ABSTRACT During 2005 to 2007, the SEC ordered a pilot program in which one‐third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short‐sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre‐experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.

ABSTRACT The average cash‐to‐assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.

ABSTRACT We focus on public‐market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision‐making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.

ABSTRACT We analyze an entrepreneur/manager's choice between private and public ownership. The manager needs decision‐making autonomy to optimally manage the firm and thus trades off an endogenized control preference against the higher cost of capital accompanying greater managerial autonomy. Investors need liquid ownership stakes. Public capital markets provide liquidity, but stipulate corporate governance that imposes generic exogenous controls, so the manager may not attain the desired trade‐off between autonomy and the cost of capital. In contrast, private ownership provides the desired trade‐off through precisely calibrated contracting, but creates illiquid ownership. Exploring this tension generates new predictions.

Richard W. Baker, Jr., Leon T. Kendall, Walter C. Nelson, J. Charles Partee, David Fritz, Harry S. Schwartz, Changing Character of the Real Estate Mortgage Markets: Discussion, The Journal of Finance, Vol. 19, No. 2, Part 1: Papers and Proceedings of the Twenty-Second Annual Meeting of the American Finance Association, Boston, Massachusetts, December 27-29, 1963 (May, 1964), pp. 321-333

ABSTRACT In this study, we examine how information foraging by auditors affects audit evidence collection in two distinct contexts, and show how a small change to audit methodology mitigates the potentially harmful effects of foraging. Information Foraging Theory explains how, while navigating an information environment, individuals learn to acquire information through personally experiencing the costs incurred and the values obtained from information. Consistent with the theory, we find that auditors react to the immediately felt costs of information collection (e.g., time and effort) at the expense of a more global consideration of information value (i.e., auditors collect lower-quality audit evidence). However, foraging behavior is moderated by removing the personal cost to the individual auditor (identifying audit evidence for another member of the audit team to collect), further demonstrating that these personally felt costs influence auditor choices in a way that reduces the quality of information collected. We contribute to the literature by demonstrating how information foraging can influence evidence quality and, thus, audit quality, and how a slight alteration of audit methodology can mitigate this behavior.

ABSTRACT We extend the literature on earnings management through real operating decisions by providing insight into the types of expenditures (core versus noncore and operating versus non-operating activities) affected by earnings management. We partition a sample of California nonprofit hospitals based on their earnings management incentives. We find that expenditures on non-operating and non-revenue-generating activities appear to decrease in hospitals with incentives to engage in such behavior, while core patient care activities remain unchanged. We also find evidence of earnings management in non-core operational expenses. Second, we analyze real earnings management related to pay-for-performance incentives and find that hospitals with stronger performance incentives exhibit a significant incremental decrease in expenditures. Finally, we examine two different kinds of behavior to discriminate between earnings management and good operational decisions and provide weak evidence to support opportunism rather than good management. Together, these results provide evidence of the use of real operating decisions to manage earnings.

ABSTRACT: This study reports the result of an experiment examining two aspects of the audit context that auditors likely do not suspect can influence audited account balances: the magnitude of an audit difference and the presence of a prior client concession. Negotiation theory shows that negotiators’ initial positions (e.g., clients’ unaudited balances) as well as feelings of reciprocity created by prior negotiations serve to create expectations for the current negotiation and, in turn, affect the outcomes of such negotiations. Our results show that the magnitude of an audit difference involving an estimate (i.e., difference between client’s account balance and the auditor’s independent estimate) as well as the presence of a prior client concession influence auditors’ negotiation expectations. Specifically, auditors proposed smaller adjustments when the magnitude of the audit difference was high and when the client conceded on an audit issue prior to resolving the difference in estimates. These manipulations similarly influence the negotiated outcome, and this influence is fully mediated by the auditor’s initial negotiation position.

This article presents the report of the Committee on Doctoral Programs in Accounting. The committee made various recommendations on how to improve the Doctoral programs. It suggested that the doctoral program is the principal educational process for preparing students both for university teaching and for basic research in accounting. Hence the primary objective of the study program for the doctorate should be to develop in the student original and incisive thinking and to create an attitude conducive to study and research. As wide variations in the backgrounds of doctoral students call for individually designed programs of course work, instruction in methods of teaching and familiarity with the learning process should be a part of the doctoral program. At the end of the study program the doctoral candidate should demonstrate proficiency in accounting and a reasonable understanding of economics, statistics, the functional areas of business, the behavioral sciences, and mathematical methods. And finally the demand for college teachers of accounting should not be an excuse for lowering the standards for the doctoral program.

Hypothetical referenda have been proposed as an incentive‐compatible mechanism that can be used to obtain social valuations of environmental resources. We employ experimental methods to test the hypothesis that such referenda are indeed incentive compatible. Our results lead us to reject that hypothesis.