This study examines whether the provisions of a firm's bank debt contracts affect its accounting choices. Starting with a sample of firms who have bank debt and who also voluntarily changed accounting methods, we investigate whether the likelihood that the change in accounting method increased (rather than decreased) the borrower's income depends on (1) whether the change in accounting method affects the bank debt contract calculations, (2) the expected costs of violating the bank debt covenants, (3) whether performance pricing provisions affect the interest rate on the loan, and (4) whether the bank debt contract contains accounting-based dividend restrictions. After controlling for other motives for changing accounting methods, we find that borrowers whose bank debt contracts allow accounting method changes to affect contact calculations are more likely to make income-increasing rather than income-decreasing changes. This increase in likelihood of an income-increasing change is attenuated when expected costs of technical violation are lower because there is a single lender, and occurs for borrowers whose debt contacts have performance pricing and dividend restrictions. These results suggest that incentives to lower interest rates through performance pricing or to retain dividend payment flexibility influence borrowers' accounting method choices, thereby addressing the fundamental questions posed by Fields et al. (2001) of whether, under what circumstances, and how accounting choice matters.

The SEC issued Staff Accounting Bulletin (SAB) No. 101 to address its concern that firms were masking true performance by managing earnings using accelerated revenue recognition. Critics of this Accounting Bulletin stated that it would eliminate industry-accepted revenue recognition practices and reduce the quality of reported earnings. The FASB's revenue recognition discussions echo these concerns stating that revenues recorded prior to the completion of the earnings process contain value-relevant information about future performance. This paper investigates these two hypotheses using a sample of firms that accelerated revenue recognition prior to SAB No. 101 adoption (SAB 101 firms) and a matched set of firms that were unaffected by this regulation (unaffected firms). Our earnings distribution tests indicate that SAB 101 firms are more likely to meet earnings benchmarks. Specifically, we find that, in the pre-adoption period, SAB 101 firms report fewer small negative and more small positive earnings than they do in the post-adoption period and than do unaffected firms in the pre-adoption period; SAB 101 firms report fewer small negative and more small positive earnings changes in the pre-adoption period compared to the post-adoption period. We also document that SAB 101 firms are more likely to have weaker corporate governance and more likely to have financial covenants, providing them with greater incentives to manage earnings. However, we find that the association between earnings and future cash flows and between unexpected earnings and earnings announcement period returns were higher for SAB 101 firms than for unaffected firms in the preadoption period, indicating higher earnings informativeness for SAB 101 firms. These associations declined for SAB 101 firms in the post-adoption period, suggesting that SAB No. 101 caused a decline in earnings informativeness. Overall, our results suggest that, although the revenue recognition practices targeted by SAB No. 101 have been used by some firms to manage earnings, the regulation's prohibition of revenue recognition prior to completion of the earnings process, on average, results in less informative earnings since these unearned revenues provide value-relevant information.

We document potential cross-sectional differences in how expected loss accounting will affect provision timeliness to provide important policy insights and contribute to the literature regarding the estimation of the expected loss model adoption impact and provision timeliness determinants. Our findings that analyst provision forecasts incrementally predict future nonperforming loans (NPLs) and market returns suggest that the incurred loss provision does not incorporate all available future loss information. Higher incremental coefficients on provision forecasts for banks with greater unrecognized future losses and incurred loss constraints suggest CECL could affect cross-sectional provision timeliness differences by removing these constraints. Specifically, the provision forecast and future NPL association increases with banks' unconstrained future loss estimates reflected in loan fair value disclosures and incurred loss constraints indicated by heterogeneous loans individually reviewed for impairment. This association also increases with EPS forecast errors, but decreases with target price and NPL forecast errors.

In this study we examine whether banks owned by interstate multibank holding companies coordinate their security gains and losses to manage their tax, earnings, and capital management objectives. Specifically, we examine whether the realization of security gains and losses is related to the objectives of the individual bank, the consolidated group, or both. We find subsidiary banks manage their gain realizations not only to reduce their own state taxes, but also strategically to reduce their consolidated groups' tax expense. Specifically, members of consolidated banking groups shift gain recognition to lower-taxed group members and away from higher-taxed group members. In addition, we find evidence suggesting that banks realize security gains and losses to manage both their own and their groups' financial statement earnings.

A flourishing stream of research suggests that liquidity-constrained firms with low accounting quality have limited access to capital for investments. We extend this research by investigating whether these firms are more likely to lease their assets. Lessors’ superior control rights allow them to provide capital to constrained firms with low-quality accounting reports. Consistent with this conjecture, we find that low accounting quality firms have a higher propensity to lease than purchase assets. To verify that leasing does not merely reflect these firms’ desire for off-balance-sheet accounting, we investigate whether banks’ access to private information and monitoring affect the relation between accounting quality and leasing. We find the association between accounting quality and leasing decreases when banks have higher monitoring incentives and when loans contain capital expenditure provisions. These results suggest that other mechanisms can substitute for the role of accounting quality in reducing information problems.

This study compares samples of publicly and privately held bank holding companies to examine whether the high frequency of small earnings increases relative to small earnings decreases reported by public firms is attributable to earnings management. We expect public banks' shareholders to be more likely than private banks' shareholders to rely on simple earnings-based heuristics in evaluating firm performance, so we expect public banks to have more incentives to report steadily increasing earnings. Consistent with this expectation, we find that relative to private banks, public banks: (1) report fewer small earnings declines, (2) are more likely to use the loan loss provision and security gain realizations to eliminate small earnings decreases, and (3) report longer strings of consecutive earnings increases. These results suggest that the asymmetric pattern of more small earnings increases than decreases, first documented by Burgstahler and Dichev (1997), is attributable to earnings management and is not simply a reflection of the underlying distribution of earnings changes.

Concerns that goodwill impairments unresponsiveness to declining performance produces inflated goodwill led standard-setters to reconsider post-acquisition impairment-only accounting. We use granular large-scale data to provide institutionally relevant novel descriptive evidence motivated by this hotly debated accounting standard. Comparing goodwill versus other acquired intangibles growth rates for firms reporting goodwill throughout the 2010–2020 post-FAS 141(R) period provides no evidence of runaway goodwill inflation concerns. For firms with goodwill anytime during 2010–2020 we use Shapley values to explore the explanatory power of performance factors affecting goodwill impairments. Consistent with standard-setters’ intent, single-segment market performance explains 81 percent of goodwill impairment incidence variation (controlling for Fama-French-38 industry and time fixed-effects). Limited evidence of reduced impairment incidence after incorporating FASB sanctioned control premia or alternative market values provides little support for discretionary impairment avoidance. Conversely, higher impairment incidence when book values incorporate IFRS (2020) proposed off-balance-sheet headroom or market-to-book decreases supports discretionary impairment recognition. Data Availability: The data used in this study are obtained from commercial sources, including Compustat, Calcbench, I/B/E/S, FactSet Mergerstat/BVR, and Peters and Taylor's intangible capital dataset.