This study tests the bonus-maximization hypothesis that managers make discretionary accrual decisions to maximize their short-term bonuses. By using the management and financial reporting database of a large conglomerate, we extend previous investigations in two ways. First, the analysis is conducted using business unit-level data, which reduces the aggregation problem that is likely to arise using firm-level data. Second, managers in this setting are paid bonuses based solely on business unit earnings. The potentially confounding effects of long-term performance and stock-based incentive compensation are thus absent. These innovations yield robust evidence consistent with Healy (1985).

We investigate whether firms identified as potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation, and Liability Act (more commonly known as Superfund) appear to manipulate earnings to minimize their exposure to Superfund clean‐up and transaction costs. We analyze the discretionary accrual behavior of 612 PRPs from 1981 to 1995 and increase the power of our tests by identifying those PRPs with the most incentive to manage earnings during PRP identification years. The results provide robust evidence consistent with the hypothesis that these PRPs use income‐reducing discretionary accruals during PRP identification years in an attempt to minimize Superfund clean‐up and transaction costs. We also consider whether PRPs' incentives to manage earnings change in response to a change in the EPA regulatory regime and find modest evidence consistent with our conjecture.

In this paper, we investigate whether budgets ratchet. Using business-unit data from a large multinational corporation, we find evidence consistent with ratcheting where favorable budget variances result in performance budget increases that are larger than decreases associated with unfavorable variances of the same magnitude. We argue that under ratcheting, the cost of reporting positive transitory earnings surprises outweigh the short-term benefits of the current-period bonus. Consequently, we hypothesize that managers make income-decreasing discretionary accruals to offset transitory earnings surprises beyond the level expected under fixed budgets. Using a proxy for transitory earnings surprise, we find evidence consistent with this hypothesis.

This paper reexamines the determinants of the number of analysts following a firm using econometric models based on count distributions. We replicate Bhushan's (1989) analyst-following study to demonstrate the effects of using count-data econometrics, in lieu of OLS, in studying phenomena where the dependent variable ranges among nonnegative integers. In contrast with the original paper, our findings indicate the number of institutional investors is inversely related with analyst following. We also provide econometric evidence to support the preferred use of the negative binomial model in estimating cross-sectional, analyst-following regressions.

We use the context of a company's initial public offering (IPO) of equity securities as a capital‐markets setting to empirically study the economic consequences of endogenous disclosure. In particular, we examine the relation between the extent of dollar detail an IPO issuer provides regarding their intended use of proceeds and first‐day underpricing. We document substantial variation in the specificity of this disclosure and find that an increase in such specificity is associated with lower IPO underpricing. Overall, our results suggest that IPOs that provide specific use‐of‐proceeds disclosures have less ex ante uncertainty, in the sense that these disclosures help investors estimate the dispersion of secondary market values. Our paper contributes to the empirical accounting literature by documenting an association between voluntary disclosure and what is arguably the foremost cost of raising initial equity capital (i.e., IPO underpricing).

We use the context of a company's initial public offering (IPO) of equity securities as a capital-markets setting to empirically study the economic consequences of endogenous disclosure. In particular, we examine the relation between the extent of dollar detail an IPO issuer provides regarding their intended use of proceeds and first-day underpricing. We document substantial variation in the specificity of this disclosure and find that an increase in such specificity is associated with lower IPO underpricing. Overall, our results suggest that IPOs that provide specific use-of-proceeds disclosures have less ex ante uncertainty, in the sense that these disclosures help investors estimate the dispersion of secondary market values. Our paper contributes to the empirical accounting literature by documenting an association between voluntary disclosure and what is arguably the foremost cost of raising initial equity capital (i.e., IPO underpricing).

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.