HASKAYNE SCHOOL OF BUSINESS, UNIVERSITY OF CALGARY AND
THE MERVES CENTER FOR ACCOUNTING AND INFORMATION TECHNOLOGY
FOX SCHOOL OF BUSINESS, TEMPLE UNIVERSITY
Present the
2015 Conference on Convergence of Financial and Managerial Accounting Research
Banff, Alberta Canada
June 14-17
Sunday, June 14
Welcome Reception (7:00 to 9:00 p.m., Ivor Petrak Room)
Monday, June 15
Inauguration (8:30 to 9:15 a.m., Alberta Room)
Welcome and Introduction
Jim Dewald, Dean of the Haskayne School of Business
The Importance of Accounting to Business
Richard F. Haskayne, OC, AOE, FCA
Plenary Session 1 (9:15 a.m. to 10:45 a.m., Alberta Room)
Industry Panel on “The Strategic Role of the CFO”
Steve Bower, Board member and Chair of the Audit & Risk Committee,
Long View Systems; Board member, Invest Toronto
Sherri Brillon, Executive VP and CFO of Encana Corporation
Cameron John, VP and CFO of Di-Corp
Meike Wielebski, CFO of Alberta Tubular Products Ltd.
Steve Wilson, former Executive VP and CFO of Shaw Communications
Plenary Session 2 (11:00 a.m. to 12:30 p.m., Alberta Room)
Conference Theme: Convergence of Financial and Managerial Accounting Research
Rajiv Banker, Temple University
The effect of office-level factors on audit quality
William Floyd, Stanford University
Maureen McNichols, Stanford University
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Patricia C. O’Brien, University of Waterloo
Rimmy Tomy, Stanford University
We study factors that affect differential audit quality across offices within Big 4 audit firms. Our
proposed contributions to the audit quality literature are: first, to focus on the audit office as the unit of
analysis; second, to provide a novel and strong control for the audit risk inherent in an office’s client
portfolio; and third, to focus on factors that can be controlled by regulators or audit firms, leading to
policy implications from our work. We separate factors that relate to auditors’ competence and
expertise from those that relate to auditors’ willingness to report unfavorable audit findings. We find
that audit quality, as measured by the rate of restatements, varies significantly across audit offices. We
find that controlling for client risk substantially reduces the variation in audit quality, but that variation
in audit quality across offices remains. We document that the frequency of going concern opinions also
varies significantly across audit offices, and that controls for client risk significantly reduce this variation,
but that significant office-level variation in the willingness to issue going concern opinions remains.
Parallel Sessions 1 (1:30 to 3:30 p.m.)
Themed Session 1A: Analysts (Alberta Room)
Information Discovery by Analysts
Daniel Naveen, Drexel University
Sangmook Lee, Penn State University
Lalitha Naveen, Temple University
Our contribution is to provide direct evidence that analysts engage in costly discovery of private
information, and investors value this discovery. The innovation in our paper is to read over 3,700 analyst
reports from Investext and explicitly identify whether the report contains discovery or interpretation.
Analysts discover new information by talking to management sources (through personal meetings,
investor meetings, and conference calls) or non-management sources (such as surveys or channel
checks, and industry contacts). We find that information discovery is prevalent in 17% of the reports. For
reports containing discovery, the average cumulative abnormal returns (over the three-day window
surrounding the report issuance) are statistically and economically significant (5.9% for upgrades and –
8.6% for downgrades). The cumulative abnormal returns are higher for reports containing discovery
relative to those containing interpretation. We find that economic determinants predict whether a
report will contain discovery. Discovery from management sources is more likely for reports in the
period prior to Regulation FD and for reports by optimistic analysts. Discovery from non-management
sources is more likely for reports written in the period following Regulation FD, for those written by AllStar analysts, for firms that have high information asymmetry, and firms where the competition among
analysts is higher.
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Do Short Sellers Discipline Financial Analysts? Evidence from a Quasi-natural Experiment
Yun Ke, Brock University
Kin Lo, University of British Columbia
Jinfei Sheng, University of British Columbia
Jenny Li Zhang, University of British Columbia
This paper examines the impact of short sellers on financial analysts’ forecast bias. Exploiting the SEC’s
Regulation SHO as an exogenous shock to the cost of short-selling, we find that short sellers can
discipline financial analysts and reduce their forecast bias. The disciplining effect is more pronounced
when firms have moderate levels of analyst coverage, high levels of institutional ownership, and greater
earnings management. We conclude that short sellers positively contribute to price and market
efficiency by reducing analysts’ forecast bias.
Do Analysts Read the News?
Alan Guoming Huang, University of Waterloo
Kaleab Y. Mamo, University of Waterloo
We examine whether and how the general supply of firm information via media news sources influences
equity analysts’ earnings forecast revisions. Combining large databases of U.S. firm specific news stories
and individual sell-side analysts’ earnings forecast revisions during 2000 to 2010, we find that equity
analysts’ forecast revisions are significantly influenced by the tone of the news. The relation between
news and forecast revision is stronger for news that contains information regarding firm fundamentals.
Media reinforces analysts’ revision decisions when firm information asymmetry is larger and when
analysts face stronger conflicts of interest. Despite analysts’ reaction to news, they generally respond to
news with a low speed; and consequently, markets react less favorably when analysts’ revisions are
based on stale news.
Asymmetric Cost Behavior and Future Analyst Forecasts, Earnings Surprise and Abnormal Returns
Rajiv Banker, Temple University
Han-Up Park, Temple University
This study examines the implications of asymmetric cost behavior following a sales decline on future
analyst forecasts and firm performance. We construct model-based earnings forecast that captures
sticky cost behavior and compare it to analysts' consensus forecast. We find that model-based earnings
forecasts have incremental information relative to analysts' initial consensus forecast and also their
revised annual earnings forecast just prior to actual earnings announcement. We find future earnings
surprises and abnormal returns are related to the difference between model-based earnings forecast
and analysts' initial consensus forecast. We document that abnormal returns and analysts' forecast
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revisions during subsequent quarters are concentrated in the pre-announcement window, suggesting
that new information that can be predicted as an implication of cost behavior arrives in the market.
Themed Session 1B – Agency and Contracting (New Brunswick Room)
Uncertainty and Debt Covenants
Peter Demerjian, University of Washington
I examine the use of financial covenants when contracting for debt under uncertainty. Uncertainty, in
the context of this study, is a lack of information about the borrower’s future value. Using an incomplete
contracting framework, I examine the implications of ex ante uncertainty that is resolved by information
received following loan initiation but prior to maturity. I argue that both borrower and creditor will be
hesitant to contract under such circumstances. I contend that financial covenants, by providing an
explicit contractual mechanism to facilitate ex post renegotiation, mitigate the contracting friction
caused by uncertainty and incomplete information. Examining a large sample of private loan contracts, I
find that greater levels of uncertainty are associated with greater intensity of covenant use.
The Value of Information about Agent’s Ability in the Presence of Adverse Selection
Rajiv D. Banker, Temple University
Shaopeng Li, Temple University
Lucas Threinen, Temple University
This paper explores the role of information obtained by a principal about an agent’s type (or ‘ability’) in
the simultaneous presence of moral hazard and adverse selection. We derive the expected value of
information, and we show that, because the principal faces a tradeoff in trying simultaneously to deal
with two types of information problems, the value depends on the variability of output and the agent’s
degree of risk-aversion, and on the precision of the information and its sensitivity to the agent’s type.
We also show that, although its value depends on the severity of the adverse selection problem,
information is not always more valuable when the adverse selection problem is more severe. Further,
we show that, for a wide variety of common distributions, information about the agent’s ability can be
linearly aggregated without loss, and we prove that the relative weights placed on different information
in the optimal contract design are proportional to the precision and the sensitivity of the information–
two of the same factors that determine the value of information. We find that, in contrast to a moral
hazard setting, the optimal relative weights will be identical across some groups of agencies.
Contractual Incentives and Career Concerns
Peter O. Christensen, Aarhus University
Hans Frimor, Copenhagen Business School
Florin Sabac, University of Alberta
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In a multi-period model of optimal contracting and career concerns, we show career concerns have real
incentive effects only when long-term contracts are not feasible, or the noncontractible information is
not effectively contractible through renegotiation of long-term contracts. In general, long-term
contracting with renegotiation dominates short-term contracting if there is non-contractible information
by allowing effective contracting on an aggregated statistic of the non-contractible information. In some
cases, this partial control over the incentives arising from non-contractible information is sufficient to
undo the effects of career concerns. Thus, career concerns, explicit incentive contracts, and noncontractible information need to be jointly considered.
The Impact of CEO Ability on Information Asymmetry
Bok Baik, Seoul National University
Paul Brockman, Lehigh University
David B. Farber, University of Texas at El Paso
Sam Lee, Iowa State University
Understanding the impact of corporate financial disclosures on information asymmetry is a
fundamentally important issue. A deep literature exists on understanding determinants of financial
disclosure quality and one potentially important determinant that has recently emerged is CEO ability.
Conceptually, higher ability CEOs have a better understanding of their firms’ business (Mahoney 1995;
Coff 1997; Demerjian et al. 2012) and use their firms’ resources more productively (Holcomb et al.
2009). Recognizing the importance of managerial ability, several studies have examined corporate
disclosure choices across levels of CEO ability (Francis et al. 2008; Malmendier and Tate 2009; Baik et al.
2011; Demerjian et al. 2013). We argue, however, that our understanding about the relation between
CEO ability and information asymmetry remains incomplete. While some studies provide evidence
consistent with CEO ability enhancing financial disclosures, thereby suggesting lower information
asymmetry (Baik et al. 2011; Demerjian et al. 2013), other studies suggest that CEO ability increases
information asymmetry (Bebchuk et al. 2002; Malmendier and Tate 2009; Baranchuk et al. 2011).
