Earnings Management: Theoretical and Empirical Research
This course is constructed as the first accounting scholarship class offered to second-year
Ph.D. students that attend the Ph.D. program.
1.1. The Goal of the course
As a first course in putting the students on the path to accounting scholarship, the goals of
this course are simple:
1. Introduce the student to the accounting scene.
2. Teach the student to read an accounting paper.
3. Have the student take preliminary steps towards mastering writing an accounting paper.
4. Lay the foundations for the research skills required for later courses and writing a
thesis.
I believe that an extensive work during a single semester can achieve these goals at least
at a preliminary level. That is, we will take baby steps to bring the students to a level that
enables him to mature in later courses. This is the good news. The bad news is that
there is a long way to go after this course before the students are ready yet to prepare a
dissertation and finish the requirements for the Ph.D. degree.
1,2 The Content
Broadly, the work in this course is divided into two categories:
1. Knowledge.
2. Skills. Acquire basic skills in SAS and Meta-analysis.
3. Learn the rudiments of game theory that enable a student to promote a hypothesis
through a simple game and read analytical papers comfortably.
Knowledge
There is basic knowledge that touches on the basic issues such as why accounting
information is important and the role of accounting information in the capital
markets. This part is achieved through reading, writing, and lectures.
In addition, there is basic knowledge regarding the research questions and state of the
1
art in accounting research: financial and managerial accounting. This part is
achieved through reading surveys. Reading surveys is a relatively quick way to get
into a field, its major research questions, answers, and debates. We will do it either
through the Aziz Method or the PPT method. By the Aziz method, one student
presents the survey comprehensively, and prepares a summary of a few pages long
for the rest of the students who will read it before his/her presentation. Each student
is responsible for each presented paper for the comprehensive exams to be taken at
the end of the course work. The PPT method is that the presenting student sends
his/her powerpoint slides before class and print them as notes which will allow them to
make notes during presentation. The presenting student prepares a lecture that is no
longer than three academic hours. The grade on presentation involves grade for
presenter and grade for participants for asking questions and contributing to
discussion.
An example is provided below.
2. Skills
Skills refer to starting the path to SAS, meta-analysis, and game theory tools. Given
the concentration in financial accounting research in the department, a student is
likely to prepare a dissertation that is an empirical research with capital market
orientation. To that end, the student has to acquire basic skills in SAS regarding
inputting data, merging files, and cleaning data, as this will be necessary for him/her
when he/she processes Compustat, CRSP, I/B/E/S, and SDC. We would like the
student to master everything here and now but this is not feasible.
In this course, we meet Compustat and SDC, and if time permits, I/B/E/S.
The method is to read a chapter in a basic SAS book assigned below and prepare
exercises that fit in the research questions arisen in the literature reviews.
The employment of MetaAnalysis tools is optional and depends on the progress of the
course. We will however, use the first step in MetaAnalysis of coding papers that we
read to create your library of read papers.
2
Game theory tools are required to read analytical papers in accounting research and
for focusing our thoughts on research questions. This part of the course is based on
notes that I prepare.
Broadly, the plan is as follows: first three weeks are planned to be a time of
organization and writing a paper with accounting message. The next seven weeks
are dedicated to reading surveys and doing SAS. The last leg of the course is
dedicated to earnings management and quality of earnings and to completing SAS
assignments.
1.3. Grade
The grade is based on a take-home exam which comprises of questions that are given
during the semester; participation and presentation; and the assignments.
?2. Reading List
The reading list covers material that will be studied in the course as specified in the
accompanying table of assignments.
2.1. Books and Monographs
Beaver, William. Financial Reporting: An Accounting Revolution. Prentice Hall
ontemporary Topics in Accounting Series. Third edition.
Christensen, Peter Ove, and Jerald A. Feltham. 2002. Economics of Information, Volume
I: Information in Markets. Springer-Verlag, New York, LLC.
Christensen, Peter Ove, and Jerald A. Feltham. 2005. Economics of Information, Volume
II: Performance Evaluation. Springer-Verlag, New York, LLC.
Cody, Ronald P., and Jeffery K. Smith.
2006.
Applied Statistics and the SAS
Programming Language. Prentice Hall.
Dechow, P., and K. Schrand. 2004. Earnings quality. The CFO Institute.
Francis, J., Q. Chen, D.R. Philbrick, and R.H. Willis. 2004.
Security Analyst
Independence. The CFO Institute.
Kreps, David. 1990. A Course in Micro-Economic Theory. Prentice Hall.
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Lipsey M.W., and David B. Wilson. 2000. Practical Meta-Analysis (Applied Social
Research Methods). Sage Publications, Inc.
