I first distinguish the terms economic growth, economic development, and sustainable development. I then discuss the term ESG and why this term is used with respect to the corporation. I follow with a discussion of the shareholder primacy perspective and how this perspective plays a defining role in corporate law, corporate governance, and asset management. I argue that the shareholder primacy perspective is not appropriate for sustainability reporting because when a firm pollutes the environment, reduces biodiversity, or has inequitable social policies, it does not bear the full cost of its action; society and the planet does. Therefore, providing sustainability disclosures that are relevant to investors misses the point that sustainability disclosures are motivated by the desire of other stakeholders to learn about externalities. I discuss the different standard setters in the sustainability space and how accounting and measurement play key roles. I close with a discussion of research opportunities. Data Availability: Data are publicly available from sources indicated in the text.

Relative to recording securitizations as collateralized borrowings, the “gain on sale” treatment has several accounting benefits such as reducing leverage, increasing earnings, and improving efficiency. We investigate whether managers engage in real transaction management to take advantages of these benefits. We predict that in order to maximize financial statement window-dressing, managers will engage in securitizations toward the end of the quarter. We find that 41 percent of the quarter's transactions occur in the third month of the quarter and almost half of these occur in the last five days of the quarter. In addition, we show that when firms report securitization gains sufficient to beat earnings thresholds, the securitization transactions are more likely to have occurred in the last five days of the quarter. We also document that the impact of securitizations on leverage is large and material for many firms. Our results suggest that window-dressing the financial statements appears to be a valuable side-benefit of engaging in securitization transactions.

[This paper evaluates alternative accrual-based models for detecting earnings management. The evaluation compares the specification and power of commonly used test statistics across the measures of discretionary accruals generated by the models and provides the following major insights. First, all of the models appear well specified when applied to a random sample of firm-years. Second, the models all generate tests of low power for earnings management of economically plausible magnitudes (e.g., one to five percent of total assets). Third, all models reject the null hypothesis of no earnings management at rates exceeding the specified test-levels when applied to samples of firms with extreme financial performance. This result highlights the importance of controlling for financial performance when investigating earnings management stimuli that are correlated with financial performance. Finally, a modified version of the model developed by Jones (1991) exhibits the most power in detecting earnings management.]

[Top executives' compensation contracts typically provide for annual incentive awards that link executives' cash compensation and reported earnings. This link has been confirmed empirically by Lambert and Larcker (1987), who document a positive association between the cash compensation of chief executive officers (CEOs) and their firms' contemporaneous earnings performance. The widespread use of earnings-based incentives has prompted concerns that executives may select real decisions and accounting procedures to maximize their earnings-based compensation, irrespective of the impact on the economic well-being of the firm (Kaplan and Atkinson 1989, 724; Watts and Zimmerman 1986, 204). These concerns presume that the earnings-based performance measures specified in compensation contracts are strictly adhered to in setting executive compensation. In practice, however, these plans are administered by compensation committees, who could adjust compensation to prevent executives from engaging in opportunistic behavior. Existing research provides mixed evidence as to whether compensation committees adjust earnings-based compensation. For example, Abdel-khalik (1985) finds evidence that CEO compensation is adjusted in response to accounting procedure changes. In contrast, Healy et al. (1987) find no evidence that CEO compensation is adjusted for the effects of accounting procedure changes on reported earnings. This study provides evidence suggesting that compensation committees do adjust earnings-based incentive compensation. It documents reliable and systematic evidence that CEOs' cash compensation is adjusted for restructuring charges. We investigate a sample of 182 restructuring charges taken by 91 Fortune 500 firms between 1982 and 1989. The short-term incentive plans of the sample firms do not include explicit provisions for restructuring charges to be excluded from the definition of earnings used to determine executives' incentive compensation. The empirical analysis, however, indicates that CEO cash compensation is shielded from restructuring charges relative to other components of earnings. The results also suggest that the degree to which executive compensation is adjusted for a restructuring charge depends on the characteristics of the restructuring. Our evidence is consistent with the hypothesis that compensation committees systematically override the provisions of incentive plans to avoid providing executives with incentives to behave opportunistically. Restructurings typically require a large charge to earnings but can have a positive impact on the economic well-being of a firm. By adjusting executive compensation for restructuring charges, the compensation committee ensures that executives are not deterred from undertaking value-enhancing restructurings.]

We investigate the determinants of analysts' target price implied returns and the implication of our findings for investment decision-making. We identify four broad sets of factors that help explain the cross-sectional variation in target price implied returns: future realized stock returns, errors in forecasting fundamentals, errors in forecasting the expected return to risk, and biases relating to analysts' incentives. Our results suggest that all four sets help explain target price implied returns, with errors in forecasting the expected return to empirical risk proxies having the greatest impact. Collectively, these variables explain nearly a quarter of the cross-sectional variation in target price implied returns. We use our model to predict the optimistic bias in target price implied returns and evaluate whether investors correctly ignore the predictable bias. The results suggest that investors make similar valuation errors to analysts and/or do not perfectly back out the predicted bias in target prices.

We investigate analysts' motives for rounding annual EPS forecasts (placing a zero or five in the penny location of the forecast). We first show that an intuitive reason for analysts to engage in rounding is in circumstances where the penny digit of the forecast is of less economic significance. By rounding, analysts reveal that their forecasts are not intended to be precise to the penny. We also show that analyst incentives impact the likelihood of rounding. Specifically, we predict that analysts will exert less effort forecasting earnings for firms that generate less brokerage or investment banking business since such firms create less value for the analysts' employers. As a consequence of this reduced effort and attention, the analyst will be more uncertain about the penny digit of the forecast and so will round. Our results are consistent with this prediction. One implication of our findings is that a rounded forecast is a simple and easily observable proxy for a more noisy measure of the market's expectation of earnings. Consistent with this implication, we show that rounded forecasts bias down earnings response coefficients at earnings announcements.

We hypothesize that one way accounting practices spread is through law firm connections. We investigate this prediction by examining companies that avoided reporting compensation expense by engaging in stock option backdating. We hypothesize that executives engaged in backdating because they were desensitized to its inappropriateness when they learned through their legal counsel that other companies were engaging in this practice. We identify backdating companies through backdating-related restatements of earnings. Using network analysis, we find that backdating companies are highly connected with other backdating companies via shared law firms. Logistic regressions reveal that the odds of a company backdating are 53 to 88 percent higher when its law firm has another client that backdates, and that law firm connections are incremental to board interlocks and geographic location. Finally, law firms with backdating clients have more other clients with “lucky” grants, suggesting that backdating spread to other companies, but only some restated.

This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. We argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows. We document that observable firm characteristics can be used as instruments for accrual quality (e.g., volatility of accruals and volatility of earnings). Finally, we show that our measure of accrual quality is positively related to earnings persistence.

Evaluates alternative accrual-based models for detecting earnings management. Comparison of the specification and power of commonly used test statistics; Application of the models to a random sample of firm-years; Importance of controlling for financial performance when investigating earnings management stimuli that are correlated with financial performance.

Suggests that compensation committees adjust earnings-based executive incentive compensation. Annual executive incentive awards background; Hypotheses on the impact of restructuring charges on executives' annual incentive compensation; Description of sample selection and variable measurement.