Themed Session 1C: Labor and Cost Management (Frontenac Room)
The Effect of Leverage on Wages: Evidence from Korea
Curtis Hall, Drexel University
Boochun Jung, University of Hawaii at Manoa
Duri Park, Drexel University
Ilhang Shin, Yonsei University
We examine the effect of leverage on wages using comprehensive wage data form Korea. Wage
determination is important to the accounting literature because it represents the price component of
labor costs. However, studies on wages are quite limited due to unavailability of data in U.S. By contrast,
all publicly traded firms in Korea are required to report wage information. Prior literature has developed
the theories of debt discipline and risk compensation, which predict opposing effects on the relation
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between leverage and wages. Consistent with the debt discipline effect dominating the effect of risk
compensation in Korea, we find that leverage is negatively related to wages. We also find that the
negative relation between leverage and wages is strongest for firms under financial distress and firms
with lower labor union membership. This demonstrates that the bargaining power of labor relative to
management affects the extent to which debt disciplines wage determination in Korea.
Do Higher Wages Pay for Themselves? An Intra-firm Test of the Effect of Wages on Employee
Performance
James Hesford, Ecole hoteliere de Lausanne
Nicolas Mangin, Ecole hoteliere de Lausanne
Mina Pizzini, Texas State University
This study uses field data from 490 hotels in a single lodging chain to investigate three questions related
to the efficiency-wage hypothesis. (1) Does paying workers higher relative wages ex ante result in better
ex post actual performance, either by motivating workers to exert greater effort or by attracting higher
quality workers? (2) Is the magnitude of the relation between performance and wages the same when
workers are overpaid versus underpaid? (3) Do the overall benefits of paying higher wages outweigh the
costs? The data enable us to perform powerful tests of wage performance relations because exogenous
factors that likely affect employee behavior are standardized across hotels. Our results suggest that
actual performance (measured by customer satisfaction, revenues, and profit) is increasing in the
relative wage, and that higher performance is the result, and not the cause, of higher wages. We find
that the magnitude of the wage performance relation is at least as large for workers who are overpaid
compared to those who are underpaid. This result, which differs from the results of experimental
studies, suggests that overpaid workers do not rationalize away wage premiums. Finally, our results
indicate that increases in wages do, in fact, pay for themselves. A $1,000 increase in the general
manager’s relative wage results in a $1,080 increase in profit for the mean hotel. This research
contributes to a series of studies that investigates the extent to which wages influence performance
(e.g., Levine, 1992; Fehr and Falk, 1999; Hannan, Kagal, and Moser, 2002; Hannan, 2005), and whether
the marginal benefit of wage increases justifies their costs (Levin, 1993).
Cost Management, a Key Aspect in Achieving the Competitiveness of the Colombian Manufacturing
Sector
Maria Victoria Uribe Bohorquez, Pontificia Universidad Javeriana
In recent years, manufacturing companies have found themselves with problems that have affected
their growth, profitability, management, outcomes, their probability of survival and, at the end its
competitiveness. The Colombian government created an agenda for achieving national competitiveness,
taking into account the importance of the industry in the national economy, this agenda has been done
specifically for this sector. That is why it is necessary to demonstrate how cost management is a key and
essential element in achieving competitiveness and fulfilling the agenda generated by the National
Government. In order to comply that purpose this paper is organized into three main sections, the first
contains a concise description of the industrial sector, its composition, characteristics and results; the
second is a brief theoretical framework for understanding the competitiveness, determining factors to
achieve it, a comparison between Colombian competitiveness index and other countries will be carried
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out and the main aspects of the competitiveness agenda will be enunciated for Colombian industry, in
the third section, by way of conclusion, explains how cost management is the key to achieving the
sector's competitiveness that could be useful for to the costs study of the manufacturing companies.
Achieving Career, Social, and Role Model Objectives in a Mentorship Program
Irene M. Herremans, University of Calgary
Norm Althouse, University of Calgary
Frances Donahue, University of Calgary
Dongning Yu, University of Calgary
Rosa Hendijani, University of Calgary
Mentoring is a process where a more experienced professional (the mentor) works with a less
experienced individual (the mentee) to share experience, expertise, and insights. Jacobi (1991) suggests
that the most common theories providing insight into the mentor-mentee relationship are the following:
social learning theory (for example, Bandura, 1977; Astin 1977, 1984); concept of involvement (Astin,
1977); concept of integration (Tint, 1975); social support theory (Cobb, 1976); and development
theories (Levinson et al., 1978; Sheeby, 1974; Thomas et al, 1982). According to Jacobi (1991) social
learning theory describes the “role of modeling in learning,” but it fails to explain aspects of the
mentoring process that do not involve learning per se, especially the pyschosocial and, to a lesser
extent, the role-model aspects of mentoring. Social support theory emphasizes reduction of stress
through supportive relationships, and development theories focus more on adult development than
student development (Jacobi, 1991). Because theories used in the past research do not provide a good
fit with the specific objectives of this research, we turn to the theory of planned behavior, described as
follows: “Intentions to perform behaviors of different kinds can be predicted with high accuracy from
attitudes toward the behavior, subjective norms, and perceived behavioral control; and these
intentions…account for considerable variance in actual behavior” (Ajzen, 1991, p. 179). To achieve
outcomes/benefits from the relationship in the three areas of career development, psychosocial
support, and role modeling, a good fit or match is necessary between mentee and mentor (Bozeman
and Feeney, 2008). Even though a number of isolated characteristics have been studied in past menteementor research, our research organizes these characteristics using the model provided by the theory of
planned behavior. This theory is based on the assumption that the desired outcomes of the program will
be achieved if certain input characteristics exist for both the mentor and mentee. Those characteristics
are the following: 1) an attitude that the mentorship will add value; 2) norms (friends or acquaintances)
that influence the participant’s behavior; and 3) mentee’s and mentor’s control of characteristics or
variables inherent in the development of the relationship, such as the availability information,
scheduling availability, trust in the mentor, amount of time required, and personality characteristics.
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Parallel Sessions 2 (3:45 to 5:45 p.m.)
Themed Session 2A: Research and Development and Innovation (Alberta Room)
Corporate Innovative Efficiency: Evidence of Effects on the Cost of Credit
Paul Griffin, University of California, Davis
Hyun A Hong, University of California
Ji Woo Ryou, University of Texas, Pan American
This study shows that corporate innovative efficiency (IE) measures based on patent approvals and
patent citations in relation to research and development expenditures associate strongly and negatively
with the future cost of credit. We use S&P credit ratings over the next five years to proxy for the future
cost of credit. Credit agencies’ limited awareness of the future payoffs from IE, competition intensity in
innovative firms’ product markets, the quality of accounting information, and a proxy for managerial
ability help explain the lagged relation. This lagged response to IE information means that credit rating
agencies in the short term impose a higher borrowing cost on innovative firms than their performance
and risk characteristics would justify.
Real Activities Management during Initial Public Offerings: Evidence from R&D Expenditures
Tatiana Fedyk, University of San Francisco
Natalya Khimich, Drexel University
In this paper we demonstrate that an aggregate real earnings management measure used in prior
literature leads to conflicting results in the initial public offering (IPO) setting. To present evidence of
real activities management during IPOs, we study a specific component of real activities management –
R&D expenditures. We find both types of R&D management – R&D underinvestment and
overinvestment – with R&D overinvestment predominating. We show that management decision varies
systematically with firms’ cross sectional characteristics: 1) firms that are at the growth stage, nonprofitable, or belong to science driven industries are more likely to overinvest in R&D; 2) firms with
reduced accounting flexibility and firms that would report losses in the absence of downward R&D
management are more likely to underinvest in R&D. We further demonstrate that both under- and
overinvesting firms exhibit future underperformance. Our findings that overinvesting in R&D firms
experience higher abnormal trading volume around lockup expiration date point to managerial
opportunism as a dominating motive for overinvestment.
CEO Sensation Seeking and Corporate Innovation
Jayanthi Sunder, University of Arizona
Shyam V. Sunder, University of Arizona
Jingjing Zhang, McGill University
We examine the role of managerial behavioral attributes in corporate innovation, focusing on sensation
seeking. Innovation requires risk taking and a desire for new experiences, attributes captured by
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sensation seeking behavior. We identify sensation seeking CEOs based on their revealed preference for
flying small aircraft in their personal life. Our evidence shows that sensation seeking CEOs are more
successful at innovation and more effective with innovation spending, controlling for CEO
overconfidence, pure risk-taking, general managerial ability, or an endogenous matching of CEOs to
firms. Additionally, governance structures that involve low direct monitoring allow such CEOs to be
effective.
Innovation Activities and Financial Performance
Mark Anderson, University of Calgary
Dmitri Byzalov, Temple University
Soonchul Hyun, University of Calgary
Rajiv Banker, Temple University
We investigate how innovation activities drive quality and financial performance. We consider both
product innovations, including development of new and improved products, and process innovations,
including development of new and improved processes. Following contingency theory, we examine
these relations separately for companies that follow a product leadership strategy and companies that
follow an operating excellence strategy. We test our hypotheses using survey data collected by
Statistics Canada for a broad cross-section of companies. For product leadership firms, both
development of new products and improvement of existing products lead to higher profit margins and
sales growth through improved product quality. Improvements in quality also lead to higher margins
and sales growth through higher productivity for these firms. For operating excellence firms, only
improvement of existing products leads to higher quality and such companies do not capture direct
gains from higher quality through improved margins or sales growth. Improvements in quality do
increase productivity leading to higher sales growth but not higher margins for these firms. New
processes negatively impact quality for both sets of firms.
