...Journal of Accounting and Economics 50 (2010) 344–401 Contents lists available at ScienceDirect Journal of Accounting and Economics journal homepage: www.elsevier.com/locate/jae Understanding earnings quality: A review of the proxies, their determinants and their consequences$ Patricia Dechow a, Weili Ge b, Catherine Schrand c,n a b c University of California, Berkeley, CA 94720, United States University of Washington, Seattle, WA 98195, United States University of Pennsylvania, Philadelphia, PA 19104, United States a r t i c l e i n f o abstract Available online 4 November 2010 Researchers have used various measures as indications of ‘‘earnings quality’’ including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because ‘‘quality’’ is contingent on the decision context. We also point out that the ‘‘quality’’ of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work. & 2010 Elsevier B.V. All rights reserved. JEL classification: G31 M40 M41 Keywords: Earnings quality Earnings management Review Survey 1. Introduction Statement of Financial Accounting...
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...Research Study Capital-Market Effects of Corporate Disclosures and Disclosure Regulation Christian Leuz Peter Wysocki June 26, 2006 Commissioned by the Task Force to Modernize Securities Legislation in Canada Christian Leuz Christian Leuz is currently the Professor of Accounting at the University of Chicago, Graduate School of Business. He is also the David G. Booth Faculty Fellow. Prior to this position, Professor Leuz was the Harold Stott Term Assistant Professor in Accounting at the Wharton School of the University of Pennsylvania and Fellow at Wharton’s Financial Institution Center. His research interests include transparency and corporate governance, financial disclosure and securities regulation, and the links between the institutions of market economies. Professor Leuz earned his doctoral degree and “Habilitation” at the Goethe University Frankfurt in Germany. His most recent publications have appeared in the Journal of Financial Economics, the Journal of Accounting and Economics and the Journal of Accounting Research. He is an Associate Editor of the Journal of Accounting and Economics and serves currently on the Editorial Board of The Accounting Review, the Journal of Accounting Research, the Journal of Business, Finance and Accounting, and the International Journal of Accounting. He has received several grants and honors, of which the Geewax Terker Prize is the latest. Peter Wysocki Professor Peter Wysocki is an associate professor of management at...
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...IFRS adoption. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit trade-off between ͑1͒ recurring, albeit modest, comparability benefits for investors; ͑2͒ recurring future cost savings that will largely accrue to multinational companies; and ͑3͒ one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. In Part II of the series ͑see Hail et al. 2010͒, we provide an analysis of the policy factors related to the decision and present several scenarios for the future evolution of U.S. accounting standards in light of the current global movement toward IFRS. Keywords: accounting regulation; standard setting; U.S. equity markets; mandatory disclosure; political economy; convergence; harmonization. JEL Classifications: F50; G15; G38; K22; M41; M48; O51. Luzi Hail is an...
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...The European Accounting Review 2002, 11:1, 119–151 Accounting and capital markets: a survey of the European evidence Pascal Dumontier ` Pierre Mendes-France University, Grenoble Bernard Raffournier University of Geneva ABSTRACT The relationship between accounting information and capital markets has been the subject of numerous studies, especially in the US. The purpose of this article is to examine the corresponding evidence in Europe. This review classi es the European literature into three groups: studies of the market reaction to newly released accounting information; studies of the long-term association between stock returns and accounting numbers; studies devoted to the use of accounting data by investors and to the impact of market pressure on accounting choices. The paper reviews and summarizes the main results related to each of these topics. It also addresses some methodological issues and provides suggestions for future research. 1. INTRODUCTION Since the pioneering work of Ball and Brown (1968), the relationship between accounting information and capital markets has attracted considerable attention, to the point that it is probably one of the most popular issues in the accounting literature. The interest for this subject is legitimate, given the generally accepted statement that accounting gures are aimed at providing investors with relevant information for their investment decisions. Even if accounting data are used in various contexts such as the contracting...
