We investigate if high-ability managers are more likely to intentionally smooth earnings, a form of earnings management, and when they do so. Although prior studies provide evidence that report higher quality the literature does not indicate whether this behavior is common because (or happens in spite of) managers’ intentional smoothing activities. find (a) significantly engage smoothing, (b) their associated with improved future operating performance, (c) prevalent either benefits...

We examine the relation between managerial ability and earnings quality. find that quality is positively associated with ability. Specifically, more able managers are fewer subsequent restatements, higher accruals persistence, lower errors in bad debt provision, accrual estimations. The results consistent premise can do impact of judgments estimates used to form earnings.

Abstract Over the last 5 years, top accounting journals have published 388 articles that incorporate an empirical proxy for accruals‐based earnings management. Researchers use these proxies to measure diverse managerial activities represent fundamentally different constructs (from beneficial management at one end of spectrum manipulation other). We present a simple framework defines specific construct “earnings manipulation” and places it within context broader concept management.” At level,...

ABSTRACT We investigate whether income smoothing affects the usefulness of earnings for contracting through monitoring role earnings‐based debt covenants. First, we examine initial contract design and predict that will increase (decrease) use covenants if improves (reduces) to monitor borrowers. find private contracts borrowers with greater are more likely include A structural model explores cause this relationship provides evidence ability reflect credit risk. Second, technical default...

ABSTRACT Firm life‐cycle stage reflects a firm's current strategic direction toward exploration independent of age or size. We provide evidence that young firms are particularly vulnerable to negative innovation consequences from financial regulation but do not appear experience any compensating reporting quality (FRQ) benefits. Using generalized difference‐in‐differences design around Sarbanes Oxley Act 2002 (SOX), we document significant reduction in both research and development (R&D)...

ABSTRACT Researchers typically infer real earnings management when a firm's operating and investing activities differ from industry norms. A significant problem with classifying deviations averages as myopic is that companies can change their decisions for strategic business reasons rather than to mislead stakeholders. Using principal components analysis, we systematically evaluate existing measures develop comprehensive measure better capture manipulation. Our reflects (i) across multiple...

Abstract The widespread use of rank and file equity‐based compensation suggests that executives believe employees can affect firm outcomes, some research supports this view. If incentives influence employees’ productive efforts, they might also their earnings management decisions. We find increases in option‐based compensation—our proxy for compensation—are associated with relation is attributable to real activities (as opposed accrual) management. Cross‐sectional tests indicate the stronger...

Abstract Prior research suggests that the fear of litigation precludes most managers from manipulating earnings in initial public offering ( IPO ) setting. Yet, managers' restraint is perhaps unwarranted: has not yet linked instances aggressive pre‐ reporting to increased risk. This paper investigates when triggers legal consequences. Examining 2,037 s, we find even ex post evidence indicates presence inflation, more likely occur investors have relied on suspect during pricing process. Why...

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We investigate whether consistently reporting non-GAAP performance metrics is associated with investment efficiency. Prior research finds a positive association between firms' disclosure of measures and levels, concluding that can lead to overinvestment. corroborate this association, but additional tests are not consistent the conclusion motivates inefficient Specifically, we explore relation future cash flows as proxy for realization investments in net present value projects. find firms...

We investigate whether historical cost measurement of assets lowers the usefulness DuPont analysis for investors. Because firms report at modified under US GAAP, accounting ratios can be biased upward when have appreciated. Thus, variation in asset turnover, which is ratio most affected by measurement, due to both economic forces and effects. assess extent effects using average age a firm’s find that turnover are higher more persistent with older assets. Forecast errors associated change...

We investigate whether income smoothing affects the usefulness of earnings for contracting through monitoring role earnings-based debt covenants. First, we examine initial contract design and predict that will increase (decrease) use covenants if improves (reduces) to monitor borrowers. find private contracts borrowers with greater are more likely include A structural model exploring cause this relation provides evidence ability reflect credit risk. Second, technical default following...

Researchers typically infer real earnings management when a firm’s operating and investing activities differ from industry norms. A significant problem with classifying deviations averages as is that companies can change their decisions for strategic business reasons rather than to mislead stakeholders. We systematically evaluate existing measures develop comprehensive measure better capture manipulation using principal components analysis. Our reflects (1) across multiple (2) other signals...

Despite the presence of a number studies that examine financial reporting at IPO, link between opportunism and post-IPO penalties (including litigation) remains undocumented. The absence this may stem from noise introduced by relaxed legal requirements (along with other unique features) in IPO setting or, alternatively, it might relate to methodological issues make detecting difficult. Yet, evidence is important, as indicates ex ante incentives report conservatively. Accordingly, paper...

Abstract Pornography is no longer an activity confined to a small group of individuals or the privacy one’s home. Rather, it has permeated modern culture, including work environment. Given pervasive nature pornography, we study how viewing pornography affects unethical behavior at work. Using survey data from sample that approximates nationally representative in terms demographics, find positive correlation between and intended behavior. We then conduct experiment provide causal evidence....

Firm life-cycle stage reflects a firm's current strategic direction towards exploration independent of age or size. We provide evidence that young firms are particularly vulnerable to negative innovation consequences from financial regulation but do not appear experience any compensating reporting quality benefits. Using generalized difference-in-differences design around SOX, we document significant reduction in both R&D spending and outputs for after regulation. Declines manifest the...

Although researchers commonly acknowledge that public-company audits should add value by improving the precision of financial information via reduced estimation errors, prior literature correctly notes there is little direct archival evidence to support this assertion. Moreover, regulatory changes beginning with SOX attempt change managers' behaviors increasing their incentives produce high-quality, low-error statements. If these regulations are effective in reducing pre-audit then role...

ABSTRACT The U.S. has invested substantial resources into the regulation and oversight of public-company financial reporting. While these investments should incentivize high-quality reporting among quarterly annual statements, sharp rise in public company auditor may disproportionately benefit reports given fiscal year-centric nature audits. We compare within company-year difference statement error between examine how any changed following SOX. find that pre-SOX is lower for audited...

This paper examines an innovation in capital formation that has spurred contentious debate: the Umbrella Partnership Corporation (“Up-C”) IPO. Advisors and underwriters argue Up-C deal structure is a driver of post-IPO value and, thus, value-enhancing means raising may be one solution to concerns regarding drop number publicly traded companies. Consistent with these claims, recent research suggests organizing soon-to-be public businesses as pass-through entities (as case for Up-Cs) leads...

U.S. and international accounting standards have mandated recognition and/or disclosure of fair value information for an increasing number items. One consequence this shift has been the emergence voluntary disclosures in audited financial statements that explicitly question reliability information. We investigate whether these reflect legitimate concerns by examining is less reliable firms include such footnotes their statements. examine issue context estimate employee stock options SFAS...

This paper investigates whether some initial public offering (IPO) managers report informative (as opposed to opportunistic) income-increasing accruals and the extent which market participants differentially price accruals. I find significantly more persistent non-correlation with future restatements when firm is underwritten by a reputable investment bank, converse (less persistence restatements) firms employ less banks. The however, does not appear be fooled; IPO security prices only...