Themed Session 2B: Operations and Performance (New Brunswick Room)
An Empirical Analysis of Performance Impacts from Conversion to Franchise Operations
James Hesford, Ecole hoteliere de Lausanne
Mina Pizzini, Texas State University
Gordon Potter, Cornell University
Franchising is an important form of organizational control. Possible benefits of franchising include its
ability to reduce agency costs that increase with costly monitoring, and to provide incentives for the use
of local information by onsite managers. However, these benefits may come at a cost, as franchisees
may reduce quality by choosing to free ride. While many studies have investigated the reasons for
franchising, few studies have documented the impacts of franchising on unit level operating
performance. Using time-series data from a number of lodging properties that were converted to
franchisee control from company control, this study documents performance impacts of franchising. The
analysis reveals that conversion to franchisee control results in a modest decline in revenues and an
immediate sharp decline in quality. The magnitude of revenue and quality declines are contingent on
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factors that proxy for the franchisor’s monitoring costs and the degree to which the outlet can benefit
from local decision-making authority.
Operating Leverage and Future Earnings
David Abbody, University of California, Los Angeles
Shai Levi, Tel Aviv University
Dan Weiss, Tel Aviv University
This study examines the impact of operating leverage, defined as the ratio between fixed and variable
costs, on future earnings. First, we find that high operating leverage has a longer impact on future
earnings than low operating leverage, primarily because of a slower cost-adjustment process. Second,
for firms with high operating leverage, a negative revenue shock has a larger negative impact on future
earnings than a positive revenue shock. That is, we document that high operating leverage induces an
asymmetric effect on future earnings, mainly driven by a slower cost-adjustment process on the
downside than on the upside. Examining the implications of high operating leverage, we find that firms
with high operating leverage hold low financial leverage and pay their executives more equity-based
compensation. Overall, our findings are an important addition to two streams of studies: operating
leverage and cost behavior.
The Impact of Investor Sentiment on Operating Expenditure – a Catering Perspective
Timo Gores, University of Cologne
Carsten Homburg, University of Cologne
Julia Nasev, University of Cologne
We test the impact of investor sentiment on operating expenditure drawing on the catering theory
which predicts that self-interested managers adjust their corporate policies to noise traders’
misperceptions in periods of high sentiment. Consistent with prior literature suggesting that noise
traders prefer high growth stocks, we find that managers increase spending related to R&D,
advertisement, SG&A and tend to hire more employees in response to high sentiment. Cross-sectional
analyses show that (1) catering increases as managers’ horizons decrease, (2) catering is more
pronounced for those firms that are more strongly affected by investor sentiment, and (3) catering
through SG&A resources increases for firms for which SG&A costs have higher value relevance. Building
on this finding, we examine whether earnings targets moderate catering tendencies. Our results suggest
that managers cater less in the presence of incentives to meet earnings targets, indicating a trade-off
between meeting investors’ real activity expectations vs. meeting investors’ financial performance
expectations.
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Restructuring for Global Success? Post-restructuring Performance of Local versus Geographicallydispersed Companies
Koren Jo, University of Texas at Dallas
Guang Ma, National University of Singapore
This study investigates the effects of the interaction between geographic dispersion and restructuring
on the post-restructuring performance of firms and the market reaction to the restructuring
announcement. Using propensity score matching and difference-in-difference approach to isolate the
effect of restructuring, we find that geographically dispersed firms perform worse than local firms from
restructuring in the post-restructuring periods, geographically dispersed firms have higher
overinvestment in post-restructuring periods than local firms, primarily overinvestment in R&D
expenditures. We also find that the market overreacts to local firms’ restructuring announcements and
underreacts to dispersed firms’ restructuring announcements. Our evidence suggests that
geographically dispersed firms have smaller or even insignificant performance improvement from
restructuring, while local firms have significantly larger performance improvement. The evidence is
inconsistent with the agency costs view of restructuring as theories predict more benefits would be
drawn from restructuring for firms with higher agency costs.
Themed Session 2C: Disclosure (Frontenac Room)
Disclosure of Management Accounting Information and Operational Efficiency: An Examination of
Same Store Sales Disclosures
Michael Kimbrough, University of Maryland
Hanna Lee, University of Maryland
MaryJane Rabier, McGill University
We empirically test Einhorn and Ziv's (2007) theoretical prediction that public disclosure can alter
managers‘ use of information internally. Specifically, we examine whether managers‘ choice to report
quarterly same store sales affects operational efficiency and financial performance as well as the quality
of a firm‘s information environment, as proxied by management and analyst forecast accuracy. After
correcting for endogeneity, we find that reporters have lower inventory turnover rates, higher LIFO
reserves, and higher abnormal inventory than non-reporters, indicating that reporters are less efficient
in managing inventory. We further find that reporters have lower long-term return on equity than nonreporters, suggesting that reporters‘ lower efficiency translates into worse financial performance.
Reporters also have less accurate management earnings forecasts than non-reporters consistent with
evidence provided by Goodman, Neamtiu, Shroff, and White (2014) that the quality of managers‘
internal resource allocation decisions is reflected in the quality of their externally released forecasts.
Finally, we find that same store sales reporting is associated with more accurate analyst sales forecasts
but less accurate analyst earnings forecasts. Our findings provide new evidence that public disclosure of
information can be costly to the firm by contributing to managers‘ biased use of that information.
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Verifiable Detail as a Valid Source of Disclosure Credibility in Non-Financial Strategy Disclosure
James N. Cannon, Iowa State University
Christine A. Denison, Iowa State University
This paper examines whether verifiable detail provides a valid source of credibility as defined by
believability and trustworthiness in non-financial voluntary disclosures. In an experimental study, we
find that customer retention strategy disclosures that include verifiable detail are perceived to be more
believable than disclosures that provide no detail. In an archival study, we find that firms with customer
retention strategy disclosures that include verifiable detail have ex post performance more consistent
with effective customer retention strategy than firms that disclose non-verifiable detail. We conclude
from this that firms that provide verifiable detail are more trustworthy than firms that provide nonverifiable detail. In contrast, we find no significant difference in ex post performance of firms that
provide disclosures with verifiable detail and that of firms that provide disclosures with no detail. In
combination, we infer that it is the verifiability of detail that provides credibility in non-financial
disclosure through its believability and trustworthiness.
Do Managers Withhold Bad News During Hedge Fund Interventions?
Inder K. Khurana, University of Missouri-Columbia
Yinghua Li, Arizona State University
Wei Wang, University of Missouri-Columbia
We examine the impact of hedge fund interventions on target firms’ voluntary disclosure choices. We
find that both the likelihood and the frequency of management earnings forecasts conveying bad news
decrease significantly following intervention by hedge fund activists. Bad news withholding is less
pronounced when hedge funds have longer holding periods, have relatively higher ownership in target
firms, and pursue a passive agenda. In contrast, managers are more likely to withhold bad news when
their firms are undervalued or financially distressed at the time of hedge fund intervention, have more
volatile operations, and have weak governance oversight. Moreover, CEOs approaching retirement
(longer-tenured CEOs) are more (less) likely to withhold bad news forecasts following hedge fund
intervention. Our results are consistent with hedge fund intervention inducing managers to strategically
withhold bad news to maintain control of the firm and protect their careers and reputation.
Do Compustat Financial Statement Data Articulate?
Ryan Casey, University of Denver
Feng Gao, University of Illinois at Chicago
Michael Kirschnheiter, University of Illinois at Chicago
Siyi Li, University of Illinois at Chicago
Shailendra Pandit, University of Illinois at Chicago
Using the Financial Statement Balancing Model (FSBM) from Compustat, we examine whether financial
statement data articulate for 10,681 U.S. non-financial firms for 24 years, a total of 92,951 firm years.
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We accomplish three research goals. First, we build the first formal model of financial statement
articulation, providing a benchmark for subsequent discussions of articulation. Second, we show how to
handle missing data to ensure articulation, by either filling in zeros or inferring the missing data using
other variables in the equations. Third, we produce modified variables that resolve exceptions in the
articulating equations, so that these variables form relations that are consistent across time and firms.
We then compare the “modified database” (MDB) using these updated variables with the original
Compustat data, and find significant differences in many commonly used financial variables, such as
Altman’s z-score. We believe that our MDB has the potential to help researchers increase sample size
and data quality in empirical studies.
Tuesday, June 16
Parallel Sessions 3 (8:15 to 10:15 a.m.)
Themed Session 3A: Financial Reporting and Misreporting (Alberta Room)
The Accrual Anomaly: Accrual Originations, Accrual Reversals, and Investor Learning
Tatiana Fedyk, University of San Francisco
Zvi Singer, McGill University
Theodore Sougiannis, University of Illinois
We test whether the earnings fixation hypothesis can fully explain the accrual anomaly. For this, we
develop and empirically validate a methodology for detecting accrual originations and their reversals.
We demonstrate that the earnings of both types of accruals are of low persistence, and therefore, both
types should be mispriced if investors naively fixate on earnings. However, pricing tests show that only
originating (but not reversing) accruals are mispriced, and that the mispricing ends by the time of their
reversal. These results are consistent with investors initially fixating on earnings, followed by gradual
learning and correction of the mispricing. We find that analysts’ earnings forecast revisions reflect the
differential implications of accrual originations and reversals for future earnings. Thus, the revisions are
likely one channel through which investors learn and correct the mispricing. We further demonstrate
that our findings can be useful for significantly improving the accrual-based trading strategy by ex-ante
detecting and removing accrual reversals from extreme accrual portfolios.
