I investigate whether management earnings forecasts fully reflect the implications of accruals for future earnings. I find that managers overestimate accrual persistence in range forecasts but not in point forecasts and that managers’ accrual-related forecast bias in range forecasts increases with forecast range and forecast horizon. My results suggest that managers overestimate accrual persistence when faced with greater difficulty forecasting earnings. Moreover, I find that managers’ accrual-related forecast bias in range forecasts is somewhat affected by managerial opportunism and fear of litigation. Finally, I find accrual mispricing for firms issuing range forecasts but not for firms issuing point forecasts.

Discrete recognition is a long-standing and ubiquitous accounting practice, but it has been widely criticized for suppressing information and inducing accounting-motivated transactions. We study a model to examine the economic consequences of shifting away from discrete recognition to a continuous measurement approach. Without manipulation, discrete recognition is less informative than the continuous approach. However, the continuous regime induces more manipulation. The equilibrium informativeness is determined by both the accounting standard and endogenous manipulation. Discrete recognition is more informative than its continuous counterpart precisely when manipulation is a severe threat. We respond to the recent call in Kothari, Ramanna, and Skinner (2010) for using positive accounting theory to explain certain long-standing accounting practices. We also discuss the model's implications for fair value accounting.

This paper investigates banks’ reporting choices in the context of bank runs. A fundamental-based run imposes market discipline on insolvent banks, but a panic-based run closes banks that could have survived with better coordination among creditors. We augment a bank-run model with the bank’s reporting choices. We show that banks with intermediate fundamentals have stronger incentive to misreport than those in the two tails. Moreover, reporting discretion reduces panic-based runs, but excessive discretion also reduces fundamental-based runs. The optimal amount of reporting discretion increases in the bank’s vulnerability to panic-based runs. Finally, a given bank’s opportunistic use of reporting discretion exerts a negative externality on other banks. Our paper answers the call by Armstrong et al. (2016) and Bushman (2016) to understand better the effects of banks’ special features on their reporting choices.

We characterize the properties of optimal accounting rules in a signaling game. An impatient firm sells shares to competitive investors. The firm can signal its private information about the fundamental by retaining a fraction of the shares. In addition, the firm can commit to disclosing information according to a set of accounting rules chosen ex ante. Information disclosure reduces signaling cost so that perfect disclosure is optimal. When perfect disclosure is impossible, the optimal accounting rule features a lower bound and a summary statistic of the fundamental. The interpretation of the lower bound is consistent with accounting conservatism, and the statistic summarizes the information most relevant to the firm׳s valuation. The justification for accounting conservatism relies on the existence of information asymmetry and the infeasibility of perfect accounting disclosure. This is consistent with the conjecture of LaFond and Watts (2008) that information asymmetry calls for accounting conservatism.

We examine how financial statement informativeness, analyst following, and news relate to the information asymmetry between insiders and outsiders. Corporations’ timely disclosures of value relevant information and information collection by outsiders reduce information asymmetry, limiting insiders’ ability to trade profitably on private information. We use the profitability and intensity of insider trades to proxy for information asymmetry. We find that increased analyst following is associated with reduced profitability of insider trades and reduced insider purchases. Financial statement informativeness is negatively associated with the frequency of insider purchases. However, company news, good or bad, is positively associated with insider purchase frequency.

The use of equity incentives is significantly greater in countries with stronger insider trading restrictions, and these higher incentives are associated with higher total pay. These findings are robust to alternative definitions of insider trading restrictions and enforcement, and to panel regressions with country fixed effects. We also find significant increases in top executive pay and the use of equity-based incentives in the period immediately following the initial enforcement of insider trading laws. We conclude that insider trading laws are one channel through which cross-country differences in pay practices can be explained.

This paper re-evaluates evidence in Ayers and Freeman [Ayers, F., Freeman, R., 1997. Market assessment of industry and firm earnings information. Journal of Accounting and Economics 24, 205–218] suggesting that investors anticipate industry-wide components of earnings earlier than firm-specific components, and that post-earnings-announcement drift following annual earnings announcements is due primarily to firm-specific components of earnings. Our tests indicate that post-announcement drift is entirely attributable to coefficient bias due to measurement errors in the use of realized earnings changes as proxies for unexpected earnings. Also, coefficient differences in the market's anticipation of subsequent-year industry and firm-specific earnings become insignificant when we introduce suitable controls for non-linearity in the return/earnings relation.

We analytically study the economic consequences of the disclosure of managerial compensation contracts in a setting where two firms, by designing compensation contracts for their respective managers, compete for a new investment opportunity. Each manager is privately informed about her firm's profitability from this investment. We find that the disclosure leads to firms' emphasizing short-term stock performance in their managers' contracts. This, in turn, induces managers to signal favorable private information via myopic overinvestment, which deters rival firms' investments and gains their own firms a competitive edge. Nonetheless, such strategic use of compensation contracts is absent when the contracts are not disclosed; under this regime, equilibrium contracts only focus on long-term outcomes. Moreover, while disclosure-mandate-induced managerial myopia erodes firm profits, it may benefit consumer and social welfare. Our theory illuminates the economic consequences of the Compensation Discussion and Analysis (CD&A) disclosure implemented in 2006.

Investment banks and issuers of Chinese domestic IPOs became fully responsible for IPO offer prices only on June 10, 2009. Before this regulatory reform, the optimistic bias in post-IPO earnings forecasts is highly comparable across affiliated and unaffiliated analysts. Afterward, the forecasts of affiliated analysts are 33 percentage points more positively distorted on average. In the first 90 days after an IPO, this relative forecast bias even increases to 63 percentage points and enlarges further when the issuer׳s stock price drops in the aftermarket. Affiliated analysts distort especially their forecasts for fiscal years further away from the forecast release date.