This paper analyzes economic characteristics of firms that correct previously reported quarterly earnings. The basic findings are that, relative to their industry, the sample (correcting) firms are smaller, less profitable, have higher debt, are slower growing, and face more serious uncertainties. Their average stock returns between the issuance of erroneous quarterly reports and their correction are negative. Also, correction disclosure frequently precedes SEC or stockholder suits against firm management. Results are consistent with predictions based on the economic interests of management and their auditors.

This study assesses the stock market's reaction to a series of events leading up to a mandated change in accounting for retail land sales. Evidence is found to support the conclusion that the market reacted to some of these events in a manner consistent with the effects of the accounting change on debt annagement contracts. A distinctive aspect of the analysis is the efficient use of security returns data to detect market reactions and to derive empirical distributions of test statistics employed. The analysis is extended by a model for grouping regression equations known as seemingly unrelated regressions. However, the gains from this extension are modest.

In the Sixties, the qualified stock option was the predominant form of long-term incentive compensation contract for major industrial firms in the U.S. In the early Seventies these same firms replaced their tax-qualified stock option plans with non-qualified sttock options and later modified these plans to include a variety of new contingent compensation arrangements, some of which were based on accounting numbers instead of stock prices. This paper develops the hypothesis that tax considerations play an important role in explaining the form of compensation contracts. The pattern and timing of changes in the compensation plans of the top 100 industrial firms provides evidence consistent with the tax hypothesis.

We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.

Li and You (this volume) study public firms’ common stock return reactions to two events: when analysts’ initiate coverage of the firm and when they terminate coverage. They test the returns for evidence of three sources of value added by analysts: (1) more monitoring of the firm, (2) reduced information asymmetry about the firm, and (3) greater demand for the firm’s common stock. They find consistent support for analysts adding value by increasing demand, but not monitoring or by reducing information asymmetry. Their findings also indicate that analysts’ initiations supply little new information. I review these findings, put them in perspective with related research, and note research directions.

Managers, consultants, and the financial press assert that compensation plans based on residual income change managers' behavior. This assertion is empirically tested by selecting a sample of firms that began using a residual income performance measure in their compensation plans and comparing their performance to a control sample of firms that continue to use traditional accounting earnings-based incentives. The results generally support the adage `you get what you measure and reward'. The results also support many hypothesized managerial actions associated with residual income-based performance measure incentives.

This study reexamines competition, cost structure, and growth opportunities effects on earnings response coefficients and extends this literature in several ways. First, it presents a more refined theoretical motivation for investigating competition and cost structure effects. Second, it introduces new economic factor proxies that confirm prior findings with respect to competition but differ from prior findings with respect to cost structure and growth opportunities. Overall the evidence suggests that accounting earnings reflect information about future economic rents generated by firms' assets-in-place. The evidence also suggests, contrary to prior studies, that accounting earnings are not very informative about firms' growth opportunities.