Prior research documents that firms tend to beat three earnings benchmarks—zero earnings, last year's earnings, and analyst's forecasted earnings—and that there are both equity market and compensation-related benefits associated with beating these benchmarks. This study investigates whether and under what conditions beating these three earnings benchmarks reduces a firm's cost of debt. I use two proxies for a firm's cost of debt: credit ratings and initial bond yield spread. Results suggest that firms beating earnings benchmarks have a higher probability of rating upgrades and a smaller initial bond yield spread. Additional analyses indicate that (1) the benefits of beating earnings benchmarks are more pronounced for firms with high default risk; (2) beating the zero earnings benchmark generally provides the biggest reward in terms of a lower cost of debt; and (3) the reduction in the cost of debt is attenuated but does not disappear for firms beating benchmarks through earnings management. In sum, results suggest that there are benefits associated with beating earnings benchmarks in the debt market. These benefits vary by benchmark, firm default risk, and method utilized to beat the benchmark. Among other implications, this evidence suggests that the relative importance of specific benchmarks differs across the equity and bond markets.

This study examines the association between chief financial officer (CFO) equity incentives and earnings management. Chief executive officer (CEO) equity incentives have been shown to be associated with accruals management and the likelihood of beating analyst forecasts (Bergstresser and Philippon, 2006; Cheng and Warfield, 2005). Because CFOs’ primary responsibility is financial reporting, CFO equity incentives should play a stronger role than those of the CEO in earnings management. We find that the magnitude of accruals and the likelihood of beating analyst forecasts are more sensitive to CFO equity incentives than to those of the CEO. Our evidence supports the Securities and Exchange Commission's (SEC) new disclosure requirement on CFO compensation.

Using the market values of audit partners’ houses as a measure of their personal wealth, we find that wealthier U.S. partners provide higher-quality audits, as evidenced by fewer material restatements, fewer material SEC comment letters, and higher audit fees. A battery of falsification tests shows that these findings are not driven by the matching of wealthier partners with clients with higher financial reporting quality. Our additional analyses suggest two explanations: greater personal wealth both incentivizes partners to exert more effort in delivering high-quality audits and reveals partners’ audit competence.

We test whether Standard and Poor's (S&P) assigns higher bond ratings after it switches from investor-pay to issuer-pay fees in 1974. Using Moody's rating for the same bond as a benchmark, we find that when S&P charges investors and Moody's charges issuers, S&P's ratings are lower than Moody's. Once S&P adopts issuer-pay, its ratings increase and no longer differ from Moody's. More importantly, S&P only assigns higher ratings for bonds that are subject to greater conflicts of interest, measured by higher expected rating fees or lower credit quality. These findings suggest that the issuer-pay model leads to higher ratings.

In 2007, Pink Sheets LLC assigned each Pink Sheets ® company to a disclosure tier and on its website affixed a colorful graphic to its stock symbol signifying the company's public disclosure level. This unique innovation allows us to investigate the impact of increased salience of disclosure practices on liquidity. Using a difference‐in‐difference design, we find evidence that firms classified into the Current Information category experienced an increase in liquidity while firms classified into the No Information category experienced a decrease in liquidity, both relative to other unclassified over‐the‐counter firms. This suggests that increases in the salience of disclosure practices via assignment to disclosure tiers affect investors’ attention, leading to changes in trading behavior that ultimately translate into liquidity changes. We also provide evidence that some investors anticipated the resulting liquidity changes because stock returns around a key event date leading up to the release of the disclosure tiers are positively associated with subsequent liquidity changes.

Extant research suggests that book-tax differences are useful measures in evaluating firm performance. There is little evidence, however, regarding taxable income as an alternative performance measure to book income. We examine firm characteristics that mitigate or enhance the ability of taxable income to inform investors regarding firm performance. We find that the relative and incremental information content of estimated taxable income to book income is lower for high tax planning firms and higher for low earnings quality firms. Our results suggest that tax planning and low earnings quality have contrasting effects on the information content of estimated taxable income. These findings are pertinent to recent research examining book-tax differences as a measure of earnings quality and taxable income as an alternative performance measure.

ABSTRACT: Financial economics has posited a limited role for idiosyncratic noneconomic manager-specific influences, but the strategic management literature suggests such individual influences can affect corporate outcomes. We investigate whether individual managers play an economically significant role in their firms’ voluntary financial disclosure choices. Tracking managers across firms over time, we find top executives exert unique and economically significant influence (manager-specific fixed effects) on their firms’ voluntary disclosures, incremental to known economic determinants of disclosure, and firm- and time-specific effects. Managers’ unique disclosure styles are associated with observable demographic characteristics of their personal backgrounds: managers promoted from finance, accounting, and legal career tracks, managers born before World War II, and those with military experience develop disclosure styles displaying certain conservative characteristics; and managers from finance and accounting and those with military experience favor more precise disclosure styles. These plausible associations confirm that our estimated manager-specific fixed effects capture systematic long-lived differences in managers’ unique disclosure styles.

We investigate whether the positive associations between discretionary accrual proxies and beating earnings benchmarks hold for comparisons of groups segregated at other points in the distributions of earnings, earnings changes, and analystsbased unexpected earnings. We refer to these points as “pseudo” targets. Results suggest that the positive association between discretionary accruals and beating the profit benchmark extends to pseudo targets throughout the earnings distribution. We find similar results for the earnings change distribution. In contrast, we find few positive associations between discretionary accruals and beating pseudo targets derived from analysts-based unexpected earnings. We develop an additional analysis that accounts for the systematic association between discretionary accruals and earnings and earnings changes. Results suggest that the positive association between discretionary accruals and earnings intensifies around the actual profit benchmark (i.e., where earnings management incentives may be more pronounced). We find similar effects around the actual earnings increase benchmark. However, analogous patterns exist for cash flows around the profit and earnings increase benchmarks. In sum, we are unable to eliminate other plausible explanations for the associations between discretionary accruals and beating the profit and earnings increase benchmarks.