[Effective January 1985, SFAS No. 80 requires banks to recognize changes in the market value of futures contracts that qualify (a) as micro hedges as adjustments to the carrying amount of the hedged item ("hedge accounting"), and (b) as macro hedges currently in income ("immediate recognition"). The distinction between micro and macro hedges depends on whether the futures contracts are linked with identifiable hedge transactions (micro hedge) or not (macro hedge). Three factors motivate commercial banks to use macro hedges: (1) it may be difficult to isolate hedge transactions; (2) since 1983, required disclosures provide readily available measures of macro exposure; and (3) it is possible to increase exposure by micro hedging some items but not others. Consequently, commercial banks, as large macro hedge users, are concerned that immediate recognition accounting causes gains and losses on futures contracts and hedged items to be recognized in different periods. This asymmetry, they argue, increases the variability of earnings and discourages effective use of futures contracts to hedge interest rate risk. Brokerage firms have similar concerns about immediate recognition accounting for futures contracts used for investment or speculation. This paper examines commercial banks' and brokerage firms' claim that the current accounting rules for futures contracts increase earnings variability. As such, this analysis departs from prior studies that focus on the security market's reaction to an accounting change. Simulations calibrated with empirical data collected from a sample of 76 commercial banks are used to generate earnings streams computed under immediate recognition and hedge accounting. The variability of the simulated earnings patterns is then compared using parametric and nonparametric tests. These tests show that immediate recognition accounting significantly increases the dispersion of annual earnings vis-�-vis the earnings stream produced under hedge accounting. This finding, which is robust to the size of the hedge and the measure of earnings, suggests at least one motivation for a change in commercial banks' hedging behavior. Empirical tests are used to compare earnings patterns of a sample of 27 brokerage firms. These results indicate no significant difference between the variability of earnings before and after the effective date of SFAS No. 80. Although based on a small number of time series observations, this finding does not support critics' concern over the accounting treatment for futures contracts used for investment or speculation.]

Debt covenants, Financial distress, Covenant default, Shareholders

This paper examines the empirical relation between corporate ownership structure and innovation. We test the hypothesis that diffusely-held firms are less innovative than firms with either a high concentration of management ownership or a significant equity block held by an outside investor. Overall, the evidence indicates that diffusely-held firms are less innovative along the dimensions we examine: patent activity, growth by acquisition versus internal development, and timing of long-term investment spending. These results are consistent with the conjecture that concentrated ownership and shareholder monitoring are effective at alleviating the high agency and contracting costs associated with innovation.

Analyst stock recommendation, Earnings forecast revisions, Stock returns

Analysts, Analyst forecasts, Stock recommendations, Cultivating management relations

Examines commercial banks' and brokerage firms' claim that existing accounting rules for futures contracts increase earnings variability in the United States. Background on the SFAS No. 80 requiring banks to recognize market changes in futures contracts that qualify as micro and macro hedges; Hedging interest rate exposures; Accounting for futures contracts by commercial banks.

Jennifer Francis, J. Douglas Hanna, Linda Vincent, Causes and Effects of Discretionary Asset Write-Offs, Journal of Accounting Research, Vol. 34, Studies on Recognition, Measurement, and Disclosure Issues in Accounting (1996), pp. 117-134

This paper examines the benefits from communications made at corporate presentations to securities analysts. We examine whether firms benefit by increasing analyst following or by correcting mispricing, and whether analysts gain by acquiring information that improves the frequency or quality of their forecasts. The results show significant increases in analyst following, and significantly positive abnormal returns on the presentation date, with larger reactions observed for underpriced securities. Finally, although we find an increase in forecasting activity following the presentations, we find no evidence that analysts' post-presentation forecasts are less disperse, more accurate or less biased than their pre-presentation forecasts.

We reexamine prior studies' conclusion that accruals are less persistent than cash, focusing on two aspects of persistence that are crucial to determining its properties. The first (time specificity) refers to the fact that persistence describes how current-period shocks to income translate into next-period income. Traditional measures of accruals are, however, functions of current- and non-current-period transactions. We show that the inclusion of non-current-period transactions leads to a downward (upward) bias on the persistence of accruals (cash flows). We develop alternative measures of accruals and cash flows that are not misaligned and show that the differential persistence of cash flows over accruals is more than 70% smaller using these measures. The second aspect of persistence is firm-specificity. Specifically, we evaluate persistence using firm-specific estimations and find that more than 85% of firms show no evidence that accruals are less persistent than cash flows.

Financial reporting, Value relevance, Usefulness, Information environment