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...problems and international cross-listings: A defense of the bonding hypothesis☆ G. Andrew Karolyi ⁎ Johnson Graduate School of Management, Cornell University, 348 Sage Hall, Ithaca, NY 14853, USA a r t i c l e i n f o Article history: Received 30 June 2011 Received in revised form 6 August 2012 Accepted 7 August 2012 Available online 17 August 2012 JEL classification: F30 G15 G32 G38 Keywords: Cross-listing Stocks Bonding International financial markets a b s t r a c t Why firms from around the world seek to cross-list their shares on overseas exchanges has intrigued scholars during the past two decades. A general dissatisfaction with the conventional wisdom about investment barriers segmenting global investors and how cross-listings overcome those barriers cleared the way for newer wisdom about informational problems and agency conflicts, and how firms could overcome weaknesses in corporate governance by listing on, and thus “bonding” to, overseas markets with stronger regulatory oversight, stringent reporting and disclosure requirements and investor protections. Critics have challenged the viability of the bonding hypothesis, which I answer in this review. © 2012 Elsevier B.V. All rights reserved. 1. Introduction Cross-listing — also referred to as “dual-listing,” “international listing,” or even “inter-listing,” — is usually a strategic choice made by a firm to secondarily list its equity shares trading in a home market exchange on a new overseas...
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...professional accountancy body, ICAEW provides leadership and practical support to over 142,000 members in more than 160 countries, working with governments, regulators and industry to ensure the highest standards are maintained. The ICAEW Financial Reporting Faculty provides its members with practical assistance and support with IFRS, UK GAAP and other aspects of business reporting. It also comments on business reporting issues on behalf of ICAEW to standard setters and regulators. Its Information for Better Markets thought leadership programme subjects key questions in business reporting to careful and impartial analysis so as to help achieve practical solutions to complex problems. The programme focuses on three key themes: disclosure, measurement and regulation. We welcome comments and enquiries on this report and on the other aspects of the Information for Better Markets programme. To contact us, please email bettermarkets@icaew.com. © ICAEW 2014 All rights reserved. If you want to reproduce or redistribute any of the material in this publication, you should first get ICAEW’s permission in writing. ICAEW will not be liable for any reliance you place on the information in this publication. You should seek independent advice. ISBN 978-1-78363-174-2 TECDIG13559 The Effects of Mandatory IFRS Adoption in the EU: A Review of Empirical Research Contents...
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...discount (10% × 276.36) $27.64 Copyright © 2012 Pearson Canada Inc 11 Scott, Financial Accounting Theory, 6th Edition Instructor’s Manual P.V.’s balance sheet at time 2 would be: P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash: (140 + 14 + 150) $304.00 Chapter 2 Shareholders’ Equity Opening balance: $276.36 (286.36 - 10.00 dividend) Capital Asset, at Present value 0.00 $304.00 $304.00 Net income 27.64 Thus, at time 2 the shareholders have: Cash from dividend Interest at 10% on cash dividend, for year 2 Value of firm per balance sheet $10.00 1.00 304.00 $315.00 This is the same value as that of the firm at time 2, assuming P.V. Ltd. paid no dividends (see Question 1). Consequently, the firm’s dividend policy does not matter to the shareholders under ideal conditions. It may be worth noting that a crucial requirement here, following from ideal conditions, is that the investors and the firm both earn interest on financial assets at the same rate. 3. Year 1 At time 0, you know that if the bad economy state is realized, ex post net income for year 1 will be a loss of $23.97. If the good economy state is realized, ex post net income...