Earnings Management and Annual Report Readability
Kin Lo, University of British Columbia
Felipe Ramos, FUCAPE Business School
Rafael Rogo, University of British Columbia
We explore how the readability of annual reports varies with earnings management. Using the Fog Index
to measure readability (Li 2008), and focusing on the management discussion and analysis section of the
annual report (MD&A), we predict and find that firms that are most likely to have managed earnings to
beat the prior year’s earnings have MD&As that are more difficult to read. In addition, we find that
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readability has marginal but incremental power in predicting financial misstatements when added to the
F-Score model of Dechow et al. (2011)
Financial Statement Errors: Evidence from the Distributional Properties of Financial Statement
Numbers
Dan Amiram, Columbia University
Zahn Bozanic, The Ohio State University
Ethan Rouen, Columbia University
Motivated by methods used to evaluate the quality of empirical data, we create a novel firm-year
measure to estimate the level of error in financial statements. The measure, which has several
conceptual and statistical advantages over available alternatives, assesses the extent to which features
of the distribution of a firm’s financial statement numbers diverge from a theoretical distribution
posited by Benford’s Law. After providing intuition for the theory underlying the measure, we use
numerical methods to demonstrate that certain error types in financial statement numbers increase the
deviation from the theoretical distribution. We corroborate the numerical analysis with simulation
analysis that reveals that the introduction of errors to reported revenue also increases the deviation. We
then provide empirical evidence that the measure captures financial statement data quality. We first
show the measure’s association with commonly used measures of accruals-based earnings
management, earnings manipulation, and real activities earnings management. Next, we demonstrate
that i) the restated data of misstatement firms more closely conforms to Benford’s Law and ii) as
divergence from Benford’s Law increases, earnings persistence decreases after financial statement
disclosure. Finally, we show that our measure predicts material misstatements as identified by SEC
Accounting and Auditing Enforcement Releases (AAERs) and can be used as a leading indicator to
identify misstatements.
What Are You Saying? Using Topic to Detect Financial Misreporting
Nerissa C. Brown, University of Delaware
Richard Crowley, University of Illinois
W. Brooke Elliott, University of Illinois
Detection models of financial misreporting have evolved beyond basic quantitative or financial
measures to include textual or linguistic characteristics of firms’ disclosures. While these textual analysis
methods provide incremental power in identifying misreporting, they examine how content is being
disclosed as opposed to what is being disclosed. This study introduces a novel fraud-detection measure,
labeled as “topic,” that quantifies the thematic content of financial statements. We derive our measure
from a Bayesian topic modeling methodology called Latent Dirichlet Allocation (LDA). We then
demonstrate the incremental predictive power of our topic measure in detecting intentional financial
misreporting. We identify occurrences of financial misreporting using SEC enforcement actions (AAERs)
and restatements arising from intentional misapplications of GAAP (i.e., irregularities). We find strong
evidence that topic predicts intentional misreporting beyond financial and textual style characteristics.
Furthermore, our results indicate that the detection power of financial metrics is subsumed by our topic
measure in prediction models for both AAERs and restatements arising from irregularities.
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Themed Session 3B: Executive Pay and Performance (New Brunswick Room)
The Effect of Relative Performance Evaluation on Investment Efficiency and Firm Performance
Frances Tice, University of Colorado at Boulder
This study examines the effect of relative performance evaluation (RPE) on managers’ investment
decisions and firm performance. Principal-agent theory suggests that RPE use in CEO compensation
plans can improve incentive alignment when firm performance is affected by common shocks, thus
motivating managers to increase shareholder wealth. I test this theory using contract details explicitly
disclosed in proxy statements. I find that RPE firms are generally less likely to over- or underinvest than
non-RPE firms, consistent with RPE use improving incentive alignment. I also find some evidence that
RPE firms have higher total shareholder return (TSR) than similar non-RPE firms when contracting
specifically on TSR. In addition, the positive effects of RPE on investment efficiency and firm
performance increase with the extent of common risk for firm and peer performance. Together, these
results suggest that RPE use in CEO compensation plans reduces agency costs and improves incentive
alignment.
Product Market Peers and Relative Performance Evaluation
Sudarshan Jayaraman, University of Rochester
Todd Milbourn, Washington University in St. Louis
Hojun Seo, Washington University in St. Louis
We examine Relative Performance Evaluation (RPE) theory in CEO compensation contracts by identifying
peer firms based on textual analysis of firms’ product descriptions in 10- K filings (Hoberg and Phillips,
2013). Holmstrom (1982) predicts that a principal filters out common external shocks in evaluating
performance of a risk-averse agent, and the extent to which firms filter common external shocks strictly
increases in the number of the agent’s peers. Consistent with these predictions, we find that firms filter
out common external shocks in evaluating CEOs, and the extent of filtering out increases with the
number of product market peers. We also find that firms completely filter out common external shocks
if the firm has a sufficiently large number of product market peers. However, we do not find consistent
evidence of RPE using pre-defined industry classifications such as SIC. Overall, our results highlight the
importance of peer group composition in empirical RPE tests and provide strong evidence consistent
with optimal contracting theory.
The Use of Unconventional Earnings in Performance Evaluation
Asher Curtis, University of Washington
Valerie Li, University of Washington
Paige Patrick, University of Washington
We document that the use of unconventional earnings in incentive contracting is widespread.
Specifically, we examine the similarities and differences between earnings used in incentive contracting
15
with GAAP earnings and the non-GAAP measures used in earnings announcements. We investigate
whether the use of unconventional earnings measures in incentive contracting is more consistent with
aligning incentives between shareholders and managers or with managerial power over compensation.
Our results are more consistent with the use of unconventional earnings measures improving incentive
alignment between shareholders and managers than with managerial power over compensation.
The Gender Pay Gap among Top Executives: The Case of CFOs
Mark Anderson, University of Calgary
Rajiv Banker, Temple University
Rong Huang, Baruch College
Jiangxia Liu, Gannon University
Previous research indicates that women face different obstacles and follow different paths from men to
corporate leadership positions. But research investigating whether women executives are underpaid
follows a human capital paradigm that considers whether pay differences are explained by factors that
apply to men and women equally such as firm size and years of experience. A residual difference from
this type of analysis is then interpreted as “weak” evidence of a social bias in pay because it cannot
discriminate between social conditions and human capital factors not accounted for in the model. We
conduct a stronger “positive” test that tests whether differences in pay are related to social conditions
that affect men and women differently. We also consider the possibility that women executives contribute
differently to firm performance than men executives. We find that the pay gap between women and men
executives diminishes with our proxy for social conditions more favorable to women leadership. We also
find that companies with top-five executive teams that include a woman executive significantly
outperform companies without a woman in their top-five executive team, indicating that women
executives contribute differently to firm performance. About one-third of women top-five executives are
chief financial officers (CFOs). We repeat our analysis for CFOs only and find that the pay gap for women
CFOs diminishes with our proxy for social conditions and that companies with a female CFO outperform a
matched sample of companies with all male top five executives.
Plenary Session 3 (10:30 a.m. to 12:00 p.m., Alberta Room)
Determinants of Audit Engagement Profitability
Kris Hoang, Tulane University
Karim Jamal, University of Alberta
Hun-Tong Tan, Nanyang Technological University
In this study, we examine the determinants of audit engagement realization (profitability) rates. We
obtain client data from the national office of a Big 4 accounting firm in Canada to examine the role of
the firm’s assignment of expert personnel (identified by the national office) and its delivery of intangible
client service dimensions such as communication, customization and responsiveness (obtained from
survey responses by client management and audit committee chairs). Controlling for client
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characteristics and financial reporting quality, we find that realization rates are higher when the firm
assigns a national industry expert as the lead senior audit manager (although not the audit partner) and
when clients give higher satisfaction ratings for intangible service attributes. We discuss implications for
client satisfaction, profitability and competition in audit markets.
Fundamental Analysis: Combining Financial Statement Analysis and Intrinsic Value Approaches
Kevin Li, University of Toronto
Partha Mohanram, University of Toronto
Using cross-sectional forecasts, we compare fundamental analysis strategies based on financial
statement analysis, such as FSCORE from Piotroski (2000) and GSCORE from Mohanram (2005), with
strategies based on intrinsic value, such as the V/P ratio from Frankel and Lee (1998) and the PEG ratio.
We find that all four strategies generate significant hedge returns. Combining financial statement
analysis approaches (FSCORE or GSCORE) with intrinsic value approaches (V/P or PEG) leads to a
significant increase in hedge returns that holds for a variety of partitions, persists over time, and is
robust after controlling for risk factors and portfolio size. The results suggest a new and powerful
method to conduct fundamental analysis and have important implications for academic research in
fundamental analysis as well as for practitioners in their elusive quest for alpha generating strategies.
Banff Excursion (12:30 to 10:00 p.m.)
Wednesday, June 17
Parallel Sessions 4 (8:15 to 10:15 a.m.)
Themed Session 4A: Earnings Quality and Accruals (Alberta Room)
Earnings Quality Associations with Firm Fundamentals and Future Growth
Grace Hsu, University of Queensland
Adilah Zafirah Mohd Suberi, University of Queensland
Anne Wyatt, University of Queensland
This study provides evidence documenting ‘earnings quality’ links to firm fundamentals and conditional
associations with future growth that may assist in the interpretation of commonly used measures of
earnings quality. Our study is motivated by concerns that earnings quality research does not distinguish
economic fundamentals effects impounded in earnings from the specific effects of interest to the
researcher (e.g., Dechow et al., 2010; Dichev et al., 2013). We employ measures of the firm’s life cycle
stage to proxy for differences in the firm’s economic fundamentals. We first predict and find higher
earnings quality for the mature firm life cycle relative to introduction, growth and decline firm life cycles,
and distinguish the proxies unambiguously signaling ‘earnings quality’. Next we document that industry
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adjusted future firm growth is associated with a lower level of earnings quality for the growth firm life
cycle compared to the other firm life cycles. Our study sheds light on the economics of earnings quality
which may be useful to researchers and analysts (e.g., higher earnings persistence reflects the mature firm
life cycle with positive operating cash flows and negative investing and financing cash flows, reflecting a
mature production function with stabilizing growth). Additional analysis for a restatement sample
suggests accounting quality measures for restated data do not convey fundamental information as
theorized and observed empirically in the primary sample.
