Knowledge that Transforms

ABSTRACT When the fair value of an investment security falls below amortized cost and there is significant doubt that the firm can hold the security until the fair value recovers, an other-than-temporary impairment (OTTI) is recognized in net income. Thus, an OTTI is a disclosure about the prospect of recovering an unrealized loss. Our findings suggest that investors priced banks' OTTI recognition during and after the financial crisis. Investors were unable to fully anticipate reported OTTIs, and priced OTTIs incrementally to reported unrealized gains/losses. After banks were required to bifurcate OTTIs, investors priced only the portion of OTTI recognized in earnings. Our results suggest that reporting unrealized losses in earnings via an OTTI changes how investors price the losses. The results inform recent standard-setting initiatives to expand disclosure about changes in fair value. JEL Classifications: M41; M42; M44. Data Availability: Data are available from sources identified in the paper.

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn Email Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation Raffi J. Indjejikian, Michal Matějka, Jason D. Schloetzer; Target Ratcheting and Incentives: Theory, Evidence, and New Opportunities. The Accounting Review 1 July 2014; 89 (4): 1259–1267. https://doi.org/10.2308/accr-50745 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search

ABSTRACT: If the differences in accounting standards across countries reflect relatively stable institutional differences, why did several countries rapidly adopt IFRS in the 2003–2008 period? We test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can explain part of a country's shift away from local accounting standards. We find that perceived network benefits increase the degree of IFRS harmonization among countries and that smaller countries have a differentially higher response to these benefits. Further, economic ties with the European Union are a particularly important source of network effects. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption was self-reinforcing during the sample period, which, in turn, has implications for the consequences of IFRS adoption. Data Availability: Most data are available from public sources identified in the text; hand-collected data are available upon request.

ABSTRACT: We examine the relation between shareholder investment horizon and chief executive officer (CEO) horizon incentives derived from compensation contracts. We find that influential incumbent shareholders provide managers with short-horizon incentives to maximize current firm value when these shareholders plan to sell their stock. Specifically, we use the initial public offering (IPO) setting in which venture capitalists (VCs) represent short-horizon, controlling investors with strong selling incentives after the IPO. We predict and find that VCs' short-term incentives influence CEO's annual horizon incentives following the IPO. At the same time, institutional monitoring limits the influence of VCs on annual, short-horizon incentives. To preempt this disciplining by market participants, VCs grant equity prior to the IPO that correspond with their short-horizons and result in shorter portfolio horizon incentives for the CEO after the IPO. We also document a positive relation between long-run abnormal stock returns and horizon incentives, consistent with horizon incentives influencing management actions. Data Availability: All data are publicly available from the sources indicated in the paper.