We study the effect of investor horizons on a comprehensive set of corporate decisions. We argue that monitoring by long-term investors generates decision making that maximizes shareholder value. We find that long-term investors strengthen governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Innovation increases, in quantity and quality. Shareholders benefit through higher profitability that the stock market does not fully anticipate, and lower risk

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 examine the impact of competition on bank earnings persistence by exploiting a natural experiment following interstate banking deregulation that increased bank competition. We find that bank earnings adjustment speed increases after their states implement the deregulation. This relationship is weakened, however, with the increase of bank's abilities to sustain earnings, as reflected in size, diversification, managerial efficiency and safety. We further find that the impact of compeititon on bank earnings adjustment speed is direct but not indirectly through the channel of earnings management

We investigate whether issuers on negative credit watch manage earnings upward and whether such earnings management favorably influences the watch resolution. We find that rating, industry, and performance matched discretionary accruals reported during negative watch are significantly higher than their respective pre- and post-watch levels, after controlling for accrual reversal. Consistent with its opportunistic nature, we find that accrual management increases with issuers' incentives to avoid downgrade, and decreases with their earnings management constraints and the strength of the external monitoring. Surprisingly, such accrual management significantly increases the likelihood of a favorable resolution—issuers in the top half of the discretionary accruals distribution are 24 percent less likely to be downgraded than those in the propensity score matched bottom half. We find that issuers that avoid downgrades through income-increasing accrual management significantly underperform those that do not over the ensuing year, mitigating the signaling or measurement error explanations for our results. Finally, we find that accrual management does not reflect attempts to improve short-term credit quality

We develop a theoretical framework to study the effects of expensing versus capitalization of investment expenditures on capital market asset prices, corporate investment, and investment efficiency. We use a two‐period model in which the financial reports at the end of the first period influence the price of the firm. In the first period, the current owner makes an investment decision that yields returns during the first and the second periods. We highlight the benefits and costs of the matching principle in GAAP and identify conditions under which less disclosure improves investment efficiency. We find that, in terms of investment efficiency, expensing beats capitalization if and only if the expected growth rate is high, the growth volatility is large, or the earnings persistence is small. We also offer testable empirical implications for accounting choice and for real earnings management

I investigate the information content of income tax expense using variance decomposition to separate stock returns into cash flow and discount rate news components. While prior literature has focused on linking tax expense with expected future cash flows, I argue that tax expense should also be informative about discount rates because of its ability to summarize fundamental economic performance. Consistent with my arguments, I find that tax expense surprises are correlated with both revisions in future cash flows and revisions in discount rates; however, the economic magnitude of tax expense's impact on returns is primarily through the discount rate channel. I also perform cross‐sectional tests, which reveal that the discount rate implications of tax expense are due not only to its ability to capture fundamental economic performance but also to its ability to convey information about a firm's earnings management and tax avoidance activities

Using a propensity score matched sample and a difference‐in‐differences research design, we find that stock price crash risk increases after a firm voluntarily incorporates clawback provisions in executive officers' compensation contracts. This heightened crash risk is concentrated in adopters that increase upward real activities‐based earnings management and those that reduce the readability of 10‐K reports. Based on cross‐sectional analyses, we also find that the increased crash risk is more pronounced for adopters with high ex ante fraud risk, low‐ability managers, high CEO equity incentives, and low dedicated institutional ownership. Collectively, our results suggest that the clawback adoption per se does not curb managerial opportunism but rather induces managers to use alternative channels for concealing bad news, which may contribute to a greater stock price crash risk; and the increase in crash risk is more likely in cases where incentives are strong or monitoring is weak. Our results should be of interest to regulators and policymakers considering the effects of clawback adoption on the investing public

I study a class of continuous-time games of learning and imperfect monitoring. A long-run player and a market share a common prior about the initial value of a Gaussian hidden state, and learn about its subsequent values by observing a noisy public signal. The long-run player can nevertheless control the evolution of this signal, and thus affect the market’s belief. The public signal has an additive structure, and noise is Brownian. I derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long-run player’s actions depend on the history of the game only through the market’s correct belief. Using these conditions, I demonstrate the existence of pure-strategy equilibria in Markov strategies for settings in which the long-run player’s flow utility is nonlinear. The central finding is a learning-driven ratchet principle affecting incentives. I illustrate the economic implications of this principle in applications to monetary policy, earnings management, and career concerns

Using a sample of US publicly traded property-liability insurers, we examine the effect of corporate transparency on earnings management. We find that a higher level of corporate transparency is associated with more conservative loss-reserves estimation. Our evidence shows that the positive effect of corporate transparency on insurers’ reserves-estimate conservatism is more pronounced for insurers that are smaller and have more diversified lines of business and that certain board characteristics—such as being smaller, meeting more frequently, and having a higher percentage of independent directors—can restrain the inadequate reserves management of less transparent US publicly traded property-liability insurers. We also provide evidence that additional regulatory mandates to seek greater transparency in the Sarbanes-Oxley Act may be redundant, given the existing regulations in the property-liability insurance industry. Finally, we find insurers’ conservative reserve estimates were more pronounced during the 2008–2009 financial crisis

Prior studies suggest that income smoothing may be used as an earnings management tool by managers, and is associated with stock price declines when companies subsequently break smoothing patterns. We contend that investors' negative reaction in these situations is also driven by their magnified concerns about firm information risk, in addition to their decreased earnings expectations. Consistent with this argument, we find that bid-ask spreads around unexpected loss announcements are greater when preceded by higher levels of income smoothing. Furthermore, total spreads before the loss announcements were not greater for firms that exhibited higher income smoothing but had not reported earlier losses. This suggests that investors had difficulties seeing through managerial opportunistic motives before the unexpected loss announcements. Additionally, we find that institutional ownership and sell-side analyst coverage appear to moderate the positive association between income smoothing and bid-ask spreads, consistent with the monitoring role institutional investors and financial analysts play in constraining managerial opportunism. We also detect a significant decrease in the extent of income smoothing following loss announcements. Overall, our results are consistent with the view that income smoothing may be viewed by investors as being motivated by managerial opportunism instead of as communicating the true earnings results. Further analysis suggests that pursing a moderate amount of volatility in reported earnings may be the optimal financial reporting policy