This study examines how financial disclosures with earnings announcements affect sell‐side analysts' information about future earnings, focusing on disclosures of financial statements and management earnings forecasts. We find that disclosures of balance sheets and segment data are associated with an increase in the degree to which analysts' forecasts of upcoming quarterly earnings are based on private information. Further analyses show that balance sheet disclosures are associated with an increase in the precision of both analysts' common and private information, segment disclosures are associated with an increase in analysts' private information, and management earnings forecast disclosures are associated with an increase in analysts' common information. These results are consistent with analysts processing balance sheet and segment disclosures into new private information regarding near‐term earnings. Additional analysis of conference calls shows that balance sheet, segment, and management earnings forecast disclosures are all associated with more discussion related to these items in the questions‐and‐answers section of conference calls, consistent with analysts playing an information interpretation role with respect to these disclosures.
We investigate to what extent the market uses information that is predictive of whether earnings will meet or beat the analyst consensus forecast of earnings ( MBE henceforth): measures of a firm's incentives to engage in MBE behavior, measures of constraints on MBE , measures of past MBE practices by firm and industry, and other variables. Using the Mishkin test framework and Bonferroni‐adjusted p ‐values, we document that of a total of 21 variables, the market inefficiently uses information in one difficulty measure and four other predictors, suggesting that strong empirically and theoretically grounded relationships concerning MBE behavior are more likely to be unraveled by the market. We further show that a portfolio based on the difference between the objective MBE probability and the market‐assessed MBE probability generates significant abnormal returns. The documented return anomaly is distinct from other known anomalies and cannot be fully explained by arbitrage risk or transaction costs.
We examine which of two opposing financial reporting incentives that group†affiliated firms experience shapes their accounting transparency evident in auditor choice. In one direction, complex group structure and intragroup transactions enable controlling shareholders to pursue diversionary activities that they later hide by distorting reported earnings. In the other direction, as outside investors price†protect against potential expropriation, controlling shareholders may be eager to improve financial reporting quality in order to alleviate agency costs. To empirically clarify whether group affiliation affects company insiders' incentives to address minority shareholders' concerns over agency costs, we examine auditor selection of group firms relative to stand†alone firms. In comparison to nongroup firms, our evidence implies that group firms are more likely to appoint Top 10 audit firms in China, especially when their controlling shareholders have stronger incentives to improve external monitoring of the financial reporting process. After isolating group firms, we find that the presence of a Top 10 auditor translates into higher earnings and disclosure quality, higher valuation implications for related†party transactions, and cheaper equity financing, implying that these firms benefit from engaging a high†quality auditor. In additional analysis consistent with our predictions, we find that group firms that are Top 10 clients pay higher audit fees and their controlling shareholders are more constrained against meeting earnings benchmarks through intragroup transactions and siphoning corporate resources at the expense of minority investors. Collectively, our evidence supports the narrative that insiders in firms belonging to business groups weigh the costs and benefits stemming from auditor choice.Les auteurs se demandent laquelle de deux motivations opposées liées à l'information financière animant les groupes d'entreprises affiliées détermine leur transparence comptable, telle qu'elle se manifeste dans le choix de l'auditeur. D'une part, la complexité de la structure du groupe et des opérations intragroupe permet aux actionnaires détenant le contrôle de se livrer à des activités de détournement qu'ils dissimulent par la suite en manipulant les résultats publiés. D'autre part, comme les investisseurs externes se protègent d'une éviction potentielle en tenant compte de ce risque dans les cours, les actionnaires détenant le contrôle peuvent avoir tendance à vouloir améliorer la qualité de l'information financière afin d'alléger les coûts de délégation. Pour déterminer empiriquement si le groupement d'entreprises affiliées influe sur les motivations des initiés à s'intéresser aux préoccupations des actionnaires minoritaires quant aux coûts de délégation, les auteurs étudient le choix de l'auditeur des groupes d'entreprises par rapport au choix de l'auditeur d'entreprises individuelles. Comparativement aux entreprises individuelles, il appert qu'en Chine, les entreprises appartenant à un groupe sont davantage susceptibles de retenir les services de cabinets d'audit appartenant aux Dix Grands, en particulier lorsque les actionnaires détenant le contrôle sont plus fortement motivés à améliorer le contrôle externe du processus d'information financière. Après avoir isolé les groupes d'entreprises, les auteurs observent que la présence d'un auditeur appartenant aux Dix Grands se traduit par une qualité accrue des résultats et de l'information publiée, l'attribution de valeurs plus élevées aux opérations entre parties liées, et des coûts inférieurs de financement par capitaux propres, ce qui donne à penser que ces entreprises tirent profit du choix d'un auditeur de calibre supérieur. Dans une analyse supplémentaire, conformément à leurs prédictions, les auteurs constatent que les groupes d'entreprises clientes des Dix Grands paient des honoraires d'audit plus élevés et que leurs actionnaires détenant le contrôle ont moins de latitude dans le recours aux opérations intragroupe et au drainage des ressources de l'entreprise aux dépens des actionnaires minoritaires en vue d'atteindre les résultats visés. Dans leur ensemble, les données qu'ils colligent confirment les allégations selon lesquelles les initiés des entreprises appartenant à des groupes soupèsent les coûts et les avantages du choix de l'auditeur.
