Rutgers School of Business
Advanced Topics in Financial Reporting
Spring 2010
Instructor: Suresh Govindaraj
Room #934, 1 Washinton Park
(tel.): (973)-353-1017
(e-mail ): suresh@business.rutgers.edu
Goal: The goal of this course is to introduce the doctoral student to the basic theory, issues and
methodologies of financial accounting research. This goal will be accomplished by carefully reading
published accounting research studies. In critically reading a research study, the student must always ask
the following basic questions:
1.
2.
3.
4.
What research question is the author investigating?
What is the marginal contribution of the study to the literature?
What is the research design?
What are the potential problems in model formulation and/or empirical inference and how can these
problems be resolved?
Course Style: This course will be conducted primarily as a seminar/workshop with lectures given by me
and the seminar participants. We will only discuss a few selected papers/topics. However, we will
discuss them thoroughly. When a student is asked to present a paper, then the student will be required to
present as if he/she was the author. The discussion leader is not only to summarize the papers, but also to
help facilitate an in-depth understanding of the methodological innovations and problems. A 5 page
summary/review of the paper is required.
Following the discussion we will open a general discussion on the topic designated for that day.
Course Requirements: In addition to presenting a paper as a team, there be a final in class examination
on the last day of class. This exam may include a paper review (the paper will be given to you a little bit
in advance). The exam will be an individual effort on your part. You will be graded on your team
presentation (30 %) and the final exam (70%).
Office Hours: By Appointment
1
Background Material:
Although the course material is primarily based on journal articles, the following books should prove
useful reference.
1. Beaver, Financial Reporting: An Accounting Revolution, 3rd edition, Prentice-Hall: 1998.
2. Campbell, Lo, MacKinlay, The Econometrics of Financial Markets, Princeton: 1997.
3. Copeland, T.E., and J.F. Weston, Financial Theory and Corporate Policy, Addison-Wesley
Publishing Company, 2005.
4. Huang C.F., and R.H. Litzenberger, Foundations for Financial Economics, Prentice Hall. 1988.
5. Keiso, Weygandt, Intermediate Financial Accounting, 11th Edition, Wiley:2004.
6. Pennacchi, George, Asset Pricing, Pearson Publishing, 2008.
7. Scott, Financial Accounting Theory, Prentice-Hall:1997
8. Watts and Zimmerman, Positive Accounting Theory, Prentice-Hall: 1986
9. White, Sondhi and Fried, The Analysis and Use of Financial Statements, 2nd edition, Wiley:
1997.
Also, the semi-academic journal Accounting Horizons and will often have timely discussions and
reviews of the issues and topics listed in this syllabus, especially if the issue is under current
discussion by standard setters. These discussions and papers are not referenced in this syllabus.
Journals (some of the common ones):
AH-Accounting Horizons
AER- American Economic Review
CAR- Contemporary Accounting Research
Econometrica
IJF- International Journal of Forecasting
JAAF- Journal of Accounting, Auditing & Finance
JAE- Journal of Accounting & Economics
JAR-Journal of Accounting Research
JBFA- Journal of Business Finance and Accounting
JEL- Journal of Economic Literature
JF- Journal of Finance
JFE- Journal of Financial Economics
JES- Journal of Economic Surveys
JET- Journal of Economic Theory
QJBE-Quarterly Journal of Business and Economics
RAST- Review of Accounting Studies
RQFA- Review of Quantitative Finance and Accounting
TAR- The Accounting Review
2
A Partial List of Important Topics and Papers
1. Market Efficiency
Fama, "Efficient Capital Markets: A Review of Theory and Empirical Work", JF (1970).
Fama, "Efficient Capital Markets: II", JF (1991).
LeRoy, "Efficient Capital Markets and Martingales", JEL (1989).
Beaver and Demski, "The Nature of Income Measurement", TAR (Jan., 1979).
2. Capital Market Research-General Background
Lev, "On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two
Decades of Empirical Research", JAR (Supp., 1989).
Kothari, "Capital Markets Research in Accounting", JAE (Sept., 2001).
Lee, "Market Efficiency and Accounting Research: A Discussion of 'Capital Market Research in
Accounting'", JAE (Sept., 2001).
Beaver, "Perspectives on Recent Capital Market Research", TAR (April, 2002).
3. Cost of Capital
Botosan, “Disclosure Level and Cost of Equity Capital”, TAR (July, 1997).
Botosan and Plumlee, "A Re-Examination of Disclosure Level and the Expected Cost of Equity
Capital", JAR (March, 2002).
Gebhardt, Lee and Swaminathan, "Toward an Implied Cost of Capital", JAR (June, 2001).
Easton, Taylor, Shroff and Sougiannis, "Using Forecasts of Earnings to Simultaneously Estimate Growth
and the Rate of Return on Equity Investment", JAR (June, 2002).
