There is relatively little evidence on the specific accruals used to manage earnings. This paper examines this issue by considering the use of specific accruals in three earnings‐management contexts: equity offerings, management buyouts, and firms avoiding earnings decreases. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items depend on the context. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of the three contexts we consider. To measure earnings management for specific accruals, we develop performance‐matched measures to capture the unexpected component of accounts receivable, inventory, accounts payable, accrued liabilities, depreciation expense, and special items. Consistent with our predictions, we find that firms issuing equity appear to prefer managing earnings upward by accelerating revenue recognition. Specifically, we find that accounts receivable for these firms are unexpectedly high. Conversely, for the management buyout context, we predict and find unexpected accounts receivable to be negative. For firms trying to avoid reporting an earnings decrease, we expect firms to be less concerned with earnings persistence and therefore more likely to use more transitory, and less costly, items to achieve their goal. We find that special items are significantly more positive for this group. This paper provides a further step toward understanding how the incentives behind earnings management affect the method used to achieve earnings goals, and it illustrates the usefulness of examining individual accruals in specific contexts.

This paper examines the relation of voluntary disclosure of management earnings forecasts and information asymmetry to insider selling through secondary equity offerings. We hypothesize that the pattern of voluntary disclosure and level of information asymmetry prior to secondary equity offerings differs systematically based on the identity of the seller. Specifically, we predict a greater frequency of voluntary disclosure and decreased level of information asymmetry when managers sell their stock through a secondary offering. We examine this hypothesis in a cross‐sectional analysis of 210 secondary equity offerings from 1984‐91, using a two‐stage conditional maximum likelihood simultaneous equations estimation procedure, which allows for possible endogeneity in the manager's decision to sell stock. Consistent with our predictions, we document a significantly positive association between managerial participation and voluntary disclosure of earnings forecasts in the nine‐month period prior to registration of the offering. We also document a significantly negative association between managerial participation and two proxies for information asymmetry. The findings provide evidence that managers act as if reduced information asymmetry correlates with a reduced cost of capital.

This paper examines the association between analysts' forecast errors at the earnings announcement date and the revisions to those forecasts during the preceding year. The study is an initial effort to use archival data from expert decision makers to test behavioral theories that have support in laboratory environments. Consistent with findings of conservatism in laboratory experiments, we find that analysts systematically underweight new information. This finding is most pronounced when the analysts are consistently revising their estimates downward throughout the year. Résumé. Les auteurs examinent le lien entre les erreurs prévisionnelles des analystes à la date de déclaration des bénéfices et les révisions dont ces prévisions ont fait l'objet au cours de l'exercice précédent. Il s'agit là d'une première tentative d'utilisation des données d'archives des experts en matière décisionnelle dans le but de tester les théories comportementales qui ont été démontrées en laboratoire. Conformément aux observations faites en laboratoire en ce qui a trait à la prudence, les auteurs constatent que les analystes accordent systématiquement trop peu de poids à l'information nouvelle/Cette constatation est très marquée lorsque les analystes révisent continuellement leurs estimations à la baisse au cours de l'année.

We evaluate the net costs and benefits of the whistleblower ( WB ) provisions adopted under the Dodd‐Frank Reform Act of 2010 by examining investor responses to events related to the proposed regulations. We focus our main analysis on a sample of firms that lobbied against implementation of the WB provisions by submitting a comment letter to the SEC . Lobbying firms are characterized by weaker existing WB programs and greater degrees of managerial entrenchment than a matched control sample of similar non‐lobbying firms. Short‐window excess stock returns around events related to implementation of the WB rules are significantly more positive for the portfolio of lobbying firms than for their matched controls; this effect is also more pronounced for lobbying firms with weaker existing WB programs. These results suggest that investors expect the new WB provisions to provide net benefits by improving shareholder protection.

Demand for disclosures on environmental, social, and governance (ESG) issues has increased dramatically. Using corporate political spending disclosures as our setting, we conduct a detailed inquiry of 541 political spending‐related shareholder proposals from 2004 to 2012 to highlight the role of shareholder activism as a mechanism to motivate ESG disclosure. Unlike earlier studies, we examine both proposals that went to a vote and proposals that were withdrawn by the activist, allowing us to assess more comprehensively the success of shareholder activism. We find that 20 percent of firms targeted by disclosure proposals begin disclosing in the subsequent year, although implementation rates vary by proposal type—8 percent for proposals subject to a vote versus 56 percent for proposals withdrawn. The sponsor is also important: unions and public pension funds are less likely than other activists to target firms with agency problems and are less successful in having proposals withdrawn, and the implementations they obtain are viewed more negatively by the broader investor base. Our findings highlight shareholder proposals as one mechanism through which investors can successfully express their preferences for corporate disclosure policies. Given activists' long‐standing interest in environmental and social disclosure policies, we believe our findings generalize to a broader set of ESG disclosures.

We examine whether Canadian firms issuing convertible debt over the period 1996–2003 structured issuances to minimize reported leverage. Over this sample period, some firms using payment-in-kind (PIK) provisions providing them with the option to make interest and/or principal payments in company shares were able to record significant amounts of the issuance as equity. In a sample of 195 convertible debt offerings, we find significant variation in accounting treatment, ranging from firms recording the entire issuance as debt to some recording the entire issuance as equity. We find evidence consistent with the contention that reporting benefits are an important reason why high-leverage corporations with material convertible debt transactions used PIK provisions. In contrast, our evidence suggests that the future financial flexibility ensuing from the use of PIK provisions was an important determinant of income trusts’ use of this feature. We acknowledge, however, that during our sample period PIK provisions simultaneously provide both financial flexibility and reporting benefits to any issuer, whether corporation or trust. Finally, we document a negative share price reaction on the part of convertible debt issuers employing PIK provisions at the time when the likelihood of the introduction of more restrictive accounting rules increased. This negative reaction is driven by the corporations in our sample, with the income trusts largely unaffected. Our findings are relevant to standard setters as they debate alternative models for distinguishing between equity and liabilities.

Compensation committees face special difficulties when setting pay in the last years of a CEO's tenure. For example, incentives to manipulate earnings for the purpose of enhancing earnings-based compensation are greater in CEOs' terminal years. We predict that compensation committees are aware of these incentives and adjust the relative weights placed on earnings components in the cash compensation function to mitigate the problem. Consistent with our prediction, we find that in CEOs' terminal years, positive changes in discretionary accruals receive significantly less weight than other income components in determining cash compensation. This provides new evidence that not all gains flow through to compensation. We also find that in non-terminal years, managers' compensation is partially shielded from the negative effects of selling, general, and administrative expenditures (SG&A), but this effect reverses in the terminal period, consistent with the compensation committee discouraging investment in legacy assets by outgoing CEOs. Overall, our findings suggest that compensation committees treat components of earnings differently when setting pay in the terminal period.