Knowledge that Transforms

Auditing, Decision making, Frequency judgements, Internal control evaluations

Maureen McNichols, G. Peter Wilson, Evidence of Earnings Management from the Provision for Bad Debts, Journal of Accounting Research, Vol. 26, Studies on Management's Ability and Incentives to Affect the Timing and Magnitude of Accounting Accruals (1988), pp. 1-31

Equity-for-debt swaps, Earnings expectations, Information effect

Ricks [1982] found that stock returns near the earnings disclosure dates of 1974 LIFO adopters were negative and significantly lower than returns near the earnings disclosure dates of firms not using LIFO. Given that firms adopting LIFO in 1974 were voluntarily switching to an accounting method providing often significant tax savings, it is not obvious why investors would have reacted negatively. Nor is it likely that investors were unaware of many of the firms' LIFO adoption decisions. This study presents evidence suggesting that the negative excess returns observed by Ricks [1982] were associated with, and possibly due to, analysts' systematic overestimates of earnings of firms adopting LIFO in 1974. We are aware of no previous study documenting systematic errors in analysts' earnings forecasts conditional on a voluntary accounting method change.

This paper empirically investigates the relation between investor wealth and the value of annual and quarterly earnings announcements as implied by (1) the behavior of mean stock trade transaction sizes at announcement dates, and (2) transaction size-stratified trading activity in postannouncement time periods. Announcement-period mean transaction sizes are found to exceed expected mean transactions sizes estimated from trading activity occurring in nonannouncement periods. This result is attributed to a greater relative trading response to earnings announcements by wealthier investors, consistent with Ohlson's [1975] proposition that information value increases with investor wealth in a security market setting. Further evidence of a positive relation between value and wealth is found when postearnings announcement stock transactions are stratified by share size into three strata, where the first stratum (small stratum) is transactions of 100 and 200 shares, the second stratum (large stratum) is transactions of 300 to 900 shares, and the third stratum (institutional

Auditing, Auditor change, Auditor change disclosure, Delayed hiring

Earnings announcements, Stock options, Option open interest

Brett Trueman, Sheridan Titman, An Explanation for Accounting Income Smoothing, Journal of Accounting Research, Vol. 26, Studies on Management's Ability and Incentives to Affect the Timing and Magnitude of Accounting Accruals (1988), pp. 127-139

Patricia J. Hughes, Eduardo S. Schwartz, The LIFO/FIFO Choice: An Asymmetric Information Approach, Journal of Accounting Research, Vol. 26, Studies on Management's Ability and Incentives to Affect the Timing and Magnitude of Accounting Accruals (1988), pp. 41-58