Rice

University of Connecticut: Nina Xu

 

Non-Financial Violations and the Credibility of Voluntary Disclosures: Evidence from Employee Discrimination Violations

I examine whether firms’ non-financial violations lead to a loss of credibility in the capital markets. Specifically, I examine whether investors change the magnitude of their reaction to management earnings forecasts and product press releases following an employee discrimination violation. Despite growing interest in firms’ non-financial performance, prior studies have found no evidence of capital market reputation damage from these failures. This study provides the first evidence of the capital market reputation damage caused by non-financial violations as measured by voluntary disclosure credibility.

Sponsors: Oklahoma State University, Texas A&M University

PI/PD: Elizabeth Tori

 

Negative Net Debt Firms’ Voluntary Disclosure Practices

NND firms have fewer constraints from creditor monitoring and higher operating variability and higher returns on their operating assets than their financial assets. Does this fact mean NND firms’ management forecast guidance is less useful? If so does media step in and take over the monitoring role for these firms? This study provides evidence that NND firms have weaker information environments and that the media serves an alternative monitor when creditors and financial intermediaries are less effective.

Sponsors: Oklahoma State University, Texas A&M University, University of Connecticut

PI/PDs: Elizabeth Tori

Texas A&M University: Senyo Tse

University of Connecticut: Nina Xu

 

Mutual Fund Disclosure and Board Monitoring

Mutual funds are required to disclose their fund performance and fees relative to their peers and the board is required to review and approve this disclosure. We find that firms truthfully disclose low fees, but avoid disclosing high fees. We also examine the effect of director monitoring on the truthfulness of the disclosures. 

Sponsors: Oklahoma State University, Texas A&M University, University of Houston

PI/PDs: Elizabeth Tori

University of Houston: Minjae Koo

 

How Managers Respond to the Effects of Bright-Line Rules: Evidence from Management Forecasts and the Valuation Allowance for Deferred Tax Assets

Firms record a deferred tax assets (DTA) if they expect sufficient taxable income to realize the asset in the future. Management records a valuation allowance (VAA) against the DTA if they believe their firm will generate insufficient taxable income to realize the asset. Prior research argues that the VAA represents management’s forecast of future taxable income and contains information relevant to the capital markets. However, in practice audit firms frequently apply a bright-line test to DTAs that forces a firm to record a full VAA. We investigate the consequences of this bright-line test on firms’ information environment.

Sponsors: Oklahoma State University, Texas A&M University

PI/PDs: Elizabeth Tori

Texas A&M University: Brad Hepfer

 

Can FinTech Competition Improve Sell-Side Research Quality?

We examine how competition from FinTech influences analyst research quality. We find that firms added to Estimize, a platform that crowdsources short-term earnings forecasts, experience a substantial reduction in consensus bias and a limited increase in consensus accuracy. Long-term forecasts and recommendations remain similarly biased, alleviating the concern that the documented reduction in bias is a response to broad economic forces. At the individual analyst level, bias reduction is more pronounced among close-to-management analysts, and more biased analysts respond by reducing their coverage of Estimize firms. The evidence suggests that competition from Estimize improves research quality by discouraging strategic bias.

Sponsors: Oklahoma State University, University of Kentucky, University of Texas at Dallas

PI/PDs: Michael C. Wolfe

University of Kentucky: Russell Jame

University of Texas at Dallas: Stanimir Markov

 

Corporate Codes of Ethics and Cash Holdings

We examine the relation between corporate codes of ethics and cash holdings. We find a negative association between code of ethics quality and cash holdings which suggests that managers hold less cash when the firm has a strong code of ethics in place. The effect is greater when agency costs are elevated due to weaker country-level investor protections. We also find that payouts and the marginal value of cash holdings to investors are increasing in code quality. Overall, our results are consistent with ethics codes helping to limit opportunistic behavior from managers when determining the firm’s level of cash holdings.

Sponsors: Oklahoma State University, University of Texas at El Paso, University of Nebraska, Korea University

PI/PDs: Michael C. Wolfe

University of Texas at El Paso: Giorgio Gotti

University of Nebraska: Tony Kang,

Korea University: Yong K. Yoo

 

Earnings Attributes and Credit Ratings

We investigate the association between different earnings attributes and credit ratings. We examine seven attributes - discretionary accruals, accruals quality, persistence, predictability, smoothness, timeliness, and conservatism. We find that six of the seven attributes are associated with credit ratings and that accrual quality and predictability dominate the other attributes, including accounting conservatism. Additional analysis shows that accruals quality is relatively more important to credit rating agencies than equity investors. This study provides comprehensive evidence on the relative importance of different earnings attributes to credit rating agencies. 

Sponsors: Oklahoma State University, University of Nebraska, Korea University

PI/PDs: Michael C. Wolfe

University of Nebraska: Tony Kang

Korea University: Sang Ho Lee, Yong K. Yoo

 

Accounting Comparability and the Efficiency of Intra-Industry Information Transfer

Prior studies find that the market is inefficient in its reaction to the earnings announcements of industry peers. This study contributes to the literature by showing that this overreaction is related to differences in accounting comparability. The evidence also suggests that that this association has diminished in recent years, particularly for firms with the highest levels of comparability. Overall, the results suggest that investors are unable to properly adjust for differences in accounting comparability when responding to the information releases of peer firms.

Sponsor: Oklahoma State University

PI/PD: Michael C. Wolfe