Weighing the Evidence on the Relation between External Corporate Financing Activities, Accruals and Stock Returns

Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting accruals are increases in net operating assets on a company’s balance sheet, we question whether it is possible to distinguish between the ‘external financing anomaly’ documented by BRS and the ‘accrual anomaly’ first documented by Sloan (1996). We show that once controlling for total accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan (2003)

Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods

We document that firms’ management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increase during the period prior to SOX, followed by a significant decline after passage of SOX. However, the increase in earnings management preceding SOX was primarily in poorly performing industries. We also show that the informativeness of earnings increased steadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX

Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods

We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation

The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking

The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms that considerably increased the total risk exposure of CEOs. We examine the effects of these regulatory changes on compensation contracts of CEOs and their effect on risk taking subsequent to SOX. We find that while overall compensation did not change, salary and bonus compensation increased and option compensation decreased following the passage of SOX. The sensitivity of CEO’s wealth to changes in shareholder wealth also decreased after SOX. These results indicate that the pay for performance sensitivity of CEO compensation has declined following SOX. Our results indicate that these changes reduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs’ pay for performance sensitivities and their risky investments following SOX are associated with a reduction in stock return volatility. However, we do not find any evidence indicating that these changes are associated with lower future operating performance

Earnings Announcement Premia and the Limits to Arbitrage

We document that earnings announcement-day premia persist beyond the sample period of earlier studies, over different disclosure environments and remain robust to the refinement of using the expected announcement day rather than the actual announcement day. A portfolio of announcing firms yields returns in excess of the corresponding risk. Excluding announcers from a well-diversified portfolio, while reducing the standard deviation of that portfolio, also reduces its Sharpe ratio, indicating that this strategy results in a less favorable risk-return trade-off. Finally, we provide evidence that the premia are dramatically reduced when the announcement risk is reduced through preannouncements. In addition, we document that the continued presence of this premia is likely to result from limits to arbitrage. These findings are consistent with the view that the announcement period returns are likely to represent compensation for announcement risk

Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes Oxley Periods

We document that accrual-based earnings management increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual-based to real earnings management methods after the passage of SOX. We also find evidence that the accrual-based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. Finally, our analysis provides evidence that the increases in accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation

The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking

The Sarbanes Oxley Act of 2002 (SOX) introduced several governance reforms that considerably increased the total risk exposure of CEOs. We examine the effects of these regulatory changes on compensation contracts of CEOs and their effect on risk taking subsequent to SOX. We find that while overall compensation did not change, salary and bonus compensation increased and option compensation decreased following the passage of SOX. The sensitivity of CEO’s wealth to changes in shareholder wealth also decreased after SOX. These results indicate that the pay for performance sensitivity of CEO compensation has declined following SOX. Our results indicate that these changes reduced investments in research and development, and capital expenditures. We also document that the above changes in CEOs’ pay for performance sensitivities and their risky investments following SOX are associated with a reduction in stock return volatility. However, we do not find any evidence indicating that these changes are associated with lower future operating performance

Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods

We document that firms’ management of accounting earnings increased steadily from 1987 until the passage of the Sarbanes Oxley Act (SOX), with a significant increase during the period prior to SOX, followed by a significant decline after passage of SOX. However, the increase in earnings management preceding SOX was primarily in poorly performing industries. We also show that the informativeness of earnings increased steadily over time, and there was no significant change in earnings informativeness following the passage of SOX. Further, we find that earnings management increased the absolute informativeness of earnings, but reduced the informativeness for a given earnings surprise, as well as reduced the abnormal return for a given amount of earnings surprise. Finally, the evidence supports the hypothesis that the opportunistic behavior of managers, primarily related to the fraction of compensation derived from options, was significantly associated with earnings management in the period preceding SOX

Search for a Technicolor omega_T Particle in Events with a Photon and a b-quark Jet at CDF

If the Technicolor omega_T particle exists, a likely decay mode is omega_T -> gamma pi_T, followed by pi_T -> bb-bar, yielding the signature gamma bb-bar. We have searched 85 pb^-1 of data collected by the CDF experiment at the Fermilab Tevatron for events with a photon and two jets, where one of the jets must contain a secondary vertex implying the presence of a b quark. We find no excess of events above standard model expectations. We express the result of an exclusion region in the M_omega_T - M_pi_T mass plane.Comment: 14 pages, 2 figures. Available from the CDF server (PS with figs): http://www-cdf.fnal.gov/physics/pub98/cdf4674_omega_t_prl_4.ps FERMILAB-PUB-98/321-

Measurement of the lepton charge asymmetry in W-boson decays produced in p-pbar collisions

We describe a measurement of the charge asymmetry of leptons from W boson decays in the rapidity range 0 enu, munu events from 110+/-7 pb^{-1}of data collected by the CDF detector during 1992-95. The asymmetry data constrain the ratio of d and u quark momentum distributions in the proton over the x range of 0.006 to 0.34 at Q2 \approx M_W^2. The asymmetry predictions that use parton distribution functions obtained from previously published CDF data in the central rapidity region (0.0<|y_l|<1.1) do not agree with the new data in the large rapidity region (|y_l|>1.1).Comment: 13 pages, 3 tables, 1 figur