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...International Financial Reporting Standards (IFRS): Pros and Cons for Investors by Ray Ball* Sidney Davidson Professor of Accounting Graduate School of Business University of Chicago 5807 S. Woodlawn Ave Chicago, IL 60637 Tel. (773) 834 5941 ray.ball@gsb.uchicago.edu Acknowledgments This paper is based on the PD Leake Lecture delivered on 8 September 2005 at the Institute of Chartered Accountants in England and Wales, which can be accessed at http://www.icaew.co.uk/cbp/index.cfm. It draws extensively on the framework in Ball (1995) and benefited from comments by Steve Zeff. Financial support from the PD Leake Trust and the Graduate School of Business at the University of Chicago is gratefully acknowledged. 1 Abstract Accounting in shaped by economic and political forces. It follows that increased worldwide integration of both markets and politics (driven by reductions in communications and information processing costs) makes increased integration of financial reporting standards and practice almost inevitable. But most market and political forces will remain local for the foreseeable future, so it is unclear how much convergence in actual financial reporting practice will (or should) occur. Furthermore, there is little settled theory or evidence on which to build an assessment of the advantages and disadvantages of uniform accounting rules within a country, let alone internationally. The pros and cons of IFRS therefore are somewhat conjectural, the unbridled enthusiasm...
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...This article was downloaded by: [Library Services City University London] On: 26 July 2013, At: 08:32 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Accounting and Business Research Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/rabr20 International Financial Reporting Standards (IFRS): pros and cons for investors Ray Ball a a University of Chicago Published online: 28 Feb 2012. To cite this article: Ray Ball (2006) International Financial Reporting Standards (IFRS): pros and cons for investors, Accounting and Business Research, 36:sup1, 5-27, DOI: 10.1080/00014788.2006.9730040 To link to this article: http://dx.doi.org/10.1080/00014788.2006.9730040 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information...
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...choice, structuring our analysis around the three types of market imperfections that influence managers’ choices: agency costs, information asymmetries, and externalities affecting non-contracting parties. We conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge. We discuss opportunities for future research, recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters. r 2001 Published by Elsevier Science B.V. JEL classification: M41 accounting Keywords: Capital markets; Accounting choice; Voluntary disclosure; Accounting judgments and estimates; Earnings manipulation $ We are grateful for comments received from Ronald Dye, participants of the 2000 Journal of Accounting and Economics conference, the editors Ross Watts and Douglas Skinner, and the discussant Jennifer Francis. Financial support from the Accounting Research Center at the Kellogg Graduate School of Management, Northwestern University is gratefully acknowledged. *Corresponding author. Tel.: +1-847-491-2673; fax: +1-847-467-1202. E-mail address: tlys@nwu.edu (T.Z. Lys). 0165-4101/01/$ - see front matter r 2001 Published by Elsevier Science B.V. PII: S 0 1...
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...The Institute of Chartered Accountants in Australia GAAP-based financial reporting: measurement of business performance charteredaccountants.com.au Professor Stephen Taylor, The University of New South Wales, Sydney, Australia The Institute of Chartered Accountants in Australia The Institute of Chartered Accountants in Australia (the Institute) is the professional body representing Chartered Accountants in Australia. Our reach extends to more than 53,000 of today and tomorrow’s business leaders, representing some 43,000 Chartered Accountants and 10,000 of Australia’s best accounting graduates who are currently enrolled in our world-class post-graduate program. Our members work in diverse roles across commerce and industry, academia, government, and public practice throughout Australia and in 107 countries around the world. We aim to lead the profession by delivering visionary thought leadership projects, setting the benchmark for the highest ethical, professional and educational standards and enhancing and promoting the Chartered Accountant brand. We also represent the interests of members to government, industry, academia and the general public by actively engaging our membership and local and international bodies on public policy, government legislation and regulatory issues. The Institute can leverage advantages for its members as a founding member of the Global Accounting Alliance (GAA), an international accounting coalition formed by the world’s premier accounting...
