Empirical Research on Financial Reporting and Disclosure
Instructor: Liandong Zhang, City University of Hong Kong
Medium of Instruction: English
Objectives
1. Introduce empirical research on financial reporting and corporate governance.
2. Stimulate research interests in this literature and help identify possible research topics.
Learning Format
I will keep the classes very informal. It is important to discuss and debate the issues in an
atmosphere with no formalities and inhibitions. You must understand that at this level, I do not
have answers for all your questions and you should treat it as a joint quest for knowledge that you
and I undertake together. For every session other than the first one, there will be selected reading
assignments (about 3 papers per session). All of you must read the assignments and come
prepared to discuss not only the general issues in the paper but also the details such as data
sources and research resign.
For each paper, one student will have the primary responsibility of starting or leading the
discussion. The leading student is required to prepare a presentation file (e.g., PPT slides) for the
paper assigned to facilitate discussion. At the Ph.D. level, I expect you to be original, innovative,
critical and serious in your discussions and exchanges of ideas. Most of the learning takes place
in two ways: (i) by discussing and exchanging ideas with others and (ii) by introspection. Both
these are essential for advancing your thought process in these matters. In that respect, I will only
be a “guide” and direct you minimally. At the start of each session, I will give a short introduction
on the topic of the session.
Evaluation: Grades will be based on the quality of the in-class presentations and discussions and
a research proposal (tentative).
Course Outline
Session 1: Overview
Background readings
Fama, E., 1965. “The behavior of stock market prices,” Journal of Business 38, 34–105.
Fama, E., and M. Jensen, 1983. “Separation of ownership and control,” Journal of Law and
Economics 26, 301-325.
Jensen, M., and W. Meckling, 1976. “Theory of the firm: managerial behavior, agency costs, and
ownership structure,” Journal of Financial Economics 3, 305-360.
Watts, R., and J.L., Zimmerman, 1986. “Positive Accounting Theory” Prentice Hall, Englewood
Cliffs, NJ.
Armstrong, C.S., W.R. Guay, J.P. Weber, 2010. “The role of information and financial reporting
in corporate governance and debt contracting,” Journal of Accounting and Economics 50, 179234.
Kothari, S.P., 2001. “Capital market research in accounting”. Journal of Accounting and
Economics 31, 105-231.
Healy, P. M., and K. G. Palepu. 2001. “Information asymmetry, corporate disclosure, and
the capital markets: A review of the empirical disclosure literature.” Journal of
Accounting and Economics 31, 405–440.
Dechow, P.M., Ge, W., Schrand, C.M., 2010. “Understanding earnings quality: A review of the
proxies, their determinants and their consequences,” Journal of Accounting and Economics 50,
344-401.
Other readings:
Evans III, J.H., M. Feng, V.B. Hoffman, D.V. Moser, 2014. “Points to consider when selfassessing your empirical accounting research,” Contemporary Accounting Research, forthcoming.
SSRN Link: http://dx.doi.org/10.2139/ssrn.2120181. (This paper can be used as a guide of
reading papers as well as preparing discussions)
Session 2: The usefulness of financial accounting information
Ball, R., and P. Brown, 1968. “An empirical evaluation of accounting income numbers.” Journal
of Accounting Research, 159-178.
Beaver, W., 1968. “The information content of annual earnings announcements.” Journal of
Accounting Research, supplement, 67-92.
Beaver, W., Clarke, R., and W. Wright, 1979. “The association between security returns and the
magnitude of earnings forecast errors.” Journal of Accounting Research 17, 316-340.
Landsman, W., and E. Maydew, 2002. “Has the information content of quarterly earnings
announcements declined in the past three decades?” Journal of Accounting Research 40, 797-808.
Session 3: Financial accounting information and market efficiency
Bernard, V., Thomas, J., 1989. “Post-earnings-announcement drift: delayed price response or risk
premium?” Journal of Accounting Research 27, 1–48.
Bernard, V., Thomas, J., 1990. “Evidence that stock prices do not fully reflect the implications of
current earnings for future earnings.” Journal of Accounting and Economics 13, 305–340.
Sloan, R., 1996. “Do stock prices fully reflect information in accruals and cash flows about future
earnings.” The Accounting Review 71, 289–316.
Richardson, S.A., Sloan, R., Soliman, M., and İ. Tuna, 2005. “Accrual reliability, earnings
persistence and stock prices.” Journal of Accounting and Economics 39, 437-485.
