11 Financial: Financial Reporting Quality / Credit Ratings / Earnings Smoothing / Earnings Comparability (FAR3)

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Chair: Boochun Jung
Associate Professor, Shidler College of Business, University of Hawai’i-Mānoa, United States


Recent Submissions

Now showing 1 - 5 of 16
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    Modeling Earnings Discontinuities: A Maximum Likelihood Approach
    ( 2017-09-02) Basu, Sudipta ; Byzalov, Dmitri
    We develop new distribution discontinuity tests for detecting earnings management and analyzing its determinants. We embed Burgstahler and Dichev’s (1997) intuition on benchmark-driven earnings management in a likelihood-based model that addresses important limitations of the existing distribution discontinuity tests. Our method offers large improvements in test performance relative to both histogram-based tests of the existence of earnings discontinuity and logit-based tests of the determinants of earnings discontinuity, and it changes some of the major findings in the earnings discontinuity literature. Future research on distribution discontinuities could benefit from adopting our likelihood-based tests.
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    Potential Prison Time and Earnings Management
    ( 2017-09-01) Costin, Claire ; Rakestraw, Joseph
    We examine the association between earnings management and the maximum potential prison time a director may receive resulting from a self-serving transaction that is neither disclosed nor approved. Executives face incentives and disincentives to manage earnings. We hypothesize and find a negative relation between potential prison time and earnings management. Further, we show that the negative relation between potential prison time and earnings management is stronger in countries where the population has more confidence in the court system. These findings suggest that potential prison time serves as a powerful disincentive to manage earnings.
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    Does Fair Value Accounting Reduce Prices and Create Illiquidity?
    ( 2017-09-01) Lunawat, Radhika ; Pronin, Kira ; Stecher, Jack ; Zhang, Gaoqing
    Concerns about the use of fair value accounting commonly focus on the sensitivity of market prices to exogenous liquidity shocks. In this paper, we show that the use of fair value accounting for assets without an active market endogenously creates illiq- uidity. The underlying mechanism is the discretion in fair value reports when prices are unavailable. Firms use this discretion to report aggressively, leading to two market e ects. On the plus side, by revealing an upper bound on an asset's value, fair value reporting leads to lower prices than would occur in a conservative regime. This is an indication that prices are more e cient than under conservatism, as the reports protect investors from paying information rents. The downside is that fair value reports cannot credibly convey a lower bound on an asset's value, causing illiquidity. We con rm these e ects in a laboratory experiment.
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    The Effect of Fair Value versus Historical Cost on Stock Price Crash Risks: Evidence from Investment Property
    ( 2017-09-01) Liu, Sophia ; Hsu, Audrey Wenhsin ; Wu, Grace Shu-Hsing
    The accounting standard used in China for investment property, Chinese Accounting Standards 3 (CASs) is comparable to IAS 40 Investment Property while there are two crucial differences: (1) an entity is allowed to use the fair value method if and only if the local property market is active or if the fair value of an entity’s investment property can be estimated reliably through the values and other information of the same or similar category of properties. In other words, CAS 3 is more prudential and restricted on the use of fair value model; (2) CAS 3 does not require an entity which uses the cost method to recognize investment property to also disclose the fair values of property in the footnotes. Using a sample of publicly traded firms that hold investment property from 2007 through 2011 in China, we conduct purer tests to shield some light on the effect of fair value reporting for investment property on firm opacity and stock price dynamics in an emerging market. We find that firms that recognize investment property at fair value in China experience an increase in crash risks, consistent with the notion that fair value reporting for investment property in China does not convey managerial private information regarding firm value while could be the channel to conceal information, and hence exhibit higher stock price crash risks. We further find evidence that the association between the fair value reporting and increased crash risks is mitigated when managers operating in firms with strong corporate governance.
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    Reporting Concerns about Earnings Quality: An Examination of Corporate Managers
    ( 2017-08-31) Schaefer, Tammie ; Brazel, Joseph ; Lucianetti, Lorenzo
    Using an experiment with corporate financial managers (e.g., CFOs, controllers), we find that when red flags are present in the financial statements under their review, managers identify those red flags and, in turn, have greater concerns over earnings quality. In addition, when pressure to meet a financial target is high, managers are more concerned about earnings quality when red flags are present. We also document that when red flags are present, managers are more likely to report both internally to their CEO and, if their concerns are not resolved internally, externally to their auditor. Pressure to meet a financial target directly influenced the decision to report internally, but not externally. Additional analyses contemplate the countervailing personal costs associated with reporting or not reporting earnings quality concerns. We demonstrate the important role short-term costs play in external reporting decisions. Finally, we provide initial evidence that corporate managers with a longer tenure at their position (public accounting background) are less (more) likely to report externally.