Knowledge that Transforms

This study investigates the macroeconomic consequences of firm-level accounting conservatism. Consistent with conditional conservatism extending to the aggregate level, I demonstrate that annual estimates of aggregate corporate profits and gross domestic product compiled by the U.S. Bureau of Economic Analysis are more sensitive to negative aggregate news than to positive aggregate news. Next, I estimate the dollar value impact of conservatism on measurements of macroeconomic fundamentals. Finally, I show that incorporating the dollar value impact of conservatism increases the explanatory power of a monetary policy reaction function that describes U.S. Federal Reserve interest rate decision behavior. These results suggest that accounting can impact social welfare by altering the measurement attributes of key macroeconomic indicators and by shaping monetary policy decisions that regulate the money supply.

Product market power provides firms with comparative advantages through more persistent profitability and insulation from competitive threats. These advantages likely provide firms with the ability to engage in greater tax avoidance. We present evidence consistent with this hypothesis. We also show that firms mimic the tax outcomes of their product market leaders. Among firms with greater product market power and comparatively high cash tax avoidance, we find stock prices to be less informative and that investors require additional compensation for the risks associated with comparatively high cash tax avoidance. Our results survive numerous robustness tests. Overall, our results suggest that industry dynamics, particularly related to a firm's competitive position, play a meaningful role in corporate tax policy.

These remarks provide some perspective on my six decades of research, teaching, and participation in the AAA. A recurring theme is that my career took several unexpected turns and that my research often had unexpected outcomes. Several areas of research are discussed, including the prediction of financial distress, the information content of earnings announcements, the information content of prices, accounting and market measures of risk, discretion in financial reporting, conservatism, and value relevance of financial statements. Included is a brief summary of some of what I have learned from six decades of teaching. I review some of the major benefits of AAA participation.

In a world characterized by increasing pressure from financial and product markets, the question of how exogenous constraints affect internal coordination and control processes has become increasingly important. This experiment investigates how two exogenous constraints that superiors can face in budget negotiation settings, increased opportunity costs and financial pressure to meet unit targets, affect budget negotiations and subordinate effort. The results show that both constraints induce more cooperation, but in different ways. Financial pressure on the superior leads to more cooperative negotiation behavior by superiors and subordinates than increased opportunity costs. Specifically, subordinates do not take advantage of the superior's increased financial pressure to enforce lower budgets. After negotiation, both constraints strongly mitigate the negative effects of superior budget imposition on subordinate effort because exogenous constraints eliminate the effect of procedural fairness considerations on subordinate effort.

We examine whether donors reward nonprofit organizations that report better governance. From a sample of 10,846 organizations from 2008 to 2010, we first identify seven nonprofit governance dimensions using factor analysis. We then test whether the quality of governance influences donor decisions by including the seven governance factors in the standard donor's demand model. We find consistent evidence that donations and government grants are positively associated with six of the seven factors that capture good governance, including formal written policies (e.g., conflict of interest), independent audits and audit committees, review and approval of executive compensation, board oversight (e.g., board independence), management characteristics (e.g., no related parties), and accessible financial information. Our results have implications for nonprofit managers and regulators. Moreover, mandatory disclosure of governance policies for nonprofit organizations provides an interesting contrast to mandatory adoption of governance policies for publicly traded companies. JEL Classifications: G18; G38; H39; L30; L31; L38; M40; M41; M42; M48. Data Availability: All data are publicly available.

This paper studies whether dissemination of private, pre-decision signals about productivity is valuable to the principal when agents work sequentially and observe each other's effort. The benefit of dissemination is that when productivity states are correlated, each agent's signal is useful as a performance measure for the other agent and for making efficient production choices. The more informative the signal is about agents' efforts, the greater the benefit of the additional performance measure, but there is a cost due to higher information rents. With no dissemination, the downstream agent learns about the upstream agent's productivity state by observing that agent's effort. The upstream agent's rents are lower because he has no incentive to free-ride on the downstream agent, who follows his effort, but there is less information on which to base the payments. The choice between dissemination and no dissemination depends on the informativeness of the signal about agents' efforts.

Audit workpapers play a key role in auditor negligence trials, yet little is known about how workpaper documentation affects jurors' decision making. I investigate how auditors' documentation of their consideration of the alternative accounting treatments and their risk-based audit approach influence jurors' negligence verdicts and damage awards. I find that documentation of their consideration of the accounting alternatives increases the likelihood that auditors are found negligent because it increases jurors' perceptions of the foreseeability of the misstatement. However, when combined with documentation that explicitly links the audit risks to the work performed to address each risk, jurors award lower damage awards because they perceive auditors' actions prior to the negligent act as more compliant with the auditing standards. My results highlight the consequences of more complete documentation on jurors' evaluations of auditors and suggest the need for documentation policies that more effectively communicate the appropriateness of auditors' professional judgments.

This study empirically examines the role of shocks to macro-uncertainty in shaping the responses of stock market participants to firm-specific earnings news. Specifically, I find that investors place greater weight on bad news following an increase in macro-uncertainty. By contrast, I find that investors place equal weight on both good and bad news following a decrease in macro-uncertainty. Furthermore, my findings show that these effects are more pronounced (1) for firms whose prior returns are more correlated with macro-uncertainty, (2) for firms that experience abnormally low trading volume during the earnings announcement, (3) for firms with relatively lower levels of institutional ownership, and (4) for firms with relatively higher information uncertainty. In sum, these findings provide novel empirical evidence that investors behave in a manner consistent with ambiguity aversion, with the effects strongest among unsophisticated investors.

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 Nicholas Seybert; Partial Retraction: Section IV: Survey in R&D Capitalization and Reputation-Driven Real Earnings Management. The Accounting Review 1 July 2015; 90 (4): 1707. https://doi.org/10.2308/accr-10453 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

We study the interaction between interbank competition and accounting information quality and their effects on banks' risk-taking behavior. We identify an endogenous false-alarm cost that banks incur when forced to sell assets to meet capital requirements. We find that when the interbank competition is less intense, an improvement in the quality of accounting information encourages banks to take more risk. Keeping the banks' investments in loans constant, the provision of high-quality accounting information reduces the false-alarm cost of assets sales and improves the discriminating efficiency of the capital requirement policy. When considering the banks' endogenous investment decisions, however, this improvement in discriminating efficiency causes excessive risk-taking, because banks respond by competing more aggressively in the deposit market, and the increase in deposit costs motivates banks to take more risk. Our paper shows that improving information quality increases risk-taking with mild competition, but has no effect under fierce competition.