[We examined management's discretionary disclosures prior to a special, yet important, event-a large earnings surprise. In what ways do managers alert investors to the surprise, and what is investors' reaction to such warnings? To address these questions, we analyzed all managerial disclosures prior to the surprising earnings release. Less than ten percent of our large-surprise firms published quantitative earnings or sales forecasts, while 50 percent of the firms kept silent. Firms facing earnings disappointments were more likely to make a disclosure, and larger disappointments were preceded more often by "harder" (more quantitative and earnings-related) warnings. We found the likelihood of warnings to be positively associated with firm size, the existence of a previous forecast, and membership in a high technology industry. Finally, warnings tend to be issued for permanent earnings disappointments, while transitory disappointments are more likely to occur without prior warning.]

This study investigates whether managers who issue annual earnings forecasts manage reported earnings toward their forecasts, fearing legal actions by investors and loss of reputation for accuracy. I hypothesize that managers make income-increasing (decreasing) accounting decisions when earnings would otherwise be below (above) management forecasts, and that the earnings management activity is increasing in expected forecast error costs.1 These costs are likely higher for overestimates than for underestimates and are increasing in the magnitude of the forecast

We investigate whether CEOs manage the timing of their voluntary disclosures around stock option awards. We conjecture that CEOs manage investors’ expectations around award dates by delaying good news and rushing forward bad news. For a sample of 2,039 CEO option awards by 572 firms with fixed award schedules, we document changes in share prices and analyst earnings forecasts around option awards that are consistent with our conjecture. We also provide more direct evidence based on management earnings forecasts issued prior to award dates. Our findings suggest that CEOs make opportunistic voluntary disclosure decisions that maximize their stock option compensation.

We investigate firms’ choices between the purchase and pooling methods in stock-for-stock acquisitions. We find that in acquisitions with large step-ups to targets’ net assets, CEOs with earnings-based compensation are more likely to choose pooling and avoid the earnings ‘penalty’ associated with purchases. We find no association between stock-based compensation and the purchase–pooling choice, suggesting that managers are not concerned about implications of large step-ups for firms’ equity values. We also find that the likelihood of purchase increases with debt contracting costs, consistent with its favorable balance sheet effects, and with costs of qualifying for pooling, particularly the restriction of share repurchases.

We investigate firms’ operating performance subsequent to the repricing of executive and non-executive employee stock options. We find that, relative to non-repricers, repricing firms have a larger increase in operating income and cash flows in subsequent periods. This performance improvement is attributable to the underlying economic determinants of the decision to restore the options’ incentive properties. However, only repricings of executive stock options are associated with improvement in performance; we find no such evidence for non-executive employees. Our findings suggest employee stock options provide sufficiently large incentive effects to favorably affect firms’ performance, but primarily so at the executive level.

We investigate factors associated with firms' decisions in 2002 and early 2003 to recognize stock‐based compensation expense under Statement of Financial Accounting Standards (SFAS) No. 123. We find that the likelihood of SFAS 123 expense recognition is significantly related to the extent of the firm's participation in capital markets, the private incentives of top management and members of the board of directors, the level of information asymmetry, and political costs. Although recognizing firms have significantly smaller SFAS 123 expense, we find no significant incremental relation between recognition likelihood and SFAS 123 expense magnitude after controlling for other factors that we expect explain the recognition decision. We also find positive and significant announcement returns for earlier announcing firms, particularly those stating that increased earnings transparency motivates their decision.

Firms with more intangible assets are more likely to repurchase shares and have more positive repurchase announcement returns, as predicted. Because intangibles generally are unrecognized, share repurchases represent a potential cost to an incomprehensive accounting model. Idle cash is positively related to repurchase likelihood and negatively related to announcement returns, as predicted. Contrary to predictions, general information asymmetry is negatively related to repurchase likelihood, but announcement returns are positively related, as predicted. Tests include controls for stock option plans, dividends, and book-to-market ratios, which generally are significant as predicted. Using change variables in the repurchase likelihood tests yields consistent inferences.

This paper investigates whether the market rewards firms meeting current period earnings expectations, and whether any such reward reflects the implications of meeting expectations in the current period for future earnings or reflects a distinct market premium. We document that abnormal annual returns are significantly greater for firms meeting expectations, controlling for the information in the current year’s earnings. We then test whether firms meeting expectations experience higher returns simply because their expected future earnings are also higher. We find firms meeting expectations have significantly higher earnings forecasts and realized earnings than firms that do not. We find that controlling for these higher future earnings, firms meeting expectations in one or two years do not receive a greater valuation than their fundamentals would suggest. We find, however, that the market assigns a higher value to firms that meet expectations consistently, controlling for an estimate of the firm’s fundamental value.