3
Intangibles
Amir, E, and B. Lev, 1995, Value-relevance of nonfinancial information: The wireless communications
industry, Journal of Accounting and Economics, “Conference on Contemporary Financial Reporting
Issues”, (October): 1-42.
Lev and Souggiannis, “The Capitalization, Amortization, and Value-Relevance of R&D”, JAE
(February, 1996).
Aboody and Lev, “The Value-Relevance of Intangibles: The Case of Software Capitalization”, JAR
(Supplement, 1998).
Barth, Clement, Foster, and Kasznik, “Brand Values and Capital Market Valuation”, RAST (1998).
Barth and Clinch. "Revalued Financial, Tangible, and Intangible Assets: Associations with Share Prices
and Non-Market-Based Value Estimates", JAR (Supp,1998).
Barth, Kasznik and McNichols, "Analyst Coverage and Intangible Assets", JAR (June, 2001).
4. Discretionary Disclosure-Theory
Verrecchia, "Discretionary Disclosure", JAE (December, 1983).
Verrecchia, "Information Quality and Discretionary Disclosure", JAE (1990).
Background Readings:
Verrecchia, "Essays on Disclosure", JAE (Dec., 2001).
Dye, “An Evaluation of “Essays on Disclosure” and the Disclosure Literature in Accounting”, JAE
(Dec., 2001).
5. Discretionary Disclosure-Empirical Results
Lang and Lundholm, “Cross-sectional Determinants of Analysts Ratings of Corporate Disclosures”, JAR
(Autumn, 1993)
Scott, “Incentives and Disincentives for Financial Disclosure: Voluntary Disclosure of Defined Benefit
Plan Information by Canadian Firms”, TAR (Jan., 1994).
4
Frankel, McNichols and Wilson, "Discretionary Disclosure and External Financing", TAR (Jan., 1995).
Skinner, "Earnings Disclosures And Stockholder Lawsuits", JAE (Nov, 1997).
Schrand and Walther, "Strategic Benchmarks In Earnings Announcements: The Selective Disclosure Of
Prior-Period Earnings Components", TAR (April, 2000).
Baginski, Hassell and Kimbrough, "The Effect of Legal Environment on Voluntary Disclosure: Evidence
from Management Earnings Forecasts Issued in U.S. and Canadian Markets", TAR (Jan., 2002).
Lundholm and Myers, "Bringing the Future Forward: The Effect of Disclosure on The Returns-Earnings
Relation", JAR (June, 2002).
Johnson, Kasznik and Nelson, "The Impact Of Securities Litigation Reform On The Disclosure Of
Forward-Looking Information By High Technology Firms", JAR (Sept., 2001).
Francis, Schipper and Vincent. "Expanded Disclosures and the Increased Usefulness of Earnings
Announcements", TAR (July, 2002).
Kasznik, "On The Association Between Voluntary Disclosure and Earnings Management", JAR (Spring.,
1999).
Background Readings:
Healy and Palepu., "Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review
of the Empirical Disclosure Literature", JAE (Sept., 2001).
Core, "A Review of the Empirical Dislosure Literature: Discussion," JAE (Sept. 2001).
6. Derivatives Disclosures
Schrand, “The Association between Stock-Price Interest Rate Sensitivity and Disclosures about
Derivative Instruments”, TAR (January, 1997).
Venkatachalem, “Value-Relevance of Banks Derivatives Disclosures”, JAE (May, 1977).
Engle, Erickson and Maydew, "Debt-Equity Hybrid Securities", JAR (Autumn, 1999).
Wong, "The Association Between SFAS No. 119 Derivatives Disclosures And The Foreign
Exchange Risk Exposure Of Manufacturing Firms", JAR (Autumn, 2000).
Aboody and Kasznik, "CEO Stock Option Awards and the Timing Of Corporate Voluntary
5
Disclosures,", JAE (Feb., 2000)
7. Cash Flows and Accruals
Rayburn, “The Association of Operating Cash Flows and Accruals with Security Returns”, JAR
(Supplement, 1986).
P. Wilson, “The Relative Information Content of Accruals and Cash Flows: Combined Evidence at the
Earnings Announcement and Annual Report Release Date”, JAR (Supp., 1986).
Dechow, “Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of
Accounting Accruals”, JAE (July, 1994).
Subramanyam, "The Pricing of Discretionary Accruals", JAE (Aug-Dec., 1996).
Sloan, “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings”,
TAR (July, 1996).
Barth, Beaver, Hand and Landsman, "Accruals, Cash Flows, and Equity Values", RAST (Dec., 1999).
Sloan, "Accruals, Cash Flows, And Equity Values: Comment,", RAST (Dec., 1999).
Pfeiffer, and Elgers, "Controlling For Lagged Stock Price Responses In Pricing Regressions: An
Application To The Pricing Of Cash Flows And Accruals", JAR (Spring, 1999).
Barth, Cram and Nelson, "Accruals and The Prediction of Future Cash Flows", TAR (Jan., 2001).
Xie, "The Mispricing of Abnormal Accruals", TAR (July, 2001).
