Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly

We show that the agency theory of overvalued equity (see Jensen, 2005) rather than investors' fixation on accruals explains the accrual anomaly, i.e., abnormal returns to an accrual trading strategy (see Sloan, 1996).Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation.Thus, high-accrual portfolios are likely to be over-represented with over-valued firms.Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms.In contrast, undervalued firms do not face incentives to report low accruals, so undervalued firms are not concentrated in low accrual decile portfolios.Therefore, across the accrual decile portfolios, we predict and find an asymmetric relation between accruals and both prior and subsequent returns.In addition, consistent with the predictions of the agency theory of overvalued equity, we find high, but not low, accrual firms' investment-financing decisions and insider trading activity are distorted, and analyst forecast optimism is concentrated among the high-accrual decile portfolios.Overall, return behavior, analyst optimism, investment-financing decisions, and insider trading activity are all consistent with the agency theory of overvalued equity, but do not support investor fixation on accruals.accrual anomaly;earnings management;agency theory of overvalued equity

Investment Banking and Analyst Objectivity: Evidence from Forecasts and Recommendations of Analysts Affiliated with M&A Advisors

Previous research finds some evidence that analysts affiliated with equity underwriters issue more optimistic earnings growth forecasts and optimistic recommendations of client stock than unaffiliated analysts. Unfortunately, these studies are unable to discriminate between three competing hypotheses for the apparent optimism. Under the bribery hypothesis, underwriting clients, with the promise of underwriting fees, coax analysts to compromise their objectivity. The execution-related conflict of hypothesis postulates that the investment banks employing analysts who are more bullish on a particular stock are better able to execute the deal, and so the banks pressure their analysts to be bullish in order to enhance their execution ability. Finally, the selection bias hypothesis postulates that analysts are objective, but because of the enhanced execution ability, banks with more optimistic analysts are more likely to get selected as underwriters. We test these hypotheses in a previously unexplored setting, namely M&A activities. Depending on whether an analyst is affiliated with the target or the acquirer and whether the analyst report is about the target or the acquirer, the hypotheses predict analyst optimism in some cases and pessimism in other. Therefore, examining the issue of analyst bias in the M&A context allows us to shed some light on alternative explanations for the impact of analyst affiliation on the properties of analyst forecasts and recommendations

Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly

We show that the agency theory of overvalued equity (see Jensen, 2005) rather than investors' fixation on accruals explains the accrual anomaly, i.e., abnormal returns to an accrual trading strategy (see Sloan, 1996).Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation.Thus, high-accrual portfolios are likely to be over-represented with over-valued firms.Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms.In contrast, undervalued firms do not face incentives to report low accruals, so undervalued firms are not concentrated in low accrual decile portfolios.Therefore, across the accrual decile portfolios, we predict and find an asymmetric relation between accruals and both prior and subsequent returns.In addition, consistent with the predictions of the agency theory of overvalued equity, we find high, but not low, accrual firms' investment-financing decisions and insider trading activity are distorted, and analyst forecast optimism is concentrated among the high-accrual decile portfolios.Overall, return behavior, analyst optimism, investment-financing decisions, and insider trading activity are all consistent with the agency theory of overvalued equity, but do not support investor fixation on accruals

What Should GAAP Look Like? A Survey and Economic Analysis

We develop an economic theory of GAAP under the assumption that GAAP’s objective is to facilitate efficient capital allocation within an economy. The theory predicts that GAAP as shaped by the economic forces of demand for and supply of financial information would focus on performance measurement and control through the income statement and balance sheet. In addition, the theory allows us to compare and contrast extant GAAP, as produced in a regulated setting, with a GAAP that might arise endogenously as a result of market forces. We conclude that verifiability and conservatism, while detracting accounting from a valuation objective, are critical features of an economic GAAP. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to areas such as intangibles where their opportunistic use is predictable. We conclude that the convergence project between the FASB and IASB should be dismantled and that competition between the two bodies would be the most practical means of achieving an economic GAAP

Measurement of the p-pbar -> Wgamma + X cross section at sqrt(s) = 1.96 TeV and WWgamma anomalous coupling limits