Asymmetric Behavior of Accruals
Rajiv Banker, Temple University
Shunlan Fang, Kent State University
Byunghoon Jin, Temple University
Estimated discretionary accruals are commonly used in accounting research as a primary indicator of
earnings management. Many studies use the residuals from Jones-type expectation models to measure
discretionary accruals. These models assume that accruals have a linear relation with sales change but
ignore the asymmetry in the impact of managers’ operating decisions on accruals that differ when sales
decrease. By forcing a linear model on an inherently non-linear relation, the modified Jones model
underestimates discretionary accruals when firms experience an extreme sales change and
overestimates them when firms experience a moderate sales change. Extensive simulation analysis
documents that this bias results in substantial Type I error in tests of positive discretionary accruals,
except at the extremes of the sales growth distribution when Type II error dominates. This non-linearity
of the bias explains why the inclusion of a linear control variable does not adequately address the
problem but performance matching (Kothari, Leone and Wasley, 2005) does much better. As a further
consequence of this non-linear bias, we document significant upward bias in estimated discretionary
accruals for firms with low sales volatility. We also document that, unlike for small profit firms, positive
discretionary accruals are significant for small loss firms relative to other firms only in the extreme ends
of the sales growth distribution.
An Improved Accrual Model Incorporating Conditional Conservatism
Sudipta Basu, Temple University
Dmitri Byzalov, Temple University
Conditional conservatism has an asymmetric effect on accruals. We argue that the standard explanatory
variables in accrual models contain information about unrealized gains and losses, and predict a
piecewise linear effect of these variables on both the growth and the matching components of accruals.
Because accountants recognize losses at a low aggregation level, we predict that disaggregated
(segment-level and quarterly) bad news indicators have incremental explanatory power. We further
argue that accountants distinguish between transitory and persistent cash losses, and predict a dynamic
effect of successive loss indicators. Empirical results for U.S. firms support our predictions and yield new
insights about the accrual process. We document a sizable increase in explanatory power, which is
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primarily attributable to conservatism in the growth component of accruals, and improved statistical
power and type I error in earnings management tests.
Accrual Reversals and Cash Conversion
Matt Bloomfield, University of Chicago
Joseph Gerakos, University of Chicago
Andrei Kovrijnykh, Arizona State University
We estimate the firm-level rate at which accruals convert into future cash flows. These conversion rates
determine the expected cash value of a dollar of accruals and can therefore be used to make accruals
comparable across firms. For firms whose accrual innovations reverse within one year, we find that, on
average, a one dollar innovation to accruals translates into 96 cents of cash flow in the subsequent fiscal
year. We find that the relation between accruals and annual returns increases with the rate at which
accrual innovations convert to cash flows. Moreover, the rate at which accrual innovations convert into
cash flows is negatively associated with the likelihood that a firm receives an AAER.
Themed Session 4B: Governance (New Brunswick Room)
Board Classification and Shareholder Value: Evidence from a Natural Experiment
Daehyun Kim, University of Texas at Austin
This study examines the shareholder value impact of board classification. Prior studies find a negative
correlation between classified boards and shareholder value, but do not establish causality. A concern is
that the negative association can be interpreted as either a negative shareholder value effect of
classified boards or as an equilibrium corporate governance phenomenon, resulting in contradictory
policy implications. This study contributes direct and causal evidence using a natural experiment based
on corporate law amendments that impose a board classification change. The market reaction
surrounding legislative events identifies a perceived shareholder value change caused by the prospect of
an exogenous shift in board classification. The results suggest that the market perceives classified
boards as reducing shareholder value and declassified boards as improving it. This evidence is consistent
with shareholder activists’ argument that board declassification benefits shareholders.
Politicians’ Equity Holdings and Accounting Conservatism
Vishal Baloria, Boston College
I examine the association between politician ownership and accounting conservatism for a sample of
S&P 1500 firms between 2005 and 2011. The contracting explanation predicts that politician owned
firms adopt less conservative accounting because lenders are less concerned with downside default risk
for these politically favored firms. The political costs explanation predicts that politician owned firms
adopt more conservative financial reporting to shield allied politicians from voter scrutiny. I find that
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equity ownership by members of the U.S. House and Senate is associated with lower levels of
conditional conservatism. This negative association is more pronounced among: (1) firms owned by local
politicians, where there is a greater alignment between the interests of the politician and the firm, and
(2) firms with long-term issuer credit ratings, for which debt market participants particularly value
conservatism as a mechanism for conveying information on downside default risk. I also examine the
relationship between politician ownership and unconditional conservatism and fail to document a
statistical relationship between the two measures. Collectively, the results provide consistent evidence
of a lower contracting demand for conditional conservatism among politician owned firms.
Understanding Director Elections: Determinants and Consequences
Yonca Ertimur, University of Colorado at Boulder
Fabrizio Ferri, Columbia University
David Oesch, University of Zurich
We examine the determinants and consequences of voting outcomes at uncontested director elections.
We document substantial variation in votes withheld from directors depending on the reasons behind
proxy advisors’ negative recommendations—the primary driver of voting outcomes. In particular, boardand committee-level issues trigger more negative votes than individual-level concerns. While high votes
withheld rarely result in director turnover, handcollected data show that in almost half of the cases
firms explicitly respond to an adverse vote by addressing the underlying concern. The rate of
responsiveness increases in voting dissent and varies with the rationale behind the vote.
CIO Educational Background, Strategic Positioning, and Investor Reaction
Rajiv D. Banker, Temple University
Cecilia Feng, Stony Brook University
Paul A. Pavlou, Temple University
Implementation of the Sarbanes-Oxley Act and recovery in IT spending after the dot-com bust in 2002
have enhanced the Chief Information Officer’s (CIO’s) role and needed skills. The CIO significantly
influences strategy implementation and firm performance through the management of IT resources. We
posit that firms must appoint a CIO with an appropriate background (technical versus business) that is
aligned with their strategic positioning (differentiation versus cost leadership) for IT resources to
support the firm’s strategy. We examine whether firms appoint a CIO based on their strategic
positioning and whether the stock market reacts differently to aligned versus misaligned CIO
appointments. We find that differentiators are more likely to appoint a CIO with a technical background,
while cost leaders are more likely to appoint a CIO with a business background. Notably, firms
announcing aligned CIO appointments (technical CIOs for differentiators and business CIOs for cost
leaders) have superior investor reactions.
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Themed Session 4C: Information and Markets (Ivor Petrak Room)
Substitution in Information Acquisition: Evidence from EDGAR
Francios Brochet, Boston University
Stephan Hollander, Tilburg University
Robin Litjens, Tilburg University
In this paper, we investigate whether a substitution relation exists between investors’ and analysts’
information acquisition activities. Using EDGAR search traffic around earnings announcements as a
measure of information acquisition by individual investors, we find a significantly negative relation with
how actively analysts ask questions in earnings-related conference calls. Further analysis reveals that
this negative relation is driven by a subsample of local investors (who, due to geographic proximity, have
better access to management’s private information), firms operating locally (with higher investor
recognition), and informationally transparent (i.e., high earnings precision) firms. These results shed
new light on the role analysts play in a post Reg-FD level playing field information environment and
highlight a bigger potential demand for their research services for geographically dispersed and
informationally opaque firms.
Does the Market Punish the Many for the Sins of the Few? The Contagion Effect of Accounting
Restatements for Foreign Firms Listed in the U.S.
Weishi Jia, Emory University
Jingran Zhao, Emory University
In this paper, we hypothesize and find that accounting restatements issued by foreign firms traded in
the U.S. induce a negative market reaction to non-restating foreign firms that are from the same home
country as the restating firms (restatement-induced home-country contagion effect). Moreover, the
magnitude of the contagion effect varies with the strength of the home market institutions of the
restating firms. Non-restating firms from countries with a weak rule of law undergo an average stock
price decline of about -1.08% while peer firms from strong rule of law countries experience an average
negative return of only -0.43% over a three-day announcement window. Our results suggest that
restatements filed by weak rule of law country-firms are perceived to be more “contagious” than those
issued by strong rule of law country-firms. This is consistent with the notion that U.S. investors take into
account the strength of home market institutions of foreign firms when evaluating the information
disclosed by restatements. Further evidence shows that firms with inferior financial reporting quality
suffer more from the negative contagion effects, supporting our argument that the contagion effect is
driven by investors’ concern over the credibility of financial reporting for non-restating home-country
peers.
21
The Effect of Internal Control Weakness on Firm Valuation: Evidence from SOX Section 404 Disclosures
Yingqi Li, Shanghai Lixin University of Commerce
Ruiqing Shao, Shanghai Lixin University of Commerce
Junli Yu, Shanghai Lixin University of Commerce
Zhou Zhang, University of Regina
Steven Xiaofan Zheng, University of Manitoba
We find that firms reporting internal control material weakness (ICW) under Section 404 of SarbanesOxley Act have 13% lower valuation than non-ICW firms based on Tobin’s q. This valuation difference is
mainly driven by stock underperformance of more than 13% during the year before ICW disclosure.
Those ICW firms that remedy the internal control weakness in the year after disclosure have much
better stock performance compared to those ICW firms who fail to remedy ICW during the same period.
We further show a better stock performance in the year before disclosure if a SOX 404 ICW firm has
prior SOX 302 ICW disclosure more than one year earlier. All these results are consistent with the
hypothesis that the equity market has reflected the negative information associated with SOX 404 ICW
reports before the actual disclosures are made. Additional analysis suggests that the market cannot
independently reflect the ICW information. More likely, the activities related to the preparation of ICW
disclosure generate new information that is reflected in the stock prices.
