I describe a brief summary of the development of databases used in accounting research and discuss the research questions addressed in traditional databases and ‘new’ databases. The new data include online searches such as Google Trends data; textual data from corporate disclosures, analyst reports, conference call transcripts, earnings press releases, and news media articles; social network and social media data from Twitter, LinkedIn, Glassdoor, and other data. New data holds promise for research on attention or cognitive processing constraints; on tone/valence, affect, deceptiveness and credibility for capital market and financial reporting outcomes. I examine the econometric challenges of new data and suggest the potential for new data to offer new auditing tools to detect poor financial reporting, which will help to discourage earnings management.

We provide a model in which a single psychological constraint, limited attention, explains both under- and overreaction to different earnings components. Investor neglect of earn-ings induces post-earnings announcement drift and the profit anomaly. Neglect of earnings components causes accrual and cash flow anomalies. The model offers empirical implica-tions relating the strength of earnings-related anomalies to the forecasting power of current earnings-related information for future earnings, investor attentiveness, and the volatilities of and correlation between accruals and cash flows. We also show that, owing to atten-tion costs, in equilibrium not all investors choose to attend to earnings or its components. (JEL G12, G14, M41, M43) Market reactions to earnings and earnings components present a striking puzzle. Stock prices on average underreact to earnings surprises (post-earnings an-nouncement drift), but overreact to the operating accruals component of earn-ings.1 Earnings- and accruals-related patterns of return predictability are often referred to as “anomalies, ” “under- ” and “overreaction, ” or reflecting investor “optimism, ” “pessimism, ” or “naı̈veté. ” Such labels offer little guidance as to

We present a model in which some of the firm’s information (“news”) can be disclosed verifiably and some information (“type”) cannot, to show that some firms may voluntarily withhold good news and disclose bad news. We describe an equilibrium in which high-type firms withhold good news and disclose bad news, whereas low-type firms disclose good news and withhold bad news. Under some parameter values, this equilibrium exists when other more traditional equilibria are ruled out by standard equilibrium refinements. The model explains some otherwise anomalous empirical evidence concerning stock price reactions to disclosure, provides some new empirical predictions, and suggests that mandatory disclosure requirements may have the undesirable consequence of making it more difficult for firms to reveal information that cannot be disclosed credibly.

An auditor's reputation lends credibility to the earnings report that he audits. An unresolved issue is whether auditor size is correlated with auditor quality, where a high-quality auditor is defined as one who brings about more credible earnings reports. According to basic intuition and a modified Holthausen-Verrecchia (1988) model, investors' response to an earnings surprise will depend on the perceived credibility of the earnings report. In this study, we examine whether the earnings response coefficient (ERC) differs between Big Eight (B8) and non-Big Eight (NB8) audited firms. This provides a test of the joint hypotheses that auditor size is a proxy for auditor credibility and of the modified H-V model. Consistent with the joint hypotheses, we find that the ERCs of Big Eight clients are statistically significantly higher than for non-Big Eight clients. The result obtains in both a matched sample of firms paired according to industry membership, and a switch sample of firms grouped according to shifts from and to B8 and NB8 auditors. Furthermore, the result is robust with respect to the inclusion of other explanatory factors for ERG that have been suggested by previous studies: growth and persistence, risk, firm size, and predisclosure information environment.

This paper models firms’ choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.

We find that analysts’ forecast errors are predicted by past accounting accruals (adjustments to cash flows to obtain reported earnings) among both equity issuers and nonissuers. Analysts are more optimistic for the subsequent four years for issuers reporting higher issue-year accruals. The predictive power is greater for discretionary accruals than nondiscretionary accruals and is independent of the presence of an underwriting affiliation. Predicted forecast errors from accruals significantly explain the long-term underperformance of new issuers. The predictability of forecast errors among nonissuers suggests that analysts’ credulity about accruals management more generally contributes to market inefficiency.

Ex post trimming of extreme returns observations that are not data errors causes spurious inferences in tests of market efficiency and behavioral explanations for anomalies. Trimming causes a downward truncation bias in estimated mean returns that is stronger in ex ante subsamples with more loss firms and in which return distributions are more right-skewed. There is an asymmetric U-shaped relation between return right-skewness and loss frequency across deciles of negative return predictors (Accruals, ΔNOA, and NOA), and a downward sloping relationship for positive return predictors (CFO and FCF). Consequently, a least-trimmed square (LTS) 1 percent deletion of returns induces a spurious inverted-U-shaped relation between returns and negative predictors, and an exaggerated positive relation for positive predictors. Thus, the resulting trimmed relations do not reject behavioral explanations for these anomalies. Trimming also induces a spurious loss anomaly. These findings highlight that in return prediction studies, observations should not be deleted based upon the values of the dependent variable, only based upon clearly identified data errors.

When cumulative net operating income (accounting value-added) outstrips cumulative free cash flow (cash value-added), subsequent earnings growth is weak. If investors with limited attention focus on accounting profitability, and neglect information about cash profitability, then net operating assets, the cumulative difference between operating income and free cash flow, measures the extent to which reporting outcomes provoke over-optimism. During the 1964–2002 sample period, net operating assets scaled by total assets is a strong negative predictor of long-run stock returns. Predictability is robust with respect to an extensive set of controls and testing methods.