This study examines discretionary accruals imbedded in quarterly earnings announcements that precede executive stock option grants. Prior research indicates that managers attempt to increase the value of their option pay (by depressing the option's exercise price) through a variety of strategies including timing voluntary disclosures, influencing option grant dates, or managing accruals. This study extends the research by jointly examining managerial incentives and opportunities to pursue an accruals-based strategy. We find evidence that discretionary accruals are lower when option pay is high and when concurrent firm performance is poor (incentive factors), but only when firms issue grants following earnings announcements relatively infrequently (opportunity factor). For firms that follow a predictable grant schedule, managers behave as if they believe that investors will discount earnings-based signals preceding the grant. Our results suggest that the decision to pursue an option-related strategy is influenced by economic tradeoffs. From a policy perspective, our results have relevance for the ongoing debate over option compensation practices, appropriate disclosure to investors, and the quality of corporate earnings.
This study examines whether the effectiveness of the audit committee and the board of directors is associated with firms' timeliness in the remediation of material weaknesses (MWs) in internal control. The sample comprises accelerated filers that disclosed at least one MW from July 2003 to December 2004 under Section 302 of the Sarbanes-Oxley Act (SOX). Using logistic regression analyses, I find that firms with larger audit committees, audit committees with greater nonaccounting financial expertise, and more independent boards are more likely to remediate MWs in a timely manner. These results suggest that the audit committee and the board play an important role in monitoring the remediation of MWs. Overall, the study contributes to our understanding of the effectiveness of the audit committee and the board under the SOX regime. The study also identifies important determinants of firms' timeliness in the remediation of MWs, which is key to improving financial reporting quality and restoring investor confidence.
Subsequent to Feltham and Ohlson 1995 and Ohlson 1995, the accounting literature has published a large numbers of papers on accounting data and value.1 A review of this literature reveals that many themes and insights recur across the papers. With the advantage of hindsight, the repetitions seem inefficient. A student who takes a stab at familiarizing herself with subject matter naturally tends to view such a state of affairs as less than ideal. Questions like “What is it that I really need to understand?” or “Taken in its totality, what ideas and results make the literature tick?” arise. This paper addresses the essence of such questions. It states the central results as eight simple formal propositions. Because all the propositions are freestanding, they can, at least in principle, be internalized independently of each other. But the sequencing is in fact relevant because it introduces step-by-step increasingly sophisticated concepts. The concepts build upon each other; the propositions’ analytical simplicity should, therefore, not be taken as a sign that they are conceptually simplistic. Much discussion follows the propositions to spell out their broader significance. And the paper approaches this task always maintaining the texture of accounting: the central variables are earnings, book values, and dividends. The paper does not digress on proofs and finer analytical points. These aspects are of little interest, which is another way of saying that the paper focuses squarely on analytical constructs/representations and how these fit together. Nor does this paper elaborate on the extent to which the literature has already dealt with the results or insights. There is no question that most, if not all, results have had some kind of presence and thus lack novelty. That said, such cataloguing and related discussion would have been long and tedious without facilitating a better understanding of the insights I wish to convey. Aside from trying to systemize the literature, and thereby making it more accessible to the average reader, the paper also has a more ambitious objective. It goes to the heart of subject matter: the exposition should give the reader the sense that all pieces and insights interrelate logically and conceptually. In other words, the task at hand is to go beyond a listing of useful results (though this should hopefully be the case, too), and instead give a sense of how the various pieces coalesce into a whole. The development of such a coherent mental map allows the reader to think of the broad literature in an integrated fashion, rather than as consisting of loosely connected, or even competing, models that primarily differ in their empirical
Extant research suggests that book-tax differences are useful measures in evaluating firm performance. There is little evidence, however, regarding taxable income as an alternative performance measure to book income. We examine firm characteristics that mitigate or enhance the ability of taxable income to inform investors regarding firm performance. We find that the relative and incremental information content of estimated taxable income to book income is lower for high tax planning firms and higher for low earnings quality firms. Our results suggest that tax planning and low earnings quality have contrasting effects on the information content of estimated taxable income. These findings are pertinent to recent research examining book-tax differences as a measure of earnings quality and taxable income as an alternative performance measure.