Green Disclosures? Social Media and Prosocial Behavior
Hai Lu, University of Toronto
Barbara Su, University of Toronto
Motivated by the continuous debate in economics and policy research on whether firms should
maximize the value of shareholders or other stakeholders, our study investigates how social media
reveals individuals’ demand for the disclosure of corporate prosocial behavior and whether the
disclosures benefit the firms involved in such behavior (green firms). We find that green firms are more
likely to join twitter early and have more tweets about their prosocial behavior. Accordingly, green firms
attract more followers on Twitter and experience a significant increase in individual investor holdings
after joining Twitter. However, the significant increase of liquidity for green firms after the adoption of
Twitter is accompanied by the increase in stock return volatility. The findings suggest that disclosures of
prosocial behavior on social media generate unexpected costs to the firms due to the unique profile of
social media followers.
Parallel Sessions 5 (10:30 a.m. to 12:30 p.m.)
Themed Session 5A: Incentives, Disclosures and Quality (Alberta Room)
Managers’ Career Concerns and Asymmetric Disclosure of Bad versus Good News
Ashiq Ali, University of Texas at Dallas
Ningzhong Li, University of Texas at Dallas
Weining Zhang, Private School Beijing
22
This study examines the effect of CEOs’ career concerns on voluntary corporate disclosure by
investigating how firms’ asymmetric disclosure of bad versus good news varies with CEO tenure. We
follow Kothari, Shu and Wysocki (2009) and estimate managers’ tendency to withhold bad news relative
to good news by examining stock price behavior around management earnings forecasts and the
announcements of dividend changes. Our results suggest that firms withhold bad news relative to good
news to a greater extent in the early than in the later years of CEOs’ service and that this effect is
weaker in firms with more institutional ownership, larger analyst following, and greater board
independence. We conclude from these results that CEOs opportunistically withhold bad news to
favorably influence the labor market’s assessment of their human capital in the early years of their
service, when the market is likely to be more uncertain about their ability. We obtain consistent
evidence with an alternative measure of managers’ career concerns. Specifically, managers are more
likely to withhold bad news relative to good news if their firms are in U.S. states with higher
enforceability of noncompetition employment contracts; these contracts place certain restrictions on
managers from joining or forming a rival company upon their dismissal.
CEO Compensation Incentives and Non-GAAP Earnings Disclosures
Dirk E. Black, Dartmouth College
Ervin L. Black, University of Oklahoma
Theodore Christensen, Brigham Young University
Kurt Gee, Stanford University
We examine the relation between compensation incentives and non-GAAP earnings disclosures. We
focus on how bonus plan incentives, long-term performance plan incentives, and equity incentives are
associated with the likelihood of non-GAAP earnings disclosures and the aggressiveness of those
disclosures. Using a large hand-collected sample of non-GAAP earnings disclosures, we find that bonus
plan incentives are associated with an increased likelihood that a CEO will report non-GAAP earnings.
We also find that long-term plan incentives are negatively associated with the likelihood and magnitude
of aggressive non-GAAP reporting. For a sub-sample of firms for which compensation contracts in proxy
filings explicitly state that managers will be evaluated based on non-GAAP metrics, we find less
opportunistic non-GAAP reporting, suggesting that boards may explicitly define adjusted performance
metrics in compensation contracts in order to limit CEOs’ ability to define their own non-GAAP numbers.
However, when boards of directors have discretion to use non-GAAP metrics when evaluating managers
(but do not explicitly define them in compensation contracts), we find more opportunistic non-GAAP
earnings reporting, consistent with managers using the flexibility in contracts to influence their
performance evaluations. In supplemental analyses, we examine how CEO compensation incentives,
horizon, and experience interact with one another in influencing non-GAAP reporting. We find that older
CEOs, who are closer to retirement, report non-GAAP earnings that exclude larger amounts of recurring
expense items, consistent with short-termism. However, older CEOs with strong long-term plan
incentives and weak bonus plan incentives are less likely to report non-GAAP earnings aggressively.
Overall, our results are consistent with boards providing long-term incentives to CEOs to protect against
short-termism.
23
Competing Reporting Objectives and Financial Reporting Quality
Adrienna Huffman, Tulane University
Melissa Lewis-Western, University of Utah
We examine two sources of reporting incentives, contracts that use reported accounting information
and transactions with capital markets, and investigate whether the type of reporting incentive impacts
the earnings management and disclosure strategies managers employ. The primary difference between
contract and market incentives is that the benefits of the former are obtained even if the counter party
is aware of (or anticipates) the earnings management. In contrast, a market-motivated strategy can only
be successful in the presence of information asymmetry. Consistent with our hypotheses, we find that
when the reporting strategy does not require information asymmetry, managers use lower cost earnings
management methods and increase disclosure to offset the negative impact of earnings management
on financial reporting quality. Thus, this study provides evidence on how managers trade off the
incentive to maintain their commitment to a particular level of financial reporting quality with
competing incentives that require earnings management.
Discretionary Disclosures of Goodwill Slack: Determinants and Consequences
Nicole Thorne Jenkins, University of Kentucky
Mikhail Pevzner, University of Baltimore
Suning Zhang, George Mason University
We examine the determinants and consequences of the recent SEC’s requirement that companies facing
deteriorating profitability disclose the percentage by which fair value of their reporting units at risk of
impairment exceeds their book values (goodwill slack). In spite of the mandatory nature of the
disclosure, manager exercise decision regarding form and precision. Consistent with the SEC’s perceived
goal for instituting this requirement, we find that poorly performing firms are more likely to disclose
goodwill slack. In addition, we find that firms audited by Big 4 auditors and firms with more verifiable
assets are more likely to disclose while firms with higher litigation risk are less likely to disclose goodwill
slack. We also document the positive association between goodwill slack disclosure and the likelihood of
future goodwill impairment announcements. Moreover, firms with goodwill slack disclosures experience
lower bid-ask spreads—a proxy for information asymmetry—around their future goodwill impairment
announcements. These results suggest that goodwill slack disclosure bring information regarding
goodwill impairments forward in time providing decision useful information to investors.
Themed Session 5B: Cost Behavior (New Brunswick Room)
How Does the Visible Hand Shape Cost Behavior? Evidence from China
Zhaoyang Gu, The Chinese University of Hong Kong
Song Tang, Shanghai University of Finance and Economics
Donghui Wu, The Chinese University of Hong Kong
24
Banker and Byzalov (2014) find that China exhibits the highest degree of cost stickiness compared to 20
other economies. We hypothesize that to maintain social stability Chinese government has the incentive
and ability to influence firms’ employment decisions, thus affecting the labor cost stickiness. We find
that, consistent with our hypothesis, China’s state owned enterprises (SOEs) have a higher degree of
labor cost stickiness than non-SOE’s, and SOEs with politically connected managers have a higher degree
of labor cost stickiness than those without. Such effects are stronger in regions with weak institutions
and more political intervention. The political factors have little impact on the stickiness of other costs.
Aggregate Cost Stickiness in GAAP Financial Statements and Future Unemployment Rate
Florent Rouxelin, University of New South Wales
Wan Wongsunwai, Northwestern University
Nir Yehuda, University of Texas at Dallas
We examine whether aggregate cost stickiness observed in recent corporate filings predicts future
macro-level unemployment rate. We document that a one-standard-deviation higher cost stickiness in
recent quarters is followed by a 0.6 to 0.8 percentage point lower unemployment rate over the next
four quarters. Additionally, we document that errors in consensus forecasts of unemployment rate
made by professional macro forecasters are partially explained by cost stickiness. The higher the
measure of cost stickiness derived from recent corporate filings, the greater the amount by which
forecasters tend to overestimate future unemployment rates. The findings suggest that professional
macro forecasters do not fully incorporate the information contained in the cost stickiness measure
obtainable from publicly available corporate filings.
Differences in Cost Behavior in Upstream and Downstream Manufacturing Firms
Rajiv D. Banker, Temple University
Hyunjin Oh, Temple University
In this study, we examine the difference in the behavior of operating costs of upstream and downstream
manufacturing industries. Research on supply chain management suggests that downstream industry
typically pass the volatility of their demand to the upstream industry. We expect that the disparity of
demand uncertainty actually faced by the upstream industry and the downstream industry affects their
cost structures distinctively and influences how managers adjust committed resources in response to
sales changes. With data on Korean manufacturing firms, we find that operating costs are anti-stickier
for firms in downstream industries than firms in upstream industries. Specifically, the observed antistickiness with slack capacity persists over two-year consecutive sales decline, reflecting a much more
flexible cost structure of firms in downstream industries We also find that volatility of operating income
varies predictably across upstream and downstream industries as a consequence of the observed cost
behavior.
25
Plans, Expectations and Cost Behavior
Hilal Atsoy, Temple University
Rajiv Banker, Temple University
Julia Nasev, University of Cologne
This paper analyzes how the managers’ plans and expectations affect asymmetric cost behavior. The
previous literature provides evidence that costs respond asymmetrically to sales increases and
decreases. This asymmetric cost behavior is due to the fact that managers’ optimal decisions trading off
capacity adjustment costs against slack capacity costs depend on their assessment of future demand
trends. When managers’ expectations for future demand are optimistic, this makes them more willing to
increase resources when current sales increase and less willing to decrease resources when current
sales decrease. Additionally, adjusting resources is costly and managers’ decisions about resource levels
depend on both current and prior sales changes. These deliberate decisions about resource adjustments
in turn drive the cost behavior. The previous studies have established that managers’ optimism and
pessimism about the future demand play an important role in the asymmetric cost behavior.
In this study, we use IFO Business Expectations database from Germany between years 1994 and 2010.
The IFO database includes a large sample of firms and provides their cost, revenue and other financial
information. A unique feature of the survey is that managers provide their monthly assessments of how
their firms’ current situation compares to the past state, and their expectations about the future state.