O’Rourke Norm, Larry Hatcher, and Edward J. Stepanski. 2005. Step-by-Step Approach
to Using SAS for Univariate & Multivariate Statistics. SAS Institute Inc.
Ronen, J., and V.L. Yaari. 2008. Earnings Management: Emerging Insights in Theory,
Practice, and Research. Springer Verlag, LLC.
2.2. Articles
2.2.1. The subject: The Accounting Scene, Compensation, and Governance
2.2.1.1.
Coffee,
The players
John
C.
2002.
Understanding
Enron:
It's
about
the
Gatekeepers,
Stupid. SSRN.com/abstract=325240.
*Ronen and Yaari. 2008. Introduction to Part 2.
2.2.1.2.
Compensation
Murphy, Kevin J. 1999. Executive Compensation. In Orley Ashenfelter and David Card,
eds., Handbook of Labor Economics, Volume 3. North Holland, Amsterdam. Ch. 38:
2485-2563.
Guay, Wayne R., Core, John E. and Larcker, David F. 2002. Executive Equity
Compensation and Incentives: A Survey. http://ssrn.com/abstract=276425.
2.2.1.3.
Governance
Bushman, Robert M., and Abbie J. Smith. 2001. Financial Accounting Information and
Corporate Governance. Journal of Accounting and Economics, 32, 1-3 (December):
237-333.
WITH
Sloan, Richard G. 2001. Financial Accounting And Corporate Governance: A discussion
Journal of Accounting and Economics, 32, 1-3 (December): 335-347.
Romano, Roberta. 2004. The Sarbanes-Oxley Act and the Making of Quack Corporate
Governance. NYU, Law and Econ Research Paper 04-032; Yale Law & Econ Research
4
Paper 297; Yale ICF Working Paper 04-37; ECGI - Finance Working Paper 52/2004.
http://ssrn.com/abstract=596101.
* Ronen and Yaari. 2008. Chapter 5, section 5.2.
2.2.2. The subject: Capital Market Research in Accounting
* Ronen and Yaari. 2008. Chapter 4 section 2 and Chapter 5 section 1.
1a) Kothari, S.P., 2001. Capital Markets Research in Accounting. Journal of Accounting
and Economics, 31, 1-3 (September): 105-231.
WITH
1b) Lee, Charles M. C. 2001. Market efficiency and Accounting Research: A Discussion
of ‘Capital Market Research in Accounting’ by S.P. Kothari. Journal of Accounting and
Economics, 31, 1-3 (September): 233-253.
2a) Holthausen, Robert W. and Ross L. Watts. 2001. The Relevance of The
Value-Relevance Literature for Financial Accounting Standard Setting. Journal of
Accounting and Economics, 31, 1-3 (September): 3-75.
WITH
2b) Barth, Mary E., William H. Beaver, and Wayne R. Landsman. 2001. The Relevance
of The Value-Relevance Literature for Financial Accounting Standard Setting: Another The
Relevance of The Value-Relevance Literature for Financial Accounting Standard Setting
View. Journal of Accounting and Economics, Economics, 31, 1-3 (September): 77-104.
WITH
3a) Healy, Paul M. and Krishna G. Palepu. 2001.
Information Asymmetry, Corporate
Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature
Journal of Accounting and Economics, 31, 1-3 (September): 405-440
WITH
3b) Core, John E. 2001. A Review of the Empirical Disclosure Literature: Discussion
Journal of Accounting and Economics, 31, 1-3 (September): 441-456.
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4a) Verrecchia, Robert E. 2001. Essays on Disclosure. Journal of Accounting and
Economics, 32, 1-3 (December): 97-180.
WITH
Dye, Ronald A. 2001. An Evaluation of “Essays on Disclosure” and the Disclosure
Literature in Accounting. Journal of Accounting and Economics, 32, 1-3 (December):
181-235.
2.2.3. The subject: Managerial Accounting and Theory
1a) Lambert, Richard A. 2001. Contracting theory and accounting. Journal of Accounting
and Economics, 32, 1-3 (December): 3-87
WITH
1b) Magee, Robert P. 2001. Discussion of “Contracting theory and accounting.” Journal
of Accounting and Economics, 32, 1-3 (December): 89-96
2a) Ittner Christopher D. and David F. Larcker. 2001. Assessing empirical research in
managerial accounting: a value-based management perspective. Journal of Accounting
and Economics, 32, 1-3 (December): 349-410.
WITH
2b) Conjectures regarding empirical managerial accounting research. Journal of
Accounting and Economics, 32, 1-3 (December):411-427
Jerold L. Zimmerman
2.2.4. The subject: Tax
3a) Shackelford Douglas A. and Terry Shevlin. 2001. Empirical Tax Research in
Accounting. Journal of Accounting and Economics, 31, 1-3 (September): 321-387.
