Quarterly earnings allow aggregation into annual earnings in four different ways. Fiscal year earnings is one measure of annual earnings, the others being earnings for annual periods ending at interim quarter-ends. We investigate earnings management in fiscal year earnings relative to these alternative measures of firms’ annual earnings. We confirm prior findings in Burgstahler and Dichev (1997. Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics 24, 99–126) of discontinuities around zero and prior year earnings in histograms of earnings. Subsequent research questions whether these discontinuities are evidence of earnings management. Using histograms of our alternative annual earnings measures, we offer evidence suggesting earnings management is responsible for the discontinuities.

Verrecchia (1983) investigates a manager's incentives for costly, discretionary disclosure of his information to risk‐averse traders when the functional form of prices is exogenously specified. We extend Verrecchia (1983) by deriving the endogenously determined functional form of prices that would arise when all traders have constant risk tolerance. We show that these endogenously determined prices are inconsistent with the assumed prices in Verrecchia (1983) when the manager elects to not disclose. We derive the manager's disclosure strategy for our setting and extend the comparative static results in Verrecchia (1990) for risk‐neutral traders to a setting where traders have constant risk tolerance and prices are endogenously derived. Further, in our setting, discretionary disclosure does not affect how traders price risk of different outcomes. Also, we offer a representation of risk‐averse traders' prices using risk‐adjusted distributions. Finally, these results provide implications for empirical‐archival discretionary disclosure studies.

This paper examines the effect of corporate equity ownership on investment when firms have product market relationships. Firms have incentives to hold long equity positions when their products are complements. These equity positions induce the firms to increase their real investment expenditures. In contrast, firms have incentives to hold short equity positions when their products are substitutes. These short positions commit the firms to a more aggressive product market stance, and also result in increased real investment expenditures. Our model offers an explanation for the empirical relationship between the establishment of corporate equity stakes and increased investment spending documented by Allen and Phillips (2000).

In this paper we examine the factors that determine how firms manage large, firm-specific risks, in this case, product liability. The risk of being sued for defective products or damage from defective products poses a small probability of a great loss to the firm. Product liability exposure arises from the firm's choice of products and markets; choices that are fundamental to the firm's business strategy and that are costly to alter. Firms are unlikely to be naturally hedged by cash flows with respect to product liability risk. Cash flows will likely be negatively correlated with product liability claims since product liability claims reduce product demand and increase costs through legal expenses and claims payments.

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

We examine how a firm's disclosure‐audience policy affects investors' expertise acquisition and price informativeness in the market. We distinguish the investors' information advantage due to superior access from that due to superior ability to process information. We show that targeted selective disclosure to sophisticated investors may encourage greater expertise acquisition on the part of investors and lead to more informative prices than either public disclosure or untargeted selective disclosure, because the value of expertise is maximized if sophisticated investors gain exclusive information access at a relatively low cost. These results illuminate the persistence of private communications between investors and firms in the post–Regulation Fair Disclosure era and provide implications for regulators in addressing increasing concerns raised about the enforcement of Regulation Fair Disclosure.

Considerable debate continues regarding the use of earnings histograms as evidence consistent with earnings management. Durstchi and Easton (2005) offer scaling and sample selection as alternative explanations for apparent discontinuities in cross-sectionally pooled histograms of earnings. We revisit the broad question of whether irregularities in reported earnings numbers can constitute evidence consistent with earnings management. We use a matched-pair design to avoid sample selection issues and study three irregularities in reported earnings per share (EPS). We first study the discontinuity pattern in the last digit (cents) of reported EPS noted by Thomas (1989) that the last digit of EPS is more likely to be zero and five and less likely to be nine for profit firms while the pattern does not appear for loss firms. Second, we consider the threshold irregularity in EPS changes noted by Degeorge, Patel, and Zeckhauser (1999), that one-cent decreases are underrepresented, relative to expectations. Third, we also revisit the rounding pattern in (unreported) third decimals of EPS noted by Das and Zhang (2003) that the one tenth of a cent is more likely between five and nine for profit firms. Our study enhances confidence in each reported irregularity's validity by identifying matched pairs of firm-years reporting EPS under two measurement regimes: one in place during the reporting period in real time, the other subsequently reported to conform to a new reporting standard. We report evidence consistent with EPS management that is not plausibly attributable to either sample selection or scaling.

Under the new Capital Accord, banks choose between two different types of risk management systems, the standard or the internal rating based approach. The paper considers how a bank's preference for a risk management system is affected by the presence of supervision by bank regulators. The model uses a principal–agent setting between a bank's owner and its risk management. The main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated, i.e., the presence of regulation may induce a bank to decrease the quality of its risk management system.