Business expectation questions include information on managers’ expectations about future sales,
production, prices, commercial operations and business development. The previous literature has
usually quantified managers’ expectations by indirect measures such as consecutive sales changes and
macroeconomic climate. We believe that business expectations measures in the IFO database improve
upon the previous measures in two ways. First, we directly observe each firm’s own assessment of its
future sales and production, rather than relying on sales changes and general measures of business
climate. Second, the direct monthly expectations measures enable us to explore new aspects that have
not been studied in the previous literature such as whether the expectations are realized, and the
variability in expectations within and over years. Costs may not all be planned in advance and the
fluctuations in monthly expectations in comparison with actuals can drive the future cost behavior.
Therefore, in this research, we aim to analyze the effects of managers’ expectations and plans about the
future, their comparisons to the realized values and their variability during a year on cost behavior.
Themed Session 5C: Corporate Social Responsibility (Ivor Petrak Room)
Does 10-K Disclosure of Corporate Social Responsibility Signal an Increase in Consumer Preference?
James N. Cannon, Iowa State University
Zhejia Ling, Iowa State University
Qian Wang, Iowa State University
Olena Watanabe, Iowa State University
This paper examines whether the signal that firms send using textual corporate social responsibility
(CSR) disclosures in their 10-K filings is consistent with preferential consumer behavior as reflected
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in firms’ abnormal earnings. We find that, on average, firms with generally-worded CSR disclosures
in their 10-Ks exhibit higher abnormal return on selling, general and administrative expenses (SG&A
margin) and abnormal operating income, compared to other firms. We also find that the intensity
of CSR disclosure (proportion of CSR keywords in 10-K filing) is negatively associated with abnormal
gross margin and positively associated with abnormal SG&A margin and that the positive abnormal
SG&A margin of CSR-disclosing firms persists to a greater degree than that of non-CSR disclosing
firms. Further, we document that the direction of a signal that CSR disclosure sends is not uniform
and depends on the type of information provided, such as philanthropy-, business-, product-,
environmental- or social-related CSR disclosure. Overall, our paper provides important insight into
those signals that CSR disclosure provides to investors by identifying systematic associations between
categories of CSR disclosure and firms' economic performance.
The Effects of CSR Reporting Regimes and Financial Conditions on Managers’ Willingness to Invest in
CSR
Yasheng Chen, Simon Fraser University
Johnny Jermais, Simon Fraser University/ JCU Singapore
Jamal A. Nazari, Simon Fraser University
Previous studies on Corporate Social Responsibility (CSR) have focused their investigations on the
impacts of CSR disclosure on decision making of external users of accounting information. We contribute
to the existing literature by focusing on the impacts of CSR disclosure on decision making of internal
users of accounting information. Specifically, we investigate the impacts of CSR reporting regimes and
companies’ financial conditions on managers’ willingness to invest in a CSR project. We hypothesize and
find that managers are significantly more willing to invest in a CSR project when companies have the
opportunity to disclose their CSR activities in a stand-alone CSR report. We also find that the integrated
reporting regime does not have any incremental effect on managers’ willingness to invest in a CSR
project relative to the financial statement disclosure regime. Finally, we find that companies' financial
conditions do not affect managers' likelihood to invest in a CSR project. Our findings are consistent with
the prediction of legitimacy theory. Our study contributes to the literature that investigates the impact
of various reporting mechanisms on internal decision making.
Board Interlocks, Interlocking Directors and Firms' Environmental Performance
Jing Lu, University of Calgary
This paper unveils the black box of board interlocks, interlocking directors' characteristics and firms'
environmental performance. It finds that a firm's environmental performance is positively linked with its
interlocking firms' performance on average and in pairs, which indicates good environmental practices
diffuse through board interlocks. In addition, interlocking directors' overall experience with
sustainability and their sustainability related avocation in non-profit organizations facilitate the
diffusion. Furthermore, having a female interlocking director contributes to the diffusion. This paper
expands sustainability research to the relational dimension of corporate governance. The empirical
evidences in this paper indicate that board interlocks are effective channels to improve firms'
environmental performance.
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Unequal Pay Within the Organization and CSR Performance
Fereshteh Mahmoudian, University of Calgary
The gap between executives’ and employees’ pay intersects with the considerations of corporate social
responsibility (CSR). Business advisors point to the linkage of CSR performance and the rewards and
incentives to employees in fulfilling the firms’ objectives. Some argue that wide pay gaps provide
incentives to employees to attempt to advance to higher organizational levels and achieve better pay
even though there is little empirical evidence supporting this idea. Moreover, the behavioral theories
argue that when pay differentials are too large, the middle and lower paid employees consider their
wages to be inequitable and therefore they react negatively by withholding effort. Pay dispersion
impacts firms’ performance only if it reflects individual performance. Other than that, any wide pay gap
would harm organization’s performance by hurting the quality of employees’ relationships thus
potentially leading to dysfunctional employee behavior. Thus, the issue of payment gap at the different
levels of the organization has raised concerns in civil society and the media. Initially the idea of pay for
performance was based on agency theory, which argued that the higher compensation at the
management level is an incentive for better performance. However, the question arises as to how far
this pay gap should be? On one hand tournament theory suggests that a large payment gap within
different levels of the organization leads to higher CSR performance. On the other hand the behavioral
theory states that higher CSR performance might be achieved with a smaller pay gap. In this study, I
address the issue of the pay gap at different levels of the firm and investigate the effect of the pay gap
on CSR performance. I explore the pay gap at two different levels within the firm. One is at the executive
level, which is between CEO and other top executives. The other is at the firm level, which is between
the executives and other mid/low paid employees. At this level, I will consider the pay gap between the
CEO and other employees and the pay gap between the top executives (other than CEO) and other
mid/low paid employees. Along with the other firm and industry specific controls, I consider gender
diversity within the top executives by including a variable that measures the ratio of female executives
to the total number of executives. I hypothesize, firstly, a negative relationship between the pay gaps
and the CSR performance at different levels. In other words, the lower the pay gap, the higher will be
the CSR performance. Secondly, I hypothesize that the ratio of female executive to total number of
executives positively affects the CSR performance. The more female executives, the higher will be the
CSR performance. I also expect to find the female ratio will be a moderator that interacts with the pay
gap to enhance the CSR performance. Furthermore, I distinguish between the female CEOs and the male
CEOs by investigating the effect of the pay gap on the CSR performance in firms that have female CEOs
vs those that have male CEOs.
Plenary Session 4 (1:30 to 3:00 p.m.)
SFAS 142, Timely Loss Recognition, and Acquisition Profitability
Matthew Cedergren, New York Univesity
Baruch Lev, New York Univesity
Paul Zarowin, New York Univesity
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We examine the relationship between accounting conservatism and acquisition profitability by
comparing acquirers’ acquisition profitability before vs. after the effective date of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (FASB 2001). Prior to SFAS 142,
firms amortized goodwill (over a period not to exceed 40 years), and few firms recorded goodwill
impairments. SFAS 142 eliminated periodic amortization of goodwill, replacing it with a fair value based
test for impairment with write-offs if necessary, and required that a firm’s goodwill be allocated to its
reporting units. Subsequently, the frequency of goodwill impairments increased, suggesting that SFAS
142 resulted in an increase in timely loss recognition (i.e., conditional conservatism), as firms were now
forced to recognize losses that previously would have been deferred as periodic expenses under the
previous reporting regime. Based on both market and accounting measures, we find a decrease in
acquisition profitability after SFAS 142, suggesting that timely loss recognition is not associated with
increased acquisition profitability. Our research is important, because the accounting literature has
attributed numerous benefits to timely loss recognition, including reducing managers’ willingness to
make ex-ante negative NPV investments (such as empire building acquisitions), and making managers
more likely to terminate investments that turn out ex-post to be negative.
Performance Measure Properties and Contract Type: Evidence from Inter-Firm Contracts
Deepa Mani, Indian School of Business, Hyderabad
Ranjani Krishnan, Michigan State University
We examine the role of performance measure precision and congruity in the tradeoff between fixedprice and cost-plus inter-firm contracts. We posit that imprecision and incongruity in the client’s
accounting performance measures provide signals of uncertainty and valuation difficulty respectively.
Imprecision implies that the client’s performance is driven by uncontrollable factors such as demand and
cost uncertainty, while incongruity implies a weaker association between performance measures and
economic value. Imprecision and incongruity create impediments in assessing project value and increase
the likelihood of costly ex post renegotiation and holdup costs. Consequently, performance measure
imprecision and incongruity reduce the likelihood of fixed price contracts. Two-way clustered logistic
specifications using archival data for 1995-2008 from 599 outsourcing contracts valued over $15 million
support our predictions. Even after controlling for task complexity and relational contracting,
performance measure properties influence contract type.
Parallel Sessions 6 (3:15 to 5:15 p.m.)
Themed Session 6A: Organizations and Behavior (Alberta Room)
Sources of Employee Appreciation Messages and Bias in Accounting Estimates
Jordan M. Bable, University of Pittsburgh
Donald V. Moser, University of Pittsburgh
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Accounting estimates are common in both internal and external reporting and are especially susceptible
to manipulation because they are subjective. We focus on the internal effects of the source of employee
appreciation messages on subordinate accountants’ willingness to comply with their supervisor’s
suggestion to lower an estimated expense to increase the supervisor’s bonus. For a period of
(hypothetical) months before the supervisor requests the biased estimate, upper-level accounting
students who assume the role of accounting managers receive a series of employee appreciation
messages from either their supervisor or the company’s human resources (HR) team. The messages are
identical in content and differ only in their source. Our analyses control for the perceived sincerity of the
messages because prior findings suggest that the effect of such messages on employees’ feelings about
their supervisor depends on the employees’ perceptions of the purpose of the messages. Consistent
with our hypotheses, participants’ estimates are lower when the appreciative messages come from their
supervisor rather than from the HR team, and this effect is mediated by the participants’ feelings about
their supervisor. These results suggest that those who implement employee appreciation
communications should consider the potential unintended cost of channeling such communications
through immediate supervisors. In addition, our study illustrates the relevance of internal reporting
issues for external financial reports in that the subordinates’ biased estimates not only increase the cash
paid to the supervisor but also affect the company’s external reports in the same manner as
conventional earnings management intended to influence external parties.
