Abstract Studies the effects of the disclosure of nonpublic information to explain target firms' runups prior to mergers. Criticisms on the disclosure system; US Securities and Exchange Commission's disclosure laws; Effects of ownership control structure on the dissemination of firms' acquisition-related information.

Income measurement, Historical cost earnings, ASR No. 190, SFAS No. 33

Under the 1996-98 security regulations in China, the accounting rate of return on equity (ROE) has to be greater than 10 percent for three "consecutive" years for a firm to qualify for stock rights offers. Despite declining economic conditions during this period, the percentage of firms reporting ROE between 10 and 11 percent is about "three" times that for 1994-95. This unique regulatory environment provides a natural experimental setting for the empirical assessment of earnings-management behavior and its consequences. This study examines whether listed Chinese firms manage earnings to meet regulatory benchmarks and whether regulators and investors consider the quality of earnings in their respective regulatory and investment decisions. On the basis of a sample of listed Chinese firms from 1996 to 1998, we observe that managers execute transactions involving below-the-line items and use income-increasing accounting accruals to meet regulatory ROE targets for stock rights offerings. The firms that apply for, but fail to receive, regulatory approval manage earnings more significantly than do firms that receive approval and pair-matched control firms. Our market study also suggests that investors differentiate the quality of earnings and put less value on earnings suspected of a greater degree of management. Overall, our results imply that the regulatory bodies and investors to some extent make rational adjustments for the quality of earnings.

Implementation methods mandated by the FASB allow firms to report equity-increasing changes as income and equity-decreasing changes as adjustments to stockholders' equity. These findings are consistent with the argument that the FASB, to reduce its political costs, attempts to minimize firms' costs of implementation. We find that the FASB permits flexibility in timing of adoption of mandated changes. Firms experiencing lower changes in return on assets (ROA) before adoption and expecting higher adoption income effects accelerate implementation. Early adopters select the year of adoption when their change in ROA is lowest and their change in leverage is highest.

Abstract Under the 1996‐98 security regulations in China, the accounting rate of return on equity (ROE) has to be greater than 10 percent for three "consecutive" years for a firm to qualify for stock rights offers. Despite declining economic conditions during this period, the percentage of firms reporting ROE between 10 and 11 percent is about "three" times that for 1994‐95. This unique regulatory environment provides a natural experimental setting for the empirical assessment of earnings‐management behavior and its consequences. This study examines whether listed Chinese firms manage earnings to meet regulatory benchmarks and whether regulators and investors consider the quality of earnings in their respective regulatory and investment decisions. On the basis of a sample of listed Chinese firms from 1996 to 1998, we observe that managers execute transactions involving below‐the‐line items and use income‐increasing accounting accruals to meet regulatory ROE targets for stock rights offerings. The firms that apply for, but fail to receive, regulatory approval manage earnings more significantly than do firms that receive approval and pair‐matched control firms. Our market study also suggests that investors differentiate the quality of earnings and put less value on earnings suspected of a greater degree of management. Overall, our results imply that the regulatory bodies and investors to some extent make rational adjustments for the quality of earnings.

ABSTRACT This study provides evidence of the role of both legal and extra‐legal institutions in limiting the income management induced by the detachment of control rights from the cash flow rights of ultimate owners. The tests use a unique, comprehensive data set for firm‐level control and ownership structures from 9 East Asian and 13 Western European countries. Univariate regressions show that income management that is induced by the wedge between control rights and cash flow rights is significantly limited in countries with high statutory protection of minority rights (proxied by legal tradition, minority rights protection, the efficiency of the judicial system, or disclosure standards) and effective extra‐legal institutions (proxied by the effectiveness of competition laws, diffusion of the press, and tax compliance). Furthermore, multiple regression results show that a common law tradition and an efficient judicial system subsume the effects of the other legal institutions, and that a high rate of tax compliance subsumes the effects of the other extra‐legal institutions in curbing insider income management. It is surprising that a high rate of tax compliance ultimately has a greater effect than legal tradition and the efficiency of the judicial system. Although this finding is unexpected, given prior evidence on the dominant roles of legal institutions in macroeconomic issues and corporate policies, it is consistent with the recent argument that effective tax enforcement is like a public good in that it can reduce insiders' private control benefits. An implication of this finding is that closer attention to extra‐legal institutions has the potential to enhance our understanding of the institutional reforms needed to limit insider private control benefits.

In this study, we investigate how product market competition affects the extent of analyst following and the properties of analyst forecasts. Using a broad sample of firms from 37 countries over the 1990–2008 period, we find that firms that operate in more concentrated industries and with stronger pricing power are associated with greater analyst following, higher forecast accuracy, and lower forecast dispersion. Moreover, the effect of product market power on analyst following and forecast properties is more pronounced in countries with less effective competition laws and higher entry costs. These findings suggest that high industry concentration and a dominant market position enhance the earnings predictability of firms and lower their information uncertainty, and that country-level institutions that promote competition effectively constrain the power in product markets.

Using corporate payout data from 33 economies, this study investigates the contribution of stock repurchases to the value of the firm and cash holdings in different country-level investor protection environments. We find that stock repurchases contribute more to firm value in countries with strong investor protection than in countries with weak investor protection. We also report that dividends contribute approximately 60% more to firm value than repurchases in countries with weak investor protection. Furthermore, as the proportion of repurchases in total payouts increases, the marginal value of cash increases in countries with strong investor protection, whereas it declines in countries with weak investor protection. In a poor investor protection environment, the marginal value of cash for a firm that makes 100% of its payouts via repurchases is 12 cents lower than that for a firm that distributes 100% of its payouts via dividends. Overall, our findings highlight that stock repurchases are less effective than dividends in mitigating agency problems associated with free cash flow in countries with poor investor protection.