18 Other Accounting Issues

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    The Dark Side of CEO Networks: Evidence from Real Activities Management
    ( 2019-09-03) Griffin, Paul ; Hong, Hyun ; Ryou, Ji Woo
    Abstract We examine the relation between CEO network size and the level of real activities management (RAM). Using the number of social connections to outside executives, directors, and others in similar positions to measure network size, we find that well-connected CEOs associate with higher levels of RAM. Social science theory suggests that this occurs because well-connected CEOs can acquire more information from their social networks to implement RAM effectively. The power and influence and labor market insurance from a large network also reduces the private cost of RAM. Supporting these two channels, we find a stronger positive relation between RAM and CEO network size when the CEO connects with more informed and influential persons and has more reputation to protect in the labor market. In addition, the positive relation concentrates in firms with low CEO share ownership, where a more severe misalignment of interests can occur. We also show that higher but not extreme levels of RAM from a large CEO network degrades the firm’s long-term operating performance, suggesting that large CEO networks have a darker side for firm value.
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    Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms
    ( 2019-08-31) Espahbodi, Reza ; Liu, Nan ; Weigand, Rob
    We propose that much of the variation in standard accruals and real-activities earnings management metrics can be explained by firms' performance trajectories. We test our proposition using dividend change as a natural setting that distinguishes high from low performance trajectory firms. Consistent with our proposition, we find that standard earnings management metrics have a stronger relation with performance trajectories than unexpected earnings at which firms' earnings management activities are supposedly targeted. Additionally, we find that firms with higher values of earnings management metrics, i.e., firms that appear to manage earnings to a greater extent, are more likely to increase their dividends; and standard earnings management metrics are unimportant in explaining changes in firm value around dividend change announcements. These results are consistent with the notion that applying standard earnings management metrics without taking performance trajectories into account can result in researchers mistaking managers' efforts to increase firm value with evidence of earnings management.
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    Capital Structure of Special-Purpose Entities
    ( 2019-08-30) Hermis, Judith ; Eger, Robert
    A novel integration of public and corporate financial theory is used to model capital structure in governmental special purpose organizations. The expectation is that given observed similarities to corporate structure, including managerial objectives, these organizations will display evidence of an intergovernmental pecking order approach to capital structure. The censored probit method suggests that special purpose entities follow an intergovernmental pecking order of capital structure, with correct classification in excess of eighty-nine percent. The results support a direct link between intergovernmental revenue and the capital structure of the organization, providing insight into the tie between managerial costs and benefits for these governmental organizations.
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    Geographic Location and Accounting Choices: Evidence from Managers’ Earnings Management Decisions
    ( 2019-08-30) Huang, Xuerong ; James, Hui ; Tiras, Samuel
    This study investigates the relation between firm geographic location, i.e., urban vs. rural, and managers’ earnings management choices. Adopting multiple definitions of urban and rural firms, we consistently find that compared to rural firms, urban firms are less likely to use production-related real earnings management while more likely to use accrual earnings. In addition, we find that firms’ urban location reduces the positive impact of both firm complexity and Sarbanes-Oxley (SOX) on managers’ decisions of using real earnings management. Overall, this study suggests that urban firm managers reduce the use of value-destroying real earnings management because (1) investors possess greater familiarity towards urban firms, and (2) more investors are readily accessible to urban firms’ soft information. In additional tests, we focus on a subsample of earnings management suspect firms and find that managers’ tradeoff decision of these two earnings management strategies is conditional on firms’ geographic locations.
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    How to Identify Effective Supervisors: The Validity of Rating Discrimination for Measuring Supervisory Skills
    ( 2019-08-30) Judith Künneke
    This study develops and validates a theory-based measure of supervisory skills. Supervisors are the linking pin between the firm and its employees, and therefore play an important role for organizational performance and success. Clarifying performance standards, monitoring subordinate performance, and providing accurate performance evaluation enable effective supervision that is beneficial to the subordinate, and eventually organizational performance. I argue that rating discrimination, that is, the variation in the ratings a supervisor provides, reflects the extent to what a supervisor is able to fulfil her supervisory responsibilities effectively, or in short, her supervisory skills. By validating this measure in different contexts, I enable research and practice to use an easily comprehensible and measurable proxy for supervisory skills for research and personnel-decision purposes.