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...Journal of Economic Perspectives—Volume 17, Number 3—Summer 2003—Pages 71–92 Executive Compensation as an Agency Problem Lucian Arye Bebchuk and Jesse M. Fried E xecutive compensation has long attracted a great deal of attention from financial economists. Indeed, the increase in academic papers on the subject of CEO compensation during the 1990s seems to have outpaced even the remarkable increase in CEO pay itself during this period (Murphy, 1999). Much research has focused on how executive compensation schemes can help alleviate the agency problem in publicly traded companies. To understand adequately the landscape of executive compensation, however, one must recognize that the design of compensation arrangements is also partly a product of this same agency problem. Alternative Approaches to Executive Compensation Our focus in this paper is on publicly traded companies without a controlling shareholder. When ownership and management are separated in this way, managers might have substantial power. This recognition goes back, of course, to Berle and Means (1932, p. 139) who observed that top corporate executives, “while in office, have almost complete discretion in management.” Since Jensen and Meckling (1976), the problem of managerial power and discretion has been analyzed in modern finance as an “agency problem.” Managers may use their discretion to benefit themselves personally in a variety y Lucian Arye Bebchuk is the William J. Friedman Professor...
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...How did increased competition affect credit ratings? Bo Becker Todd Milbourn Working Paper 09-051 Copyright © 2008, 2009, 2010 by Bo Becker and Todd Milbourn Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. How did increased competition affect credit ratings? Draft Date: September 15, 2010 Bo Becker and Todd Milbourn* Abstract. The credit rating industry has historically been dominated by just two agencies, Moody’s and S&P, leading to longstanding legislative and regulatory calls for increased competition. The material entry of a third rating agency (Fitch) to the competitive landscape offers a unique experiment to empirically examine how in fact increased competition affects the credit ratings market. Increased competition from Fitch coincides with lower quality ratings from the incumbents: rating levels went up, the correlation between ratings and market-implied yields fell, and the ability of ratings to predict default deteriorated. We offer several possible explanations for these findings that are linked to existing theories. Key words: Credit ratings; competition and reputation; information quality * Harvard Business School (Becker) and Washington University in St Louis (Milbourn). Contact author’s e-mail address: bbecker@hbs.edu. We wish to thank Pierluigi Balduzzi...
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...Economic Consequences of the Sarbanes-Oxley Act of 2002 Ivy Xiying Zhang* William E. Simon Graduate School of Business Administration Carol Simon Hall 4-312 University of Rochester Rochester, NY 14627 zhangxi@simon.rochester.edu February 2005 I am grateful for the guidance of my dissertation committee, Bill Schwert, Charles Wasley, Ross Watts, and especially Jerry Zimmerman (Chairman). I also appreciate comments from Jim Brickley, Philip Joos, Andy Leone, Jerry Warner, Joanna Wu, Yan Cao, Ling Lei, Laura Liu, Tao Kuang, and workshop participants at the University of Rochester. All errors are my own. * Abstract This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion. I then examine the private benefits and costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results are consistent with the hypothesis that shareholders consider both the restriction of nonaudit services and the provisions to enhance corporate governance costly to business. The results also show that Section 404 of SOX, which mandates an internal control test, imposes significant costs on...
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...Setting and Public Disclosure in the Financial Services Industry A Dissertation Presented to the Faculty of the Graduate School of Yale University in Candidacy for the Degree of Doctor of Philosophy by Kai Du Dissertation Director: Shyam Sunder December 2012 c 2012 by Kai Du All rights reserved. Abstract Essays in Accounting Theory: Corporate Earnings Management in a Dynamic Setting and Public Disclosure in the Financial Services Industry Kai Du 2012 This dissertation consists of three essays on the interactions between economic fundamentals and accounting information in three different settings: an infinite-horizon financial reporting problem, a coordination game with trading in the secondary market, and a bank which provides risk sharing among demand depositors. In the first essay, I propose a dynamic model of corporate earnings management in which investors have different expectations schemes. I find that while earnings management may exist when investors have rational expectations or misspecified Bayesian beliefs, it disappears in the long run of an adaptive learning process. The model also offers ample predictions on the time-series properties of asset prices and return predictabilities. The second essay studies the role of public disclosure by a distressed firm whose creditors engage in a coordination game with trading. I find that conditioned on the private information environment and equilibrium selection, better public disclosure could lead to...
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