Examines the term `incremental information content,' which considers the the current accrual and cash flow components of income. Value placed by investors on the components of income; Preferred level of aggression; Analysis of studies of incremental information content; Accounting interpretation of the term; Composition and disclosure of income.

Presents the findings of the tests for stock price response to disclosure of 1974 last in, first out (LIFO) inventory accounting decisions by adopting and non-adopting firms in the United States. Model of stock price change upon a firm's disclosure of a LIFO decision; Model and research design; Identification of disclosure interval; Estimates of LIFO adoption probabilities.

Ross Jennings, Paul J. Simko, Robert B. Thompson II, Does LIFO Inventory Accounting Improve the Income Statement at the Expense of the Balance Sheet?, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 85-109

This study explores close US congressional elections involving politicians who have influence over the SEC to examine the effect of firms' political connections on their financial reporting. This question is important in understanding the overall effect of political connections on financial reporting. Our difference‐in‐differences tests reveal no evidence that firms experiencing a relative increase in political connections report more opportunistically after close elections in anticipation of preferential treatment by the SEC in its enforcement actions. In contrast, we find evidence that these firms report less opportunistically in response to an increase in their connections with SEC‐influential politicians. Further tests show that our findings are unlikely to be driven by capital market pressure, managerial equity incentives, or corporate governance. Overall, our results are consistent with political connections mitigating opportunistic reporting through enhanced scrutiny by the SEC of politically connected firms' financial reporting. Our findings provide new insights into the interactions among political connections, SEC oversight, and financial reporting by showing how politically connected firms alter their financial reporting in anticipation of differential treatment by the SEC.

We survey commercial bank lenders to better understand how they evaluate and react to variation in financial statement quality and how they view recent changes in accounting standards. A unique aspect of this study is that our respondents focus on medium‐size loans to private companies. In fact, more than 90 percent of the survey respondents primarily make credit decisions on loans between $250 thousand and $50 million. This is in contrast to prior archival research, which focuses primarily on very large loans to public firms or very small loans to private firms. We find that lenders in our sample distinguish among financial statements in terms of quality, including conservatism, primarily on the basis of accrual patterns and restatements. While this general result holds throughout our sample, financial statement quality is substantially more important for lenders making larger loans (over $10 million) as compared to very small loans (under $1 million). In addition, bank lenders are much more likely to respond to low‐quality reporting with collateral and guarantee requirements than with an increase in the interest rate charged. This finding is consistent for lenders making both larger and smaller loans. Finally, despite concerns in the academic literature, bank lenders in our sample actually hold a neutral‐to‐positive view of recent changes in accounting standards. In addition, most do not support current efforts to exempt private companies from some accounting standards.

Statement of Financial Accounting Standards 123R suggests that lattice valuation models may improve the estimates of reported employee stock option values relative to the more commonly used Black–Scholes (BS) model. However, lattice model critics have expressed concerns that managers may use lattice models' flexibility to opportunistically understate option values. In this study, we investigate a sample of firms that recently adopted a lattice model to value employee stock options to provide evidence on this issue by identifying the determinants of lattice model adoption and examining the effect of lattice model use on reported option values. We report three main results. First, we find that firms are more likely to adopt a lattice model when it is more likely to produce lower values than the BS model and when managers have incentives to lower stock option expense. Second, we find that firms adopting a lattice model increase understatement of reported option values more than firms that continue to use the BS model and that the incremental understatement is due to use of the lattice model. Third, we conduct several tests to examine whether the valuation effect of lattice model use is consistent with efforts to correct for documented shortcomings in the BS model and find no evidence that this is the case. Taken together, the evidence in this study suggests that firms adopt and implement lattice models primarily to lower reported option values.

This study examines the effect of product market competition on managerial disclosure of earnings forecasts using large reductions in U.S. import tariff rates to identify an exogenous increase in competition for domestic firms in U.S. product markets. Our difference-in-differences estimations show that tariff reductions are associated with a significant decrease in management forecasts of annual earnings by U.S. domestic firms. Further, this decrease is more pronounced when the tariff rate reduction triggers a greater increase in imports and when the forecasts are likely to incur higher proprietary costs. Our findings are consistent with competition from existing rivals reducing voluntary disclosure through increased proprietary costs.