This study examines the interdependence between institutional ownership and the speed with which Standard & Poor's disseminates corporate accounting information. From the demand-side perspective, we find that quasi-indexers, who rely on corporate accounting information as a low-cost monitoring system, are the key driver of the institutional demand for speedy information dissemination. In addition, dissemination speed increases substantially for stocks listed in major market indices but decreases with high arbitrage risk or transaction costs. From the consequences perspective, we find that both transient investors and quasi-indexers gravitate to stocks with faster information dissemination, consistent with the latter using accounting information as a low-cost performance-monitoring mechanism, and the former being better enabled to implement their trading strategies in a richer information environment. Overall, this study provides new insights into the capital market information infrastructure by examining how information intermediaries and sophisticated investors impact each others' resource allocation decisions.

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn MailTo Tools Icon Tools Get Permissions Search Site Cite View This Citation Add to Citation Manager Citation Nahum D. Melumad, Doron Nissim, SARAH E. McVAY; Line-Item Analysis of Earnings Quality. The Accounting Review 1 May 2010; 85 (3): 1121–1122. https://doi.org/10.2308/accr.2010.85.3.1121 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentThe Accounting Review Search Advanced Search

We review and evaluate the methods commonly used in the accounting literature to correct for cross-sectional and time-series dependence. While much of the accounting literature studies settings in which variables are cross-sectionally and serially correlated, we find that the extant methods are not robust to both forms of dependence. Contrary to claims in the literature, we find that the Z2 statistic and Newey-West corrected Fama-MacBeth standard errors do not correct for both cross-sectional and time-series dependence. We show that extant methods produce misspecified test statistics in common accounting research settings, and that correcting for both forms of dependence substantially alters inferences reported in the literature. Specifically, several findings in the implied cost of equity capital literature, the cost of debt literature, and the conservatism literature appear not to be robust to the use of well-specified test statistics.

This paper examines whether stock-option grants explain missed earnings targets, including reported losses, earnings declines, and missed analysts' forecasts. Anecdotal evidence and surveys suggest that managers believe that missing an earnings target can cause stock-price drops (Graham et al. 2006). Empirical studies corroborate this notion (Skinner and Sloan 2002; Lopez and Rees 2002). Thus, a missed target could benefit an executive via lower strike price on subsequent option grants. Prior option grant studies explore only general downward earnings management (Balsam et al. 2003; Baker et al. 2003), but our study is the first to explore whether option grants encourage missed earnings targets. Indeed, if missed targets drive the prior results, then the literature has failed to document an important negative outcome of stock-option incentives. We use quarterly and annual data for fixed-date options granted after firms announce they have missed earnings targets. We find that firms that miss earnings targets have larger and more valuable subsequent grants. Further, we find that the likelihood of missing earnings targets for firms that manage earnings downward increases with stock-option grants. To control for the possibility that firms miss earnings targets for operational reasons, we only include firms that likely managed earnings downward (Dechow et al. 1995; Phillips et al. 2003). Backdating or opportunistic timing of grants cannot explain our results because we include only fixed-date grants. While many studies explicitly consider whether and why managers meet or beat earnings targets, ours is the first study to find that some managers may seek to miss earnings targets (Burgstahler and Dichev 1997).

This study uses a sample of 530 Texas school districts to investigate the information relevance of governmental financial statements published under Governmental Accounting Standards Board Statement No. 34 (GASB No. 34). Specifically, we examine whether the new government-wide statements provide information relevant for assessing a government's default risk, and if this information is incremental to that provided by the governmental funds statements. GASB No. 34 requires governments to publish governmental funds statements prepared on a modified accrual basis, and government-wide statements prepared on an accrual basis. We find that GASB No. 34's Statement of Net Assets (similar to a corporation's balance sheet) provides information relevant for assessing default risk, and this information is incremental to that provided by the governmental funds statements. However, GASB No. 34's Statement of Activities (similar to a corporation's income statement) does not provide information relevant for assessing default risk. The accrual “earnings” measure is not more informative than the modified-accrual “earnings” measure. A government's modified accrual earnings measure can be thought of as a type of measure of changes in working capital. Therefore, our results are consistent with research on corporate entities that attributes the superiority of earnings over cash flows primarily to working capital accruals and not long-term accruals. For our sample of school districts, evidence suggests that total net assets from the government-wide Statement of Net Assets, along with a measure of modified-accrual “earnings” from the governmental funds statement, provide the best information for explaining default risk.