WITH
3b) Maydew, Edward L 2001. Empirical tax research in accounting: A discussion. Journal
of Accounting and Economics, 31, 1-3 (September): 389-403.
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2.2.5 The subject: Earnings Management and Quality of Earnings
1a) Fields, Thomas D., Thomas Z. Lys, and Linda Vincent. 2001.
Empirical Research on
Accounting Choice. Journal of Accounting and Economics, 31, 1-3 (September):
255-307.
WITH
1b) Francis, Jennifer. 2001. Discussion of Empirical Research on Accounting Choice.
Journal of Accounting and Economics, 31, 1-3 (September): 309-319.
2)
Dechow, Patricia, Richard Sloan, and Amy P. Sweeney. 1995. Detecting earnings
management. The Accounting Review, 70, 2 (April): 193-225.
3)
Graham, John R., Campbell R. Harvey, and Shiva Rajgopal. 2005. The economic
implications of corporate financial reporting. Journal of Accounting and Economics,
40, 1-3 (December): 3-73.
4)
Jones,
Jennifer
J.
1991.
Earnings
management
during
import
relief
investigations. Journal of Accounting Research, 29, 2 (Autumn): 193-228.
5)
Kothari, S.P., Andrew L. Leone, and Charles E. Wasley. 2005. Performance
matched discretionary accrual measures. Journal of Accounting and Economics, 39,
1 (February): 163-197.
6)
Nelson, Mark W., John A. Elliott, and Robin L. Tarpley. 2002. Evidence from
auditors about managers’ and auditors’ earnings management decisions. The
Accounting Review, 77 (Supplement): 175-202.
7)
Nelson, Mark W., John A. Elliott, and Robin L. Tarpley. 2003. How are earnings
managed: Examples from auditors. Accounting Horizons, 17 (Supplement): 17-35.
8)
Ronen and Yaari. 2008. part 4.
2.3. Accounting scholarship
Alka, Arora, and Alam Pervaiz. 2001. The dual role of accounting earnings: Contracting
and valuation. Journal of Corporate Communications (http://www.corpcomm.org) 3
(October): 3.
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Feltham, Jerald A. and James A. Ohlson. 1995. Valuation and clean surplus accounting
for operating and financial activities. Contemporary Accounting Research, 11 (Spring):
689-731.
Modigliani Franco, and Miller. 1958. The cost of capital, corporation finance, and the cost
of capital. The American Economic Review, 48 (3): 261-297.
Ronen, Joshua and Varda Yaari. The importance of earnings and earnings
management. Working paper, presented at North-East Regional meeting. April 2007.
Ronen, Joshua. 1979. The dual role of accounting: A financial economic perspective. In
Handbook of Financial Economics. Ed. James L. Bicksler. North-Holland Company,
Amsterdam: 415-454.
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2.3.1.
Time Table and Assignments
Module
Week
TOPICS
1
1
Introduction and Accounting scholarship
1
Division
Assignment
of
assignments
among students
1. Read chapter 1 in RY.
2. Read the instructions on how to write
a paper
The dual role of accounting
3. Write a paper that deals with the
accounting scholarship’s perspective on
The scholarly perspective on
convergence.
the dual role of accounting
Please note you do not write for WALL
STREET JOURNAL. References are
important.
Clean surplus accounting
2
2-5
Game Theory for accounting
1
Lectures in:
4. Prepare the exercises in game theory
(1) Game theory
(2) Basic knowledge: The
1-3
dual
role
of
accounting
further explored
3
6
Skills
3
6
SAS
1. Find the Fortune 500 firms in 2004.
2. For each firm find its CUSIP in
Compustat, the industry it belongs to,
its cash flows from operations and
earnings, PP&E, sales in 2003.
3. Find the same variables for all firms
9
in the same industry in the same year.
4. Run PROC as given below.
4
7-10
The Accounting Scene
7
How to read a research
1. Read Jones (1991).
paper
2. Read practical meta-analysis.
3. The class codes papers on earnings
management
in
Seasoned
Equity
Offerings
4. Find if anyone of your Fortune 500
had SEO in 2004
4
8-10
Surveys
Presentation by students
5
11-13
Earnings Management and Quality of Earnings
5
11
Quality of earnings
Read Dechow and Schrand (2004).
Find the quality of earnings in your
Fortune 500 firms.
5
12
Earnings management: The
Read RY ch. 10
evolution of research
5
10
13
Earnings management: the
Read RY ch. 11
current state of research
Prepare a term project.