Hribar and Collins, "Errors In Estimating Accruals: Implications For Empirical Research", JAR (March,
2002).
Livnat, J. and R.M. Mendenhall, Comparing the post-announcement drift for surprises calculated from
analyst and time series forecast, Journal of Accounting Research, 2006, (March): 44(1), 177-205.
8. Earnings Manipulation
Accrual Based Earnings Manipulation
Main Readings:
McNichols and Wilson, "Evidence of Earnings Management from the Provision for Bad Debts", JAR
(1988).
6
Jones,” Earnings Management During Import Relief Investigations”, JAR (Autumn, 1991).
Dechow, Sloan, and Sweeney, “Detecting Earnings Management”, TAR (April, 1995)
Dechow, Sloan, and Sweeney, "Causes And Consequences Of Earnings Manipulation: An Analysis Of
Firms' Subject To Enforcement Actions By The SEC", CAR (Spring,1996).
Beaver and Engel, “Discretionary Behavior with Respect to Allowance for Loan Losses and the Behavior
of Security Prices”, JAE (May, 1997)
DeFond and Park, “Smoothing Income in Anticipation of Future Earnings” JAE (July, 1997).
Burgstahler, and Dichev, "Earnings Management to Avoid Earnings Decreases and Losses", JAE (Dec.,
1997).
Gramlich, McAnally and Thomas, "Balance Sheet Management: The Case of Short-Term Obligations
Reclassified as Long-Term Debt", JAR (Sept., 2001).
Maydew, "Tax-Induced Earnings Management by Firms with Net Operating Losses", JAR (Spring,
1997).
Shivakumar, "Do Firms Mislead Investors by Overstating Earnings before Seasoned Equity Offerings”,
JAE (June, 2000).
Collins and Hribar. "Earnings-Based and Accrual-Based Market Anomalies: One Effect or Two?", JAE
(Feb., 2000).
Beneish, and Vargus. "Insider Trading, Earnings Quality, and Accrual Mispricing", TAR (Oct., 2002).
Background Readings:
Barnea, Ronen and Sadan, "Classificatory Smoothing of Income with Extraordinary Items", TAR
(January, 1976).
Schipper, “Commentary on Earnings Management”, AH (December 1989).
More Earnings Manipulation
Main Readings:
Hand, "Did Firms Undertake Debt-Equity Swaps for An Accounting Paper Profit or True Financial
Gain?”, TAR (October, 1989).
7
Bartov, "The Timing of Asset Sales and Earnings Manipulation", TAR (October, 1993).
DeFond and Jiambalvo, "Debt Covenant Violation and Manipulation of Accruals", JAE (January, 1994).
Barton, "Does The Use of Financial Derivatives Affect Earnings Management Decision?", TAR
(Jan., 2001).
9. Firm and Market Risk
Beaver, Kettler, and Scholes, "The Association between Market Determined and Accounting Determined
Risk Measures", TAR (October, 1970).
Ryan, "A Survey Of Research Relating Accounting Numbers to Systematic Equity Risk, with
Implications for Risk Disclosure and Future Research", AH (June, 1997).
Guay, "The Impact of Derivatives on Firm Risk: An Empirical Examination of New Derivative
Users," JAE (Jan., 1999).
Ely, "Operating Lease Accounting and the Market's Assessment of Equity Risk", JAR (Autumn,
1995).
10. Compensation
Antle and Smith, "An Empirical Evaluation of the Relative Performance Evaluation of Corporate
Executives", JAR (1986).
Ely,"Interindustry Differences in the Relation between Compensation and Firm Performance
Variables”, JAR (1991).
Sloan, "Accounting Earnings and Top Executive Compensation", JAE (1993).
Dechow, Hutton and Sloan. "Economic Consequences of Accounting for Stock-Based
Compensation", JAR (Supp, 1996).
Aboody, "Market Valuation of Employee Stock Options," JAE (Aug-Dec., 1996).
Baber, Janakiraman and Kang, "Investment Opportunities and the Structure of Executive
Compensation", JAE, (June, 1996)
Huddart and Lang. "Employee Stock Option Exercises: An Empirical Analysis", JAE (1996).
Rajgopal and Shevlin, Empirical Evidence on the Relation between Stock Option Compensation and
Risk Taking”, JAE (2002).
8
Marquardt, "The Cost of Employee Stock Option Grants: An Empirical Analysis", JAR (Sept. 2002).
11. Corporate Governance and Accounting
Beasley, "An Empirical Analysis of the Relation between the Board of Director Composition and
Financial Statement Fraud", TAR (Oct., 1996).
Bushman and Smith, "Financial Accounting Information and Corporate Governance", JAE (Dec.,
2001).
Sloan, "Financial Accounting And Corporate Governance: A Discussion", JAE (Dec., 2001).
Klein, "Audit Committee, Board of Director Characteristics, and Earnings Management", JAE
(August, 2002).
9