Session 4: The contracting role of financial accounting information
Healy, P., 1985. “The effect of bonus schemes on accounting decisions,” Journal of Accounting
and Economics 7, 85-107.
Dichev, I. D. and Skinner, D. J., 2002. “Large–sample evidence on the debt covenant
hypothesis.” Journal of Accounting Research, 40: 1091–1123.
Beatty, A., Ramesh, K., and J. Weber, 2002. “The importance of accounting changes in debt
contracts: the cost of flexibility in covenant calculations.” Journal of Accounting and Economics
33, 205-227.
*** (background reading) Lambert R., and D. Larcker, 1987. “An analysis of the use of
accounting and market measures of performance in executive compensation contracts,” Journal
of Accounting Research 25, 85-125.
Session 5: Earnings management: Measurement
Kothari, S. P., Leone, A. J., Wasley, C. E., 2005. “Performance matched discretionary accrual
measures.” Journal of Accounting and Economics 39, 163–197.
Hennes, K.M., Leone, A., and B.P. Miller, 2008. “The importance of distinguishing errors from
irregularities in restatement research: the case of restatements and CEO/CFO turnover.” The
Accounting Review 83, 1487-1519.
Roychowdhury, S., 2006. “Earnings management through real activities manipulation.” Journal
of Accounting and Economics 42, 335-370.
*** (background reading) Dechow, P. M., Sloan, R. G., Sweeney, A. P., 1995. “Detecting
earnings management.” The Accounting Review 70, 193–225.
Session 6: Earnings management: Incentives
Dechow, P., R. Sloan, and A. Sweeney, 1996 “Causes and consequences of earnings
manipulations: An analysis of firms subject to enforcement actions by the SEC.” Contemporary
Accounting Research 13, 1-36.
Burgstahler, D., and I. Dichev, 1997. “Earnings management to avoid earnings decreases and
losses.” Journal of Accounting and Economics 24, 99-126.
Burns, N. and S. Kedia, 2006. “The impact of performance-based compensation on misreporting,”
Journal of Financial Economics 79, 35-76.
***(background reading) Graham, John R., Campbell R. Harvey, and Shiva Rajgopal. 2005. “The
economic implications of corporate financial reporting,” Journal of Accounting and Economics
40, 3-73.
Session 7: Accounting conservatism I: Measurement
Basu, S., 1997. “The conservatism principle and the asymmetric timeliness of earnings,” Journal
of Accounting & Economics 24, 3-37.
Ball, R., and L. Shivakumar, 2005. “Earnings quality in UK private firms: comparative loss
recognition timeliness,” Journal of Accounting and Economics 39: 83-128.
Khan, M., and R. L. Watts. 2009. Estimation and empirical properties of a firm-year measure of
accounting conservatism. Journal of Accounting and Economics 48 (2–3): 132–150.
*** (background reading) Givoly, D., and C. Hayn. 2000. The changing time-series properties of
earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of
Accounting and Economics 29 (3): 287–320.
Session 8: Accounting conservatism II: Determinants
LaFond, Ryan, and Ross L. Watts, 2008. “The information role of conservatism,” The Accounting
Review 83, 447-478.
LaFond, R., and S. Roychowdhury, 2008. “Managerial ownership and accounting conservatism,”
Journal of Accounting Research 46, 101-135.
Nikolaev, V. V. 2010. “Debt covenants and accounting conservatism.” Journal of Accounting
Research 48, 51–89.
*** (background reading) Watts, R. L. 2003a. “Conservatism in Accounting Part I: Explanations
and Implications.” Accounting Horizons 17 (3): 207–221.
*** (background reading) Watts, R.L. 2003b. “Conservatism in Accounting Part II: Evidence and
Research Opportunities.” Accounting Horizons 17 (4): 287–301.
Session 9: Corporate disclosures
Skinner, D. J, 1994. “Why firms voluntarily disclose bad news.” Journal of Accounting Research
32, 38–60.
Kothari, S.P., S.Shu, and P.D. Wysocki, 2009. “Do managers withhold bad news?” Journal of
Accounting Research 47, 241-276.
Li, F. 2008. “Annual report readability, current earnings, and earnings persistence.” Journal of
Accounting and Economics 45 (2–3): 221–247.