The Impact of Fairness Perception on Job Attitude and Job Performance: Evidence from Audit
Professionals in South Korea
Rajiv D. Banker, Temple University
Seok Young Lee, Sungshin Women’s University
Sang-Lyul Ryu, Konkuk University
Eunbin Whang, Temple University
This study examines the impact of organizational justice on job-related outcomes such as job
satisfaction, turnover intention, and job performance in public accounting firms. Organizational justice
is defined as an individual’s perception of how fairly rewards or benefits are distributed in the
workplace. Prior research in social psychology, organizational behavior, and management has identified
three dimensions of organizational justice based on the focus of fairness judgment: distributive justice,
procedural justice, and interactional justice. Distributive justice refers to an individual’s fairness
perception toward distributed rewards. Procedural justice is concerned with perceived fairness of the
formal procedures used by the organization to determine reward allocations. Interactional justice is
defined as an individual’s fairness perception of interpersonal treatment received in the process of
deciding reward allocations. Using survey data collected from 120 audit professionals at five large public
accounting firms in South Korea, we find that both distributive justice and procedural justice predict
audit professionals’ job satisfaction and turnover intention and that interactional justice predicts job
performance.
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Strategic Group Analysis in the Public Accounting Industry
Keval Amin, Stony Brook University
Rajiv Banker, Temple University
Seok Young Lee, Sungshin Women’s University
We examine the relationship between human resources and performance in public accounting firms
through the lens of strategic group theory. Using a unique hand-collected panel of data for South Korean
public accounting firms, we find proportion of certified public accountants, average personnel costs, and
leveraging of partner time are determinants of performance. We identify public accounting strategic
groups following a resource-based framework and document that human resource strategies vary across
strategic groups. We find that both differences across groups and deviations from group norms explain
performance, but deviating from group norms only bears fruit when competitors cannot easily emulate
the resource. Our findings highlight the importance of considering strategic groups to analyze the public
accounting industry.
Insider Trading and Going Concern Opinions: A Re-Examination
Dan Dhaliwal, University of Arizona
Nicholas Hallman, University of Missouri-Columbia
Kyonghee Kim, University of Missouri-Columbia
Raynolde Pereira, University of Missouri-Columbia
Recent published research advances a pressure hypothesis which contends that insiders of
distressed firms, fearing potential litigation, will pressure auditors not to issue a going concern
opinion during periods in which they undertake substantial insider trades. We re-visit the argument
involved and re-examine the empirical evidence documented in support of this hypothesis. We also
evaluate a plausible counter-argument that insiders will anticipate and time their stock sales in the
periods prior to the issuance of a going concern opinion. Contrary to recent findings, we fail to find
any relation between net abnormal insider sales and the issuance of a going concern opinion.
However, we find evidence that insiders time their sales in anticipation of the issuance of a going
concern opinion. Specifically, we find insider sales rise at least two years prior to the issuance of a
going concern opinion and decline steeply in the year of the going concern opinion. The findings
suggest that, to the extent that insider trading related litigation concerns matter, they influence
insiders to time their trades to avoid legal jeopardy. In contrast, we find no support for the
contention that insiders pressure auditors to forgo issuing a going concern opinion.
Themed Session 6B: Forecasting (New Brunswick Room)
Once Is Not Enough: The Determinants and Consequences of Management Updates of Annual
Forecasts
Michael Tang, New York University
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Li Yao, Concordia University
Paul Zarowin, New York University
This study investigates a new disclosure phenomenon – managers updating their annual earnings
forecasts, which is used by nearly 90% of annual forecasters in recent years. Consistent with the
updating decisions largely being predetermined, we find the incidence and frequency of updates to be
persistent at the firm level, especially when firms update in all quarters (regular updaters). Analysts’
reactions to managers’ initial forecasts are weaker for regular updaters, consistent with analysts
anticipating subsequent updates. We also find updaters – especially regular updaters – to be more (less)
timely than non-updaters in disclosing bad (good) news to the market, suggesting that frequent updates
of annual forecasts serve as a major channel to quickly release bad news.
Does Incorporating Information from Forecasts for Other Periods Improve Current Period Forecasts?
Zachary Kaplan, Washington University at St. Louis
Zawadi Lemayian, Washington University at St. Louis
We identify a novel source of predictable forecast error and use it to test whether markets’ identify
predictable errors in analyst forecasts. We identify predictable error in the current quarter’s forecast
using other period’s forecasts published by the same analyst during the same quarter as the quarterly
forecast used to calculate error. Other period’s forecasts explain six percent of forecast error, and we
demonstrate the ability to predict error varies with analyst skill, suggesting the cause of the errors is an
inability to identify the particular period when economic shocks will manifest themselves in reported
earnings. To examine whether these errors affect market expectations, we regress actual forecast error
and predicted forecast error on returns at the earnings announcement. We find market expectations are
nearly independent of predictable errors, inconsistent with theories that analyst errors impede the
formation of accurate earnings expectations. Our finding that other period’s forecasts impact expected
earnings is relevant to market participants and researchers seeking to model the market’s expectation
of future earnings.
Forecasting Taxes: New Evidence from Analysts
Brian Bratten, University of Kentucky
Crisiti Gleason, University of Iowa
Stephannie Larocque, University of Notre Dame
Lillian F. Mills, University of Texas at Austin
We provide new evidence about how analysts incorporate and improve upon forecasts provided by
management. Effective tax rate (ETR) forecasts provide a large sample, generalizable, and powerful
setting, because managers must forecast their firm’s annual ETR each quarter under the integral
method. Contrary to concerns that analysts invest no effort in tax forecasting and merely mimic
management, we find analysts differ from management estimates 64% of the time, and when they do so
they are more accurate on average. Improved accuracy implies they incorporate additional forwardlooking information into their forecasts. Accounting standards offer our tax setting a further challenge
for analysts: firms must record certain discrete items fully in the quarter they occur, polluting the
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forward-looking annual forecast. We find discrete item reporting increases analysts’ uncertainty,
reducing analysts’ over accuracy and increasing dispersion. Finally, while tax complexity is negatively
associated with the quality of analysts’ forecasts, the negative effect of complexity is reduced when
management provides an ETR estimate free of discrete items. We conclude accounting requirements for
discrete items add noise to the information available to analysts (and thus to users) and suggest
standard setters reconsider the value of mixing discrete item reporting with the integral method.
Tax Accounts, Earnings Persistence and Direction of Sales Change
Rajiv Banker, Temple University
Josh Khavis, Temple University
Pam Kuperstein, Temple University
We investigate how the underlying operations of a firm influence the information in the tax accounts on
the persistence of earnings by evaluating the interactive effect between the tax accounts and the
direction of sales changes. We find evidence that the direction of sales change moderates the
relationship between tax accounts and earnings persistence. Specifically, we document that while the
presence of large book tax differences indicates lower earnings persistence, this effect is attenuated for
firms with a sales decrease and lessened for firms with a sales increase. We also find that the change in
earnings attributable to a change in a firm’s effective tax rate is persistent only for firms with sales
increases. Lastly, we dichotomize the tax change component of earnings into the interim and revised
components, and find that both components are persistent, but, again, only for firms with sales
increases. Overall, we extend the literature on the role of tax accounts in explaining the persistence of
earnings by evaluating the implications of the direction of sales change.
Wait List: To Be Scheduled
How Do CEO Risk Taking Incentives Affect Security Issuances and Repurchases?
Min Maung, University of Saskatchewan
Harun Rashid, University of Calgary
Craig Wilson, University of Saskatchewan
Zhenyu Wu, University of Manitoba
We investigate how CEO risk taking incentives affect a firm’s security issuance and repurchase activities.
In general, we find that risk taking incentives measured by the sensitivity of CEO wealth to stock return
volatility (Vega) lead firms to increase debt by issuing more and re-purchasing less, and to decrease
equity by issuing less and repurchasing more. However, for firms that are already highly levered relative
to their industry peers, risk taking incentives no longer lead firms to increase debt by either issuing or
repurchasing, although they do continue to lead such firms to decrease equity by issuing less and
repurchasing more. Our findings confirm that risk taking incentives can lead to excessive leverage as
conjectured by previous literature; however, the main channel driving this result is equity repurchase
rather than debt issuance.
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Cost Stickiness and Cost Inertia: A Two-driver Model of Cost Behavior
Mark Anderson, University of Calgary
Joo-Hyung Lee, University of Calgary
Raj Mashruwala, University of Calgary
According to the asymmetric cost behavior model, managers play an active role in determining cost
behavior by adding or removing resources as activity changes. Cost stickiness occurs when managers
deliberately retain slack resources resulting from a decline in sales activity. We associate cost inertia with
resources tied to long-term physical assets and we estimate a model of cost behavior that includes two
cost drivers: revenue as a volume of activity driver and property, plant and equipment (PP&E) as a cost
driver based on assets managed. We find that changes in employee headcount and their associated costs
separate between the two cost drivers, and that the explanatory power of an asymmetric cost behavior
model including PP&E is significantly greater than the explanatory power of the single-driver cost behavior
model. We find that the cost inertia term is significantly negative and relatively large in magnitude.
Similar insights are obtained when we replace employee headcount with SG&A expenses. We estimate
an expanded model that conditions current year changes in costs relative to changes in sales on sales
increases or decreases in the previous period and find that the pattern of cost changes is consistent with
both cost stickiness and cost inertia.
We gratefully acknowledge the support of the following sponsors:
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