Professor Eli Bartov
Ph.D. Seminar, Winter 2016
Empirical Research in Accounting for Financial Markets
1.
Course description
This seminar exposes students to empirical research in financial accounting. The course covers a wide range of topics including econometric and methodological issues, security prices and accounting information, and earnings management. The goal is to introduce the students to the academic accounting literature on financial markets. The emphasis will be on identifying interesting, important, and researchable topics, formulating testable hypotheses about those topics, empirically testing those hypotheses using valid, powerful, and otherwise well-chosen research designs and empirical methods, and writing up the paper.
2.
Format
The class format will be as follows:
(i) In each class we will cover 23 published and/or working papers. All students are required to read the assigned papers before class.
(ii) In addition, one student will be assigned to write a referee report for all the papers covered in each class. The assignments for the referee reports will be made in the class prior to the one the report is due. The format and content of the report should be as discussed in our first class period.
3.
Project
You alone or with a peer are to write an empirical research paper, which is due by July 20, 2016.
Given your status as students and the relatively short time frame with which we have to work, the paper is not expected to be publishable as submitted. Rather, the primary purpose is to expose you to the process of writing an academic manuscript.
In a nutshell, the process begins with clearly stating the research question, and explaining why this question is important in light of extant literature. Next, design the tests, identify the data sources and make sure they are available; many good ideas cannot be executed due to data limitations. Then, run the tests and put the results in carefully designed tables. If the results are consistent with your hypotheses, you want to increase confidence in the inference validity by ruling out alternative hypotheses. Once your analysis survives a battery of sensitivity tests, you are ready to write up the paper.
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4.
Reading List
1.
Earnings information and security prices

Background reading:
Kothari, S.P., 2001, Capital markets research in accounting, Journal of Accounting &
Economics 31, 105-231. Read sections 1-3 and section 4.1.1.
1.1. Early studies

Ball, Ray, and Philip Brown. 1968. An empirical evaluation of accounting income numbers,
Journal of Accounting Research , 159-178.

Beaver, William H. 1968. The information content of annual earnings announcements,
Journal of Accounting Research , Supplement, 67-92.
2.
Management of accounting appearances
2.1. Earnings management

Background reading:
Schipper, K. 1989. Commentary on earnings management, Accounting Horizons 3, 91-102.
Bartov, E., F.A. Gul, and J.S.L. Tsui. 2000. Discretionary accruals models and audit qualifications, Journal of Accounting and Economics 30, 421 – 452.
McNichols, M.F. 2000.
Research design issues in earnings management studies, Journal of Accounting and Public Policy 19, 313-345.
2.1.1. Accrual-based earnings management
DeFond, M.L., and J. Jiambalvo. 1994. Debt covenant violation and manipulation of accruals.”
Journal of Accounting and Economics 17, 145-176.
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2.1.2. Transaction-based (real) earnings management
Bartov, E. 1993. The timing of asset sales and earnings manipulations, The Accounting
Review 68, 840 - 855.
2.1.3 Classificatory earning management
McVay, S. 2006. Earnings management using classification shifting: An examination of core earnings and special items, The Accounting Review 81, 501 – 531.
2.2
Does it pay to manipulate earnings?
Bartov, E., and P. Mohanram. 2014. Does income statement placement matter to investors?
The case of gains/losses from early debt extinguishment,” The Accounting Review 89(6),
2021-2056.
2.3 Earnings expectations management to exceed thresholds
Bartov, E., D. Givoly, and C. Hayn. 2002. The rewards for meeting-or-beating earnings expectations, Journal of Accounting and Economics 33, 173 – 204.
3.
Executive stock options
3.1. Executive stock options and incentive alignment

Rajgopal, S., and T. Shevlin. 2002. Empirical evidence on the relation between stock option compensation and risk taking. Journal of Accounting and Economics 33, 145-171.

Hanlon, Michelle, Rajgopal, S., and T. Shevlin. 2003. Are executive stock options associated with future earnings? Journal of Accounting and Economics 36, 3-43.

Mehran, H. 1995. Executive compensation structure, ownership, and firm performance,
Journal of Financial Economics 38, 163-184.

Efendia, J., A. Srivastavab, and E.P. Swanson. 2007. Why do corporate managers misstate financial statements? The role of option compensation and other factors, Journal of Financial Economics 85, 667-708.
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3.2. Executive stock options and managerial opportunistic behavior
3.2.1 Estimating executive stock option cost

Bartov, E., P. Mohanram, and D. Nissim. 2007. Managerial Discretion and the Economic
Determinants of the Volatility Parameter for Valuing ESOs. The Review of Accounting
Studies 12 (March), pp. 155-179.
3.2.2 Option grants backdating

Yermack, D. 1997. Good timing: CEO stock option awards and company news announcements. The Journal of Finance 52, 449-476.

Lie, E. 2005. On the timing of CEO stock option awards, Management Science 51 (May), pp. 802-812.

Heron, R.A., and E. Lie. 2007. Does backdating explain the stock price pattern around executive stock option grants? Journal of Financial Economics 83, pp. 271-295
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3.2.3 Private information and executive stock option exercises

Huddart, S., and M. Lang. 2003. Information distribution within firms: Evidence from stock option exercises. Journal of Accounting and Economics 34, 3-41.

Bartov, E., and P. Mohanram. 2004. Private information, earnings manipulations, and executive stock option exercise. The Accounting Review 79, 889-920.
4.
Market efficiency and accounting information

Background reading
Fama, Eugene, and Kenneth French. 2008. Dissecting Anomalies. The Journal of Finance
68(4), 1653-1678.
Bernard, V. L., and J. Thomas. 1990. Evidence that stock prices do not fully reflect the implications of current earnings for future earnings, Journal of Accounting and Economics
13, 305-340.
Bartov, E. 1992. Patterns in unexpected earnings as an explanation for post-announcement drift. The Accounting Review 67, 610-622.
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4.1. Post earnings announcement drift
 Ball, R., and E. Bartov. 1996. How naive is the stock market’s use of earnings information?
Journal of Accounting and Economics 21, 319-337.

Bartov, E., S. Radhakrishnan, and I. Krinsky. 2000. Investor sophistication and patterns in stock returns after earnings announcements. The Accounting Review 75, 43 – 63.

Ng, J., T. O. Rusticus, and R.S. Verdi. 2008. Implications of Transaction Costs for the
Post–Earnings Announcement Drift. Journal of Accounting Research 46(3), 661 – 696.
4.2. Pricing of accruals and cash flows

Sloan, R.G. 1996. Do stock prices reflect information in accruals and cash flows about future earnings? The Accounting Review 71, 289 – 306.

Xie, H. 2001. The mispricing of abnormal accruals. The Accounting Review 76(3), 357 -
373.

Collins, D.W., G. Gong, and P. Hribar. 2003. Investor sophistication and the mispricing of accruals. Review of Accounting Studies 8, 251-276.

Bartov, E. 2003. Discussion of ‘investor sophistication and the mispricing of accruals.’
Review of Accounting Studies 8, 277 – 281.
4.3. Post loss/profit announcement drift

Balakrishnan, K. E. Bartov, and L. Faurel. 2010. Post Loss/Profit Announcement Drift.
Journal of Accounting and Economics 50, 20-41.
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