Why Are Earnings Kinky? An Examination of the Earnings Management Explanation

Prior research has documented a “kink” in the earnings distribution: too few firms report small losses, too many firms report small profits. We investigate whether boosting of discretionary accruals to report a small profit is a reasonable explanation for this “kink.” Overall, we are unable to confirm that boosting of discretionary accruals is the key driver of the kink. We caution the use of the ratio of small profit firms to small loss firms as a measure of earnings management. We investigate and discuss a number of alternative explanations for the kink.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/47741/1/11142_2004_Article_5127187.pd

Management Forecast Credibility and Underreaction to News

In this paper, we first document evidence of underreaction to management forecast news. We then hypothesize that the credibility of the forecast influences the magnitude of this underreaction. Relying on evidence that more credible forecasts are associated with a larger reaction in the short window around the management forecasts and a smaller post-management forecast drift in returns, we show that the magnitude of the underreaction is smaller for firms that provide more credible forecasts. Our paper contributes to the literature by providing out-of-sample evidence of the drift in returns documented in the post-earnings-announcement drift literature, with the credibility of the news being one explanation for the phenomenon.Sloan School of ManagementWharton SchoolDeloitte Foundatio

Expectations management and beatable targets: how do analysts react to explicit earnings guidance?

This study investigates security analysts' reactions to public management guidance and assesses whether managers successfully guide analysts toward beatable earnings targets. We use a panel dataset between 1995 and 2001 to examine the fiscal-quarter-specific determinants of management guidance and the timing, extent, and outcomes of analysts' reactions to this guidance. We find that management guidance is more likely when analysts’ initial forecasts are optimistic, and, after controlling for the level of this optimism, when analysts’ forecast dispersion is low. Analysts quickly react to management guidance and they are more likely to issue final meetable or beatable earnings targets when management provides public guidance. Our evidence suggests that public management guidance plays an important role in leading analysts toward achievable earnings targets

Determinants and consequences of equity restructuring transactions: How are tracking stocks different from equity carve -outs and spin -offs?

This dissertation examines the determinants and consequences of management's decision to create a new common stock through an equity restructuring. Equity restructuring types include equity carve-outs, spin-offs, and the issuance of tracking stocks. I find that the key determinant of equity restructurings is market timing; that management undertakes these transactions to capture valuation rents in industries with high relative valuations. I also find that the new stocks created by these restructurings exhibit different risk-return characteristics from the original firm, but no evidence that they attract a new investor clientele. I find some evidence that these equity restructurings reduce information asymmetries between management and investors, as well as among investors, on the business underlying the new stock. I then examine the choice between the various restructuring options. I find that equity restructurings are more likely to be tracking stock issuances if (i) the underlying division generates tax benefits and (ii) the division has interdependencies with the parent division and has or produces more specific assets. I find mixed evidence on the association between managerial entrenchment and the likelihood of tracking stock issuance.Ph.D.AccountingFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/123729/2/3096224.pd

Accounting anomalies and fundamental analysis: A review of recent research advances

We survey recent research in accounting anomalies and fundamental analysis. We use forecasting of future earnings and returns as our organizing framework and suggest a roadmap for research aiming to document the forecasting benefits of accounting information. We combine this with opinions from the academic and practitioner communities to critically evaluate key clusters of papers about accounting anomalies and fundamental analysis disseminated over the last decade. Finally, we provide a new analysis on how an ex ante and ex post treatment of risk and transaction costs affects the accrual and PEAD anomalies, and offer suggestions for future research.Accruals Anomalies Forecasting Fundamental analysis Market efficiency Risk

Do short sale transactions precede bad news events?

Do short sale transactions precede bad news events? Not recently. This paper examines short sale transactions around significant news events. Using a novel and comprehensive dataset covering daily short sale transactions for 4,193 securities on the New York Stock Exchange for the period April 1, 2004 through March 31, 2005, we find no evidence that short sale transactions are concentrated prior to bad news events. This challenges prior research that has found short sale transactions have tended to precede stock price declines. Additional analysis reveals that there is no reliable evidence of daily changes in short sales transactions leading daily stock returns, inconsistent with the notion that short sale transactions (at least in the aggregate) are based on private information

Accounting for Taste: Board Member Preferences and Corporate Policy Choices

This paper explores whether firms that share common directors also pursue similar corporate policies. Using a sample of 885 U.S. firms with common directors, we find that director fixed effects strongly explain variation in firms' governance, financial, disclosure, and strategic policy choices. Moreover, the director fixed effects provide incremental explanatory power over traditional economic determinants of firms' policies. consistent with our hypotheses, the director effects are less pronounced in large firms, in firms with more outside board members, and for directors with numerous outside board appointments. Our evidence is more consistent with directors and firms "matching" their policy preferences rather than directors "imposing" their policy preferences on firm