Prior studies suggest that venture capitalists (VCs) play a monitoring role. We predict and find that IPO-year abnormal accruals are lower in the presence of VCs for a sample of 2,630 IPO firms during 1983–2001. Our findings are robust to controls for the endogenous choice of VC financing. We consistently find that the VC effect holds even when controlling for IPO lock-up provisions, VC partial cashing out subsequent to the IPO, and alternative proxies for earnings management. In addition, our findings do not support the claims of critics that VCs inflated earnings during the Internet IPO bubble. Finally, we provide some evidence that the lower earnings management associated with VC monitoring partially explains the superior post-IPO returns of VC-backed firms.

Errors in estimated product costs lead firms to win business that is unprofitable, because firms are more likely to win business when underestimated product costs lead them to bid below actual cost (Cooper et al. 1992; Hilton 2005). Feedback from repeated competitive bidding markets can teach people to bid well above estimated costs to avoid this winner's curse (Kagel 1995; Kagel and Levin 2002). We present experimental evidence that such learning is substantially hampered by sellers' sense of responsibility for the costs. This effect is consistent with psychological evidence that people tend to attribute bad outcomes to environmental factors out of their control, such as cost-estimation errors, and attribute good outcomes to their own skills, such as their ability to choose effective cost-management initiatives (Miller and Ross 1975; Zuckerman 1979). The results suggest that responsibility structures that combine pricing and production decisions may have unexpected drawbacks.

Prior research indicates that greater transparency in reporting formats facilitates the detection of earnings management. The current study hypothesizes and demonstrates that greater transparency in comprehensive income reporting also reduces the likelihood that managers will engage in earnings management in the area of increased transparency. In our experiment, 62 financial executives and chief executive officers decide which available-for-sale security to sell from a portfolio. We manipulate the transparency of comprehensive income reporting and the relationship of projected earnings to the consensus forecast in a 2×2 between-subjects design. When projected earnings are below (above) the consensus forecast, participants sell securities that increase (decrease) earnings. However, the rarely used, more transparent format for reporting comprehensive income significantly reduces both income-increasing and income-decreasing earnings management. Participants in the less transparent setting indicate that earnings management attempts will not be obvious to readers, will improve stock prices, and have no effect on management's reputation for reporting integrity. Conversely, respondents in the more transparent condition suggest that earnings management will be obvious to readers, harmful to stock prices, and damaging to reporting reputation. Results of this study suggest that more transparent reporting requirements will reduce earnings management in the area of increased transparency or change the focus of earnings management to less visible methods.

Charities that use direct mailings or other activities that combine a public education effort with fundraising appeals must allocate the joint costs related to these activities to programs, fundraising, and administration. This study investigates whether charities use joint-cost allocations to manage the program ratio—a widely used measure of spending efficiency. Using a hand-collected dataset of 708 organization-year observations from 1992 to 2000, we find evidence that charities use joint costs to mitigate changes in the program ratio.

Recent corporate governance reforms that require audit committees to pre-approve audit and nonaudit services increase audit committees' accountability to third parties for actual auditor independence and audit quality. Other SEC reforms mandate the disclosure of fees for auditor-provided services and are aimed at influencing investors' perceptions of auditor independence. These fee disclosures also reveal audit committees' pre-approval decisions, enhancing public accountability. Thus, audit committees may be less willing to hire auditors for nonaudit services to avoid fee disclosures, even when joint provision improves audit quality. One hundred experienced corporate directors, responding as audit committee members or investors, participated in an experiment in which we manipulated the effect of the auditor's provision of nonaudit services on audit quality and the fee disclosure requirement. We find that audit committee members are more likely to recommend joint provision if audit quality improves, consistent with investors' preferences. However, unlike investors, committee members are more reluctant to recommend joint provision when public disclosures are required, even at the expense of audit quality. These findings offer evidence about an indirect effect of recent reforms.

Using the Vuolteenaho (2002) variance decomposition methodology, this study assesses the relative value relevance of cash flow, accrual, and expected return news on SEC and preliminary earnings filing dates, as measured by their contribution to the volatility of unexpected returns. Cash flow news is found to be more valuerelevant than accrual news. Although expected return (risk) news is the least valuerelevant, it is significantly correlated with changes in betas and returns at the preliminary and SEC filing dates, indicating association with changes in firm risk and discount rates. This study also documents that these informational components contain less (more) value-relevant information at the SEC filing date for firms with a higher proportion of long-term (short-term) sophisticated investors after controlling for other dimensions of the information environment.