In Defense of Fair Value: Weighing the Evidence on Earnings Management and Asset Securitizations

Dechow, Myers, and Shakespeare (DMS, 2009) find a negative relation between income from securitization activities and income from non-securitization activities. DMS interprets this finding as indicating that managers use the flexibility available in fair value accounting rules to smooth earnings. We clarify the role of fair value in accounting for asset securitizations, discuss alternative explanations for the evidence presented in DMS, and offer suggestions for future research. We caution against inferring the desirability of any particular accounting method from earnings management research

Cost of capital and earnings transparency

We provide evidence that firms with more transparent earnings enjoy a lower cost of capital. We base our earnings transparency measure on the extent to which earnings and change in earnings covary contemporaneously with returns. We find a significant negative relation between our transparency measure and subsequent excess and portfolio mean returns, and expected cost of capital, even after controlling for previously documented determinants of cost of capital

Market Reaction to the Adoption of IFRS in Europe

This study examines the European stock market reaction to sixteen events associated with the adoption of International Financial Reporting Standards (IFRS) in Europe. European IFRS adoption represented a major milestone towards financial reporting convergence yet spurred controversy reaching the highest levels of government. We find a more positive reaction for firms with lower quality pre-adoption information, which is more pronounced in banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality benefits from IFRS adoption. We also find that the reaction is less positive for firms domiciled in code law countries, consistent with investors' concerns over enforcement of IFRS in those countries. Finally, we find a positive reaction to IFRS adoption events for firms with high quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption. Overall, the findings suggest that investors in European firms perceived net benefits associated with IFRS adoption.IFRS, IAS 39, Convergence, Europe, Event Study

The Contribution of Bank Regulation and Fair Value Accounting to Procyclical Leverage

Our analytical description of how banks’ responses to asset price changes can result in procyclical leverage reveals that for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, leverage is not procyclical. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of US commercial banks reveal that bank regulation explains procyclical leverage for banks relatively close to the regulatory leverage constraint and contributes to procyclical leverage for those that are not. Fair value accounting does not contribute to procyclical leverage

The Information Content of Operational Efficiency

We address whether and why a firm's operational efficiency has information content for investors and whether it is associated with prolonged price discovery at quarterly earnings announcements. We measure operational efficiency using the cash conversion cycle (CCC), where shorter CCC reflects better operational efficiency. We find that CCC has information content for investors in that shorter CCC is positively related to abnormal stock returns and trading volume at quarterly earnings announcements. We also find that shorter CCC is associated with higher future earnings and cash flows, which helps explain the positive announcement return and volume reactions. In addition, our findings reveal that CCC is associated with prolonged price discovery in that shorter CCC is associated with less timely and less efficient incorporation of information into stock prices and larger post-earnings-announcement drift. However, these findings largely are attributable to firms that announce bad earnings news

The Deep Convective Clouds and Chemistry (DC3) Field Campaign

The Deep Convective Clouds and Chemistry (DC3) field experiment produced an exceptional dataset on thunderstorms, including their dynamical, physical, and electrical structures and their impact on the chemical composition of the troposphere. The field experiment gathered detailed information on the chemical composition of the inflow and outflow regions of midlatitude thunderstorms in northeast Colorado, west Texas to central Oklahoma, and northern Alabama. A unique aspect of the DC3 strategy was to locate and sample the convective outflow a day after active convection in order to measure the chemical transformations within the upper-tropospheric convective plume. These data are being analyzed to investigate transport and dynamics of the storms, scavenging of soluble trace gases and aerosols, production of nitrogen oxides by lightning, relationships between lightning flash rates and storm parameters, chemistry in the upper troposphere that is affected by the convection, and related source characterization of the three sampling regions. DC3 also documented biomass-burning plumes and the interactions of these plumes with deep convection

Erratum to: The contribution of bank regulation and fair value accounting to procyclical leverage

Abstract Our analysis of how banks’ responses to asset price changes can result in procyclical leverage reveals that, for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, procyclical leverage does not occur. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of U.S. commercial banks reveal that bank regulation explains procyclical leverage for banks relatively close to the regulatory leverage constraint and contributes to procyclical leverage for those that are not. We also show that fair value accounting does not contribute to procyclical leverage

Why Do Pro Forma and Street Earnings not Reflect Changes in GAAP? Evidence From SFAS 123R

This study examines how key market participants—managers and analysts—responded to SFAS 123R’s controversial requirement that firms recognize stock-based compensation expense. Despite mandated recognition of the expense, some firms’ managers exclude it from pro forma earnings and some firms’ analysts exclude it from Street earnings. We find evidence consistent with managers opportunistically excluding the expense to increase earnings, smooth earnings, and meet earnings benchmarks but no evidence that these exclusions result in an earnings measure that better predicts future firm performance. In contrast, we find that analysts exclude the expense from earnings forecasts when exclusion increases earnings’ predictive ability for future performance and that opportunism generally does not explain exclusion by analysts incremental to exclusion by managers. Thus our findings indicate that opportunism is the primary explanation for exclusion of the expense from pro forma earnings and predictive ability is the primary explanation for exclusion from Street earnings. Our findings suggest the controversy surrounding the recognition of stock-based compensation expense may be attributable to cross-sectional variation in the relevance of the expense for equity valuation, as well as to differing incentives of market participants