The provision of examples as implementation guidance is pervasive in accounting standards. Prior research has established that preparers engage in “example‐based reasoning,” a tendency to favor the accounting treatment in an example, even when the example does not exactly match the transaction at hand. In this paper, we investigate whether fact‐weighting guidance counteracts this tendency. Such guidance, now found in some accounting standards, indicates whether particular transaction facts are more important than others in determining the appropriate accounting treatment. Using an experiment, we find that fact‐weighting guidance does reduce preparers' tendency to favor the accounting treatment in an example. However, results also suggest that some degree of example‐based reasoning persists even with fact‐weighting guidance, and that preparers are not fully aware of how fact‐weighting guidance affects their judgments. Our findings have practical implications. They suggest to standard setters a potential remedy—namely, fact‐weighting guidance—for the misuse of accounting examples. They also provide insights to accounting preparers regarding how fact‐weighting guidance influences their judgments in ways they may not anticipate.
We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher‐ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross‐sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high‐ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high‐quality management.
I use a laboratory experiment to examine the productive and counterproductive effects of providing employees nonpecuniary recognition based on measures of relative performance. I find that, on average, recognition programs increase both productive efforts (those intended to increase one's own performance) and counterproductive efforts (those intended to decrease peer performance) in a setting where it is salient to employees that they can exert both productive and counterproductive efforts. Interestingly, I also find that these effects are moderated by the Dark Triad of personalities, a group of three personality traits. My study reveals that recognition programs mainly lead individuals who score lower on the Dark Triad to increase counterproductive efforts and those who score higher on the Dark Triad to increase productive efforts. These results contribute to the literature on relative performance information by demonstrating that recognition programs can have both productive and counterproductive effects. However, whether these programs produce mainly a productive or counterproductive effect depends on important personality characteristics of the employees.
We explore the optimal timing of voluntary disclosures when firms and outside investors have correlated but not identical signals. By delaying disclosure of their signal, firms encourage the acquisition of information by investors by reducing the latter's exposure to the long‐term risk of holding the asset. Immediate disclosure reduces rents from acquiring the correlated signal, and thus is sometimes suboptimal in a dynamic setting. We characterize conditions under which postponing disclosure is preferable, which allows us to develop predictions on the timing of voluntary information disclosures such as management guidance.
We examine whether the presence of female directors and female audit committee members affect audit quality in terms of audit effort and auditor choice by using observations from a sample of U.S. firms, spanning the years 2001–2011. We find, after controlling for endogeneity and other board, firm, and industry characteristics, that firms with gender‐diverse boards (audit committees) pay 6 percent (8 percent) higher audit fees and are 6 percent (7 percent) more likely to choose specialist auditors compared to all‐male boards (audit committees). Our findings suggest that boards (audit committees) with female directors (members) are likely to demand higher audit quality, ceteris paribus.
Prior studies find that audit fees are higher for cross‐listed firms, and these studies primarily attribute the incremental fees to added litigation costs. In this study, we investigate whether the higher audit fees that foreign firms cross‐listed in the United States pay are also attributable to incremental audit effort associated with U.S. disclosure requirements and a more stringent U.S. auditing environment. By comparing audit fees of foreign cross‐listed firms to U.S. domiciled firms and to non‐cross‐listed foreign firms, we are able to decompose incremental audit fees into portions attributable to added audit effort and to added litigation costs. We find that, on average, foreign firms cross‐listed in the United States pay significantly higher fees than domestic U.S. firms and foreign firms that do not cross‐list. Furthermore, we find that audit effort is almost as important as litigation costs in explaining the higher fees associated with foreign cross‐listed firms; our estimates suggest that between 29 percent and 48 percent of the incremental fees are attributable to incremental audit effort. In addition, the total cross‐listing premium is increasing in the difference between the U.S. auditing regulatory environment and that of the home country of the cross‐listed firm. Our study improves our understanding of the role of audit effort in explaining the added fees charged by auditors when foreign firms cross‐list in the United States.
We examine whether, in the aggregate, margin debt is associated with the divergence of price from accounting fundamentals. We find that investors increase their margin debt following upward price movements away from accounting fundamentals, consistent with these investors being extrapolative in aggregate. We also find evidence that margin debt appears to be linked to temporary overpricing in recent periods, as the aggregate ratio of margin debt to price is reliably associated with negative future returns since at least 1992. Our results are consistent with the theoretical literature that predicts extrapolative traders have a destabilizing effect on market prices, and helps explain why prices diverge from accounting fundamentals.