Discretionary risk disclosures

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk‐averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime

Earnings management with cash flow hedge accounting

In this study we examine whether firms use cash flow hedge accounting to manage earnings by deferring derivatives gain/loss amounts to other comprehensive income (designating derivatives as cash flow hedges) or transferring derivatives gain/loss amounts from accumulated other comprehensive income to earnings (de-designating derivatives). We find evidence that firms use cash flow hedge accounting to increase earnings towards a target or take a big bath if reported earnings are below analyst forecasts. Further, we find that earnings management incentives are an important determinant in the decisions to designate derivatives as hedges and de-designate derivatives in cash flow hedges. Finally, our results indicate that the increased transparency of other comprehensive income components after the adoption of ASU 2011-05 significantly reduces earnings management with cash flow hedge accounting but does not eliminate it completely

Are Audit Fees Linear in Accruals?

This study examines the role of accruals in the pricing of financial statement audits. We posit that both large positive and large negative accruals represent increases in the auditor’s inherent risk, resulting in a nonlinear relation between accruals and audit fees. Consistent with our expectations, we find that both large negative and large positive total accruals are associated with higher audit fees. Further, the nonlinear relation between total accruals and audit fees is asymmetric, with a steeper slope on positive total accruals than negative total accruals. We next partition total accruals into specific asset accruals using an approach developed by Casey, Gao, Kirschenheiter, Li, and Pandit (2016, 2017) and find that accruals originating from different transactions exhibit predictably nonlinear relations with audit fees. On the whole, our results suggest that auditors respond asymmetrically to accruals based on the magnitude and source of the accrual