The WWgamma triple gauge boson coupling parameters are studied using p-pbar -> l nu gamma + X (l = e,mu) events at sqrt(s) = 1.96 TeV. The data were collected with the DO detector from an integrated luminosity of 162 pb^{-1} delivered by the Fermilab Tevatron Collider. The cross section times branching fraction for p-pbar -> W(gamma) + X -> l nu gamma + X with E_T^{gamma} > 8 GeV and Delta R_{l gamma} > 0.7 is 14.8 +/- 1.6 (stat) +/- 1.0 (syst) +/- 1.0 (lum) pb. The one-dimensional 95% confidence level limits on anomalous couplings are -0.88 < Delta kappa_{gamma} < 0.96 and -0.20 < lambda_{gamma} < 0.20.Comment: Submitted to Phys. Rev. D Rapid Communication

Measurement of the ttbar Production Cross Section in ppbar Collisions at sqrt{s} = 1.96 TeV using Kinematic Characteristics of Lepton + Jets Events

We present a measurement of the top quark pair ttbar production cross section in ppbar collisions at a center-of-mass energy of 1.96 TeV using 230 pb**{-1} of data collected by the DO detector at the Fermilab Tevatron Collider. We select events with one charged lepton (electron or muon), large missing transverse energy, and at least four jets, and extract the ttbar content of the sample based on the kinematic characteristics of the events. For a top quark mass of 175 GeV, we measure sigma(ttbar) = 6.7 {+1.4-1.3} (stat) {+1.6- 1.1} (syst) +/-0.4 (lumi) pb, in good agreement with the standard model prediction.Comment: submitted to Phys.Rev.Let

Measurement of the ttbar Production Cross Section in ppbar Collisions at sqrt(s)=1.96 TeV using Lepton + Jets Events with Lifetime b-tagging

We present a measurement of the top quark pair ($t\bar{t}$) production cross section ($\sigma_{t\bar{t}}$) in $p\bar{p}$ collisions at $\sqrt{s}=1.96$ TeV using 230 pb$^{-1}$ of data collected by the D0 experiment at the Fermilab Tevatron Collider. We select events with one charged lepton (electron or muon), missing transverse energy, and jets in the final state. We employ lifetime-based b-jet identification techniques to further enhance the $t\bar{t}$ purity of the selected sample. For a top quark mass of 175 GeV, we measure $\sigma_{t\bar{t}}=8.6^{+1.6}_{-1.5}(stat.+syst.)\pm 0.6(lumi.)$ pb, in agreement with the standard model expectation.Comment: 7 pages, 2 figures, 3 tables Submitted to Phys.Rev.Let

Measurement of the ratios of the Z/G* + >= n jet production cross sections to the total inclusive Z/G* cross section in ppbar collisions at sqrt(s) = 1.96 TeV

We present a study of events with Z bosons and jets produced at the Fermilab Tevatron Collider in ppbar collisions at a center of mass energy of 1.96 TeV. The data sample consists of nearly 14,000 Z/G* -> e+e- candidates corresponding to the integrated luminosity of 0.4 fb-1 collected using the D0 detector. Ratios of the Z/G* + >= n jet cross sections to the total inclusive Z/G* cross section have been measured for n = 1 to 4 jet events. Our measurements are found to be in good agreement with a next-to-leading order QCD calculation and with a tree-level QCD prediction with parton shower simulation and hadronization.Comment: 7 pages, 2 figures, slightly modified, submitted to Phys. Lett.

Measurement of the Isolated Photon Cross Section in p-pbar Collisions at sqrt{s}=1.96 TeV

The cross section for the inclusive production of isolated photons has been measured in p anti-p collisions at sqrt{s}=1.96 TeV with the D0 detector at the Fermilab Tevatron Collider. The photons span transverse momenta 23 to 300 GeV and have pseudorapidity |eta|<0.9. The cross section is compared with the results from two next-to-leading order perturbative QCD calculations. The theoretical predictions agree with the measurement within uncertainties.Comment: 7 pages, 5 figures, submitted to Phys.Lett.