Performance-measure weights for incentive compensation are often determined subjectively. Determining these weights is a cognitively difficult task, and archival research shows that observed performance-measure weights are only partially consistent with the predictions of agency theory. Ittner et al. (2003) have concluded that psychology theory can help to explain such inconsistencies. In an experimental setting based on Feltham and Xie (1994), we use psychology theories of reasoning to predict distinctive patterns of similarity and difference between optimal and actual subjective performance-measure weights. The following predictions are supported. First, in contrast to a number of prior studies, most individuals' decisions are significantly influenced by the performance measures' error variance (precision) and error covariance. Second, directional errors in the use of these measurement attributes are relatively frequent, resulting in a mean underreaction to an accounting change that alters performance measurement error. Third, individuals seem insufficiently aware that a change in the accounting for one measure has spillover effects on the optimal weighting of the other measure in a two-measure incentive system. In consequence, they make performance-measure weighting decisions that are likely to result in misallocations of agent effort.

This paper identifies tax and nontax factors that influence commercial banks' conversion from taxable C-corporation to nontaxable S-corporation from 1997 to 1999, after a 1996 tax-law change allowed banks to convert to S-corporations for the first time. We find that banks are more likely to convert when conversion saves dividend taxes, avoids alternative minimum taxes, and minimizes state income taxes. Banks are less likely to convert when conversion restricts access to equity capital, nullifies corporate tax loss carryforwards, and creates potential penalty taxes on unrealized gains existing at the conversion date. Banks with significant deferred tax assets are less likely to convert, presumably because the write-off of deferred taxes at conversion decreases regulatory capital and exposes the bank to costly regulatory intervention. We also investigate the strategic choices banks make before converting to S-corporations. Converting banks alter their capital structures, deliberately sell appreciated assets, and strategically set dividends to augment net conversion benefits.

Investigates whether replacing a standard that employs a vague, verbal disclosure threshold with a standard that employs a more stringent numerical threshold mitigates the aggressiveness of reporting decisions in accounting. Performance in a tax setting; Effect of incentives on the interpretation of vague standards.

The article presents information on the report of the Committee on Courses and curricula-General of American Accounting Association. The Committee's task, briefly, was to develop a comprehensive body of liberal arts and general business knowledge to include in an accounting major's college curriculum. The Committee believes that the development of a professional accountant should be viewed as an amalgam of formal and informal education in which college education plays only one important part. The prime objective of the accounting major's college education is not to train him for a specific job or even to train him for his chosen career, but rather to create a capacity within him for gradual development in the years which lie ahead as he faces the challenges of his profession. Thus, the development of abilities to reason, to communicate, to organize and act when confronted by various business situations become important considerations in structuring knowledge for an accounting curriculum. The conclusions reached in this report are obviously of a subjective nature rather than being based on empirical evidence. They may be colored by personal opinions and biases. Yet, these conclusions have run the gauntlet of approval by an eight-man committee constituted, as the reader may see, of a wide variety of experiences and interests.

Small and micro-enterprises are usually majority-owned by entrepreneurs. Using a unique sample of loan applications from such firms, we study the role of owners’ gender in bank credit decisions and post-credit-decision firm outcomes. We find that, ceteris paribus, female entrepreneurs are more prudent loan applicants than are males because they are less likely to apply for credit or to default after loan origination. The relatively more aggressive behavior of male applicants pays off, however, in terms of higher average firm performance after loan origination.