Knowledge that Transforms

We investigate how unique features of charities affect the manner in which they compensate their executives. We find that changes in compensation are significantly positively associated with changes in spending on programs that advance organization objectives, whether changes in program spending are attributable to changes in revenue raised or to changes in the relative costs of administering the charity. The results suggest that accounting performance measures can play a role in nonprofit organizations whose objectives are typically subjective and nonfinancial, and thus, whose progress toward objectives is difficult to quantify.

In this study we examine changes in the precision and the commonality of information contained in individual analysts' earnings forecasts, focusing on changes around earnings announcements. Using the empirical proxies suggested by the Barron et al. (1998) model that are based on the across-analyst correlation in forecast errors, we conclude that the commonality of information among active analysts decreases around earnings announcements. We also conclude that the idiosyncratic information contained in these individual analysts' forecasts increases immediately after earnings announcements, and that this increase is more significant as more analysts revise their forecasts. These results are consistent with theories positing that an important role of accounting disclosures is to trigger the generation of idiosyncratic information by elite information processors such as financial analysts (Kim and Verrecchia 1994, 1997).

Business executives and academics frequently criticize budget-based compensation plans as providing incentives for subordinates to build slack into proposed budgets. In this paper, we examine whether either of two practices—using budgets to allocate scarce resources, or providing information about co-workers—reduces budget slack and increases subordinate performance when organizations use budgets for performance evaluation. The results from our experiment show that using budgets for both resource allocation and performance evaluation not only eliminates budget slack, but also increases subordinates' effort and task performance. Additionally, we find that an internal reporting system that provides information about subordinates' budgets and performance to their co-workers mitigates budget slack when superiors do not use budgets as a basis for resource allocation. These results highlight the synergies between the planning (resource allocation) and control (performance evaluation) functions of managerial accounting practices such as budgeting. Our results also suggest that by designing the internal information system to reduce information asymmetry among subordinates, the firm can increase subordinates' incentives to provide more accurate budgets.

This paper examines whether auditor fees are associated with earnings management and the market reaction to the disclosure of auditor fees. Using data collected from proxy statements, we present evidence that nonaudit fees are positively associated with small earnings surprises and the magnitude of discretionary accruals, while audit fees are negatively associated with these earnings management indicators. We also find evidence of a negative association between nonaudit fees and share values on the date the fees were disclosed, although the effect is small in economic terms.

We examine whether cross-country differences in earnings-to-price multiples have changed between 1987–1992 and 1994–1999. Our results suggest that earnings multiples became more similar over this time period for the jurisdictions we analyze, although systematic differences remain. Economic determinants of earnings multiples (e.g., growth rates, interest rates, and returns) do not exhibit similar convergence and do not appear to explain the changes. The convergence is robust to controls for cash flow multiples and is apparent in the valuation of accruals. Accrual/cash flow correlations have also become more similar and generally less negative, suggesting a reduction in earnings smoothing. Overall, our evidence suggests convergence in accounting practice.

Prior research addressing questions such as whether investors respond to a hypothesized information event used tests of unusual return and/or trading activity as alternative measures of investor response. We investigate which of these two metrics maximizes the likelihood that a researcher correctly detects the presence or absence of a response. Building on the repeated-sample framework established in Brown and Warner (1980, 1985) and Dyckman et al. (1984), we provide evidence that (1) volume-based metrics, especially measures based on numbers of transactions, provide more powerful tests of investor response to public disclosures than do return-based metrics; and (2) supplementing return-based measures with trading-based measures increases the power of tests designed to detect investor response. Our conclusions are particularly relevant when power is critical (i.e., when sample sizes are small or anticipated investor response is small). Our evidence also suggests that before concluding that investors do not respond to a public disclosure, based on a returns analysis, researchers should confirm the nonresponse inference with trading-based measures.

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn MailTo Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation William H. Beaver; Perspectives on Recent Capital Market Research. The Accounting Review 1 April 2002; 77 (2): 453–474. https://doi.org/10.2308/accr.2002.77.2.453 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

This paper reports analyses of data obtained using a field-based questionnaire in which 253 auditors from one Big 5 firm recalled and described 515 specific experiences they had with clients who they believe were attempting to manage earnings. This approach enables us to analyze separately managers' decisions about how to attempt earnings management and auditors' decisions about whether to prevent earnings management by requiring adjustment of the financial statements. Our results indicate that managers are more likely to attempt earnings management, and auditors are less likely to adjust earnings management attempts, which are structured (not structured) with respect to precise (imprecise) standards. We also find that managers are more likely to make attempts that increase current-year income, but auditors are more likely to require that those attempts be adjusted, that managers are more likely to make attempts that decrease current-year income with unstructured transactions and/or when standards are imprecise, and that auditors are more likely to require adjustment of attempts that they identify as material or that are attempted by small clients.

Despite the increasing integration of global capital markets, there is little evidence on the valuation properties of cross-listed, non-U.S. firms' accounting variables. We use the relative performance of the earnings capitalization, the book value, and the residual income valuation models to explore the valuation properties of International Accounting Standards and U.S. Generally Accepted Accounting Principles earnings and book values reported by non-U.S., cross-listed firms trading in a common equity market. Using non-U.S./non-U.K. firms whose shares trade on the International Stock Exchange Automated Quotation system in London, we find that the earnings capitalization model is the dominant accounting-based valuation model when crosslisted firms report under International Accounting Standards. In contrast, we find that when cross-listed firms report under U.S. Generally Accepted Accounting Principles, the residual income model is the dominant accountingbased valuation model. Our exploratory study provides insights into the valuation implications of allowing a dual reporting system for foreign registrants trading in a common equity market.

This research investigates whether oil and gas producing firms use abnormal accruals and hedging with derivatives as substitutes to manage earnings volatility. Firms engaged in oil exploration and drilling are exposed to two kinds of risks that can cause earnings volatility: oil price risk and exploration risk. Firms can use abnormal accrual choices and/or derivatives to reduce earnings volatility caused by oil price risk, but cannot directly hedge the operational risk of unsuccessful drilling. Because hedging and using abnormal accruals are costly activities, and because prior research suggests managers do not eliminate all volatility (Haushalter 2000; Barton 2001), we expect that, at the margin, managers will use these smoothing mechanisms as substitutes to manage earnings volatility. Our results suggest a sequential process whereby managers of oil and gas producing firms first determine the extent to which they will use derivatives to hedge oil price risk, and then, especially in the fourth quarter, manage residual earnings volatility by trading off abnormal accruals and hedging with derivatives to smooth income.