Using three different measures of conservatism, we document that (i) the percentage of inside directors is negatively related to conservatism, and (ii) the percentage of outside directors’ shareholdings is positively related to conservatism. Our results hold after controlling for industry, firm size, leverage, growth opportunities, institutional ownership, inside director ownership, and unobservable firm characteristics that are stable over time. Overall, the evidence is consistent with accounting conservatism assisting directors in reducing agency costs of firms.

ABSTRACT Overconfident managers overestimate future returns from their firms’ investments. Thus, we predict that overconfident managers will tend to delay loss recognition and generally use less conservative accounting. Furthermore, we test whether external monitoring helps to mitigate this effect. Using measures of both conditional and unconditional conservatism respectively, we find robust evidence of a negative relation between CEO overconfidence and accounting conservatism. We further find that external monitoring does not appear to mitigate this effect. Our findings add to the growing literature on overconfidence and complement the findings by Schrand and Zechman [2011] that overconfidence affects financial reporting behavior.

ABSTRACT We provide evidence on the effect of political connections on the trade‐off between real and accrual‐based earnings management in the United States. This evidence is important because prior literature documents mixed evidence on whether political connections reduce the threat of SEC enforcement. By studying earnings management with a large sample, our study provides more generalizable insights into the effects of political connections on enforcement. We argue that politically connected firms face a lower threat of enforcement, which reduces the costs of accrual‐based earnings management and alters the trade‐off between real and accrual‐based earnings management. Consistent with our predictions, using a single‐step estimation method as well as a difference‐in‐differences test based on an exogenous shock, we find that connected firms engage in more accrual management and less real earnings management. Our results are driven by firms that have relatively high costs of real earnings management. Furthermore, we find that political connections mitigate the relation between SEC comment letters and earnings management. Overall, the evidence is consistent with politically connected firms facing a lower threat of regulatory enforcement and using this flexibility to increase accrual‐based earnings management and reduce real earnings management that is potentially value destructive. Our study complements and strengthens inferences in prior work that documents evidence of lax SEC enforcement for politically connected firms using small samples. Our findings should be of interest to policy‐makers, regulators, and other professionals that are interested in understanding the effects of political connections.

We document the existence of expertise rents by finding that financial experts on audit committees obtain higher abnormal returns from insider purchases than do non‐financial experts on audit committees. We further investigate whether information processing skills work alone or jointly with an information advantage to generate expertise rents. While financial experts on audit committees outperform financial experts on other committees, financial experts on compensation, executive, nominating, and governance committees do not outperform non‐financial experts on these committees. These findings suggest that expertise rents are domain‐specific and can be obtained only when directors have both access to private information and information processing skills. In additional testing, we find that expertise rents for financial experts on audit committees are primarily driven by non‐accounting financial experts, whose finance or supervisory experience could make them better than accounting financial experts in understanding market conditions and assessing firm risk.

ABSTRACT We present evidence on the effects of target firms' accounting conservatism in a merger and acquisition transaction. Conservatism is distinct from other accounting or accrual quality constructs examined in prior work. Its unique features can lead to potential benefits for both the targets and the acquirers. The use of conservatism by targets reduces acquirers' risks of acquiring underperforming assets or overpaying for well‐performing assets. In addition, targets' conservatism results in greater production of verifiable information that can help the acquirers better estimate and realize synergies of the combined firm. Consistent with these arguments, we find that firms with greater accounting conservatism are more likely to receive a bid. We also find that targets' conservatism increases the deal premium and the announcement returns of both the targets and the acquirers, respectively. Overall, these results indicate that conservatism provides benefits to both sellers and buyers of equity in an acquisition transaction.