Li., Y. and L. Zhang, 2015. “Short selling pressure, stock price behavior, and management
forecast precision,” Journal of Accounting Research 53, 79–117.
Session 10: The impact SOX, internal controls, and IFRS
Cohen, D.A., Dey, A., and T.Z. Lys, 2008. “Real and accrual-based earnings management in the
pre- and post- Sarbanes-Oxley periods.” The Accounting Review 83, 757-787.
Ashbaugh-Skaife, H., D. W. Collins, W.R. Kinney, and R. LaFond, 2008. The effect of sox
internal control deficiencies and their remediation on accrual quality.” The Accounting Review 83,
217-250.
Barth, M. E., Landsman, W. R., and M. H., Lang., 2008. “International Accounting Standards and
Accounting Quality.” Journal of Accounting Research 46, 467–498.
Session 11: Corporate governance and financial reporting and disclosure
Klein, A., 2002, “Audit committee, board of director characteristics, and earnings management,”
Journal of Accounting and Economics 33, 375-400.
Ajinkya, B., S. Bhojraj, and P. Sengupta, 2005. “The association between outside directors,
institutional investors and the properties of management earnings forecasts.” Journal of
Accounting Research 43, 343–376.
Ahmed, A.S., and S. Duellman, 2007. “Accounting conservatism and board of director
characteristics: An empirical analysis,” Journal of Accounting and Economics 43, 411-437.
Chen, S., Chen, X., and Q. Cheng, 2008. “Do family firms provide more or less voluntary
disclosure?” Journal of Accounting Research 46, 499–536.
Session 12: Economic consequences of financial reporting
Botosan, C. A., 1997. “Disclosure level and the cost of equity capital.” The Accounting
Review 72, 323-349.
Kim, J-B., B. Y. Song, and L. Zhang, 2011. “Internal control weakness and bank loan
contracting: Evidence from SOX Section 404 disclosures.” The Accounting Review 86, 11571188.
Biddle, G.C., Hilary, G., and R. S. Verdi, 2009. “How does financial reporting quality relate to
investment efficiency?” Journal of Accounting and Economics 48, 112-131.
Session 13: R2 and Stock price crash risk
Hutton, A.P., A.J. Marcus, and H. Tehranian. 2009. “Opaque financial reports, R2, and crash risk,”
Journal of Financial Economics 94, 67-86.
Kim, J-B, and L. Zhang, 2015. “Accounting conservatism and stock price crash risk: firm-level
evidence,” Contemporary Accounting Research, forthcoming.
Kim, J-B, and L. Zhang, 2014. “Financial reporting opacity and expected crash risk: evidence
from implied volatility smirks,” Contemporary Accounting Research 31, 851-875.
*** (background reading) Kim, J-B, Y. Li, and L. Zhang. 2011. “CFOs versus CEOs: Equity
incentives and crashes,” Journal of Financial Economics 101, 713-730.
*** (background reading) Jin, L., and C. S. Myers, 2006. “R2 around the world: New theory and
new tests,” Journal of Financial Economics 79, 257-292.
*** (optional reading) Kim, J.B, Z. Wang, and L. Zhang, 2015, “CEO overconfidence and stock
price crash risk,” Contemporary Accounting Research, forthcoming.
Session 14: Corporate tax avoidance
Chen, S., X. Chen, Q. Cheng, and T. Shevlin, 2010. “Are family firms more tax aggressive than
non-family firms?” Journal of Financial Economics 95, 41-61.
Kim, J.B., Y. Li, and L. Zhang. 2011. “Corporate tax avoidance and stock price crash risk: Firmlevel analysis,” Journal of Financial Economics 100, 639-662.
Kim, F. and L. Zhang, 2014. “Corporate political connections and tax aggressiveness,”
Contemporary Accounting Research, forthcoming. SSRN Link:
http://dx.doi.org/10.2139/ssrn.2303836.
*** (background reading) Desai, M., and D. Dharmapala, 2006. “Corporate tax avoidance and
high-powered incentives,” Journal of Financial Economics 79, 145-179.
*** (background reading) Hanlon, M., and S. Heitzman, 2010. “A review of tax research,”
Journal of Accounting and Economics 50, 127-178.
*** (background reading) Dyreng, S. D., M. Hanlon, and E. L. Maydew, 2008. “Long-run
corporate tax avoidance,” The Accounting Review 83,61-82.
Note: *** Background readings will not be formally discussed in class.