This paper provides evidence on the characteristics of firms that include “pro forma” earnings information in their press releases, whether the usefulness of pro forma earnings to investors varies systematically with these characteristics, and whether the investor response to pro forma earnings is consistent with market efficiency or mispricing. Using a sample of 249 press releases from 1997–99, we find that firms with low GAAP earnings informativeness are more likely to disclose pro forma earnings than other firms. We also find that strategic considerations, measured using the direction of GAAP earnings surprises, are an important determinant of pro forma reporting. In addition, our examination of the relative and incremental information content of pro forma earnings shows that investors find pro forma earnings to be more useful when GAAP earnings informativeness is low or when strategic considerations are absent. Tests of the predictive ability of pro forma earnings for future profitability and returns are mixed, and we therefore cannot conclusively determine whether the investor reaction to pro forma earnings at the time of the press release is consistent with market efficiency or mispricing. The paper contributes to the growing literature on pro forma earnings and more generally to the literature on voluntary and strategic disclosure.

This paper compares two attributes of a deferred tax liability (DTL) that arise from differences in book and tax depreciation methods. The first attribute is the effect of the DTL on the market value of the firm. The second is the length of time between when the asset is placed into service and when the DTL associated with that asset begins to reverse. The paper shows that a decrease in the time it takes for the DTL to begin to reverse is neither necessary nor sufficient for the value of the DTL to increase. It also shows that the value of the DTL is not equal to the present value of the future deferred tax expense. The effect of one dollar of DTL on firm value depends only on the tax depreciation rate and the discount rate.

This study examines two questions: When do firms make greater use of subjectivity in awarding bonuses? What are the effects of subjectivity on employee pay satisfaction and firm performance? We examine these questions using data from a sample of 526 department managers in 250 car dealerships. First, the findings suggest that subjective bonuses are used to complement perceived weaknesses in quantitative performance measures and to provide employees insurance against downside risk in their pay. Specifically, use of subjective bonuses is positively related to: (1) the extent of long-term investments in intangibles; (2) the extent of organizational interdependencies; (3) the extent to which the achievability of the formula bonus target is both difficult and leads to significant consequences if not met; and (4) the presence of an operating loss. Second, we find that the effects of subjective bonuses on pay satisfaction, productivity, and profitability are larger the greater the manager's tenure, consistent with the idea that subjectivity improves incentive contracting when there is greater trust between the subordinate and supervisor

XBRL (eXtensible Business Reporting Language) is an emerging technology that facilitates directed searches and simultaneous presentation of related financial statement and footnote information. We investigate whether using an XBRL-enhanced search engine helps nonprofessional financial statement users acquire and integrate related financial information when making an investment decision. We conduct our investigation in the context of recognition versus disclosure of stock option compensation. Our results reveal that many users do not access the technology, but those who do use it are better able to acquire and integrate information. Specifically, we find that when stock option accounting varies between firms, the use of an XBRL-enhanced search engine increases the likelihood that individuals acquire information about stock option compensation disclosed in the footnotes. We also find that XBRL helps individuals integrate the implications of this information, resulting in different investment decisions between individuals who use and do not use the search engine. Our results suggest that search-facilitating technologies, such as XBRL, aid financial statement users by improving the transparency of firms' financial statement information and managers' choices for reporting that information. Our results also reveal that wide publicity about the benefits of using search-facilitating technology may be needed to induce financial statement users to access the technology.

Over the past three decades the literature on financial distress prediction has largely been confined to simple multiple discriminant analysis, binary logistic or probit analysis, or rudimentary multinomial logit models (MNL). There has been a conspicuous absence of modeling innovation in this literature as well as a failure to keep abreast of important methodological developments emerging in other fields of the social sciences. In particular, there has been no recognition of major advances in discrete choice modeling over the last 15 years, which has increasingly relaxed behaviorally questionable assumptions associated with the independently and identically distributed errors (IID) condition and allowed for observed and unobserved heterogeneity. In contrast to standard logit, the mixed logit model fulfils this purpose and provides a superior framework for explanation and prediction. We explain the theoretical and econometric underpinnings of mixed logit and demonstrate its empirical usefulness in the context of a specific but topical area of accounting research: financial distress prediction. Comparisons of model-fits and out-of-sample forecasts indicate that mixed logit outperforms standard logit by significant margins. While mixed logit has valuable applications in financial distress research, its potential usefulness in other areas of accounting research should not be overlooked.

We examine whether U.K. managers use the flexibility provided under the partial method for deferred taxes to measure unrecognized deferred taxes opportunistically. We first test whether firm-specific operational and opportunistic factors are associated with the level of unrecognized deferred taxes. The tests provide evidence certain U.K. managers opportunistically measure deferred taxes to manage leverage, consistent with arguments by commentators that deferred taxes heavily influence leverage indicators that play a prominent role in the U.K. contracting framework. Because the proper identification and measurement of both operational and opportunistic determinants of unrecognized deferred taxes influence our tests, we additionally investigate whether unrecognized taxes relate to future deferred tax reversals and future operating profitability of the firm. These tests show the components of deferred taxes predict both future deferred tax reversals and indicators of future profitability of the firm as predicted. Taken together, our results indicate that, on average, the existence of balance sheet management does not nullify the predictive power of (unrecognized) deferred taxes for future deferred tax reversals and for profitability measures. One implication of the results is that the recent U.K. standard change eliminating the partial provision method for deferred taxes potentially has reduced the usefulness of deferred tax disclosures.

We investigate two determinants of two choices in the control system of divisionalized firms, namely decentralization and use of performance measures. The two determinants are those identified in the literature as important to control system design: (1) information asymmetries between corporate and divisional managers and (2) division interdependencies. We treat decentralization and performance measurement choices as endogenous variables and examine the interrelation among these choices using a simultaneous equation model. Using data from 78 divisions, our results indicate that decentralization is positively related to the level of information asymmetries and negatively to intrafirm interdependencies, while the use of performance measures is affected by the level of interdependencies among divisions within the firm, but not by information asymmetries. We find some evidence that decentralization choice and use of performance measures are complementary.

This paper investigates the effect of regulation that mandates open access to information on managers' disclosure choices and investors' reactions to disclosures. The recently passed Regulation FD (Reg FD) requires firms to make material disclosures broadly available. Using a sample of firms that previously restricted access to conference calls and a sample of firms that voluntarily allowed unlimited access to their calls in the pre-Reg FD period, we examine the effect of the new rule on managers' decisions regarding the timing, use, and information content of calls, as well as the effect on investors' trading behavior during the call. Our results indicate that Reg FD had a significant negative impact on managers' decisions to continue hosting conference calls and on their decisions regarding the optimal time to hold the call. However, contrary to the concerns of many critics, the magnitudes of these changes are not large. We do not find evidence that Reg FD decreased the amount of information disclosed during the call period, contrary to the concerns of Reg FD opponents. Finally, we find evidence that the new rule increased price volatility for firms that previously restricted access to their calls (relative to firms that previously held open calls) and that the amount of individual investor trading increased following the rule change. Overall, our results suggest that Reg FD impacted trading during the conference call window for firms most affected by the new regulation.