Prior studies identify three factors that contribute to the low contemporaneous association between returns (prices) and earnings: lack of timeliness of earnings capturing value relevant information, noise in earnings and transitory elements in earnings. This study seeks to identify whether these factors contribute to the observed inter-temporal decline in the contemporaneous association between returns (prices) and earnings documented in recent literature. Prior studies do not explicitly examine the affect of these factors on the inter-temporal decline, and the extant evidence is mixed. Empirical evidence presented here indicates that lack of timeliness of earnings and value irrelevant noise in earnings have increased over time, both contributing to the documented inter-temporal decline in the contemporaneous association between returns (prices) and earnings.

This paper shows that institutional investor investment style affects the association between accruals and future returns and book-to-market ratio and future returns. Since both the accrual and book-to-market anomalies generate positive future returns to a trading strategy that is consistent with a value investment style, I predict and find that the accrual effect and the book-to-market effect are lower when the percentage of shares held by value mutual funds is high. These findings are consistent with value mutual funds mitigating mispricing. Additionally, these effects are unrelated to total or growth mutual fund ownership. I also find that changes in value mutual fund holdings are positively associated with the book-to-market ratio, consistent with value funds trading to take advantage of the book-to-market effect, while the results are inconsistent with growth funds trading to take advantage of the anomaly. These results suggest that institutional investor investment style at the fund level has an effect on the accrual and book-to-market ratio anomalies.

The existence of private information regarding expected productivity requires decentralized firms to develop intrafirm resource allocation mechanisms. Participation can help central management acquire and allocate resources according to divisional requirements. However, optimal plans require accurate pre-allocation communications. When preferences regarding local objectives, risk, and resources diverge, division managers may bias communications, creating budgetary slack. This study tested the effectiveness of unit-profit + penalty, firm-profit-sharing, and Groves incentive schemes in inducing truthful communication and controlling resource consumption under uncertainty. The experiment incorporated three independent variables: incentive scheme and utility for resource consumption were manipulated between-subjects; risk neutrality and risk aversion were induced within-subject. Three main results are presented. First, contrary to predictions, subjects do not misrepresent expected productivity more under risk aversion, regardless of scheme. Lack of support could be due to limited understanding regarding the experimental task and tradeoffs. The properties of the Groves scheme lead to an insufficient spread among its theoretical predictions, restricting the misrepresentation range and minimizing opportunities to observe differences. Second, both Groves and firm-profit-sharing groups consumed more resources than the unit-profit + penalty groups. Third, subjects in all groups exhibit significant increases in resource consumption under risk aversion. Increased consumption under risk aversion was predicted for both the Groves and firm-profit-sharing groups. However, decreased consumption was hypothesized for the unit-profit + penalty group. To contend with a difficult task under risk aversion and to increase the probability of winning when feedback indicated a low overall likelihood, subjects may have responded with "overconsumption strategies." Overall findings suggest that, although a unit-profit + penalty scheme does not appear to control misrepresentation better than either Groves or firm-profit-sharing schemes, it is more effective in controlling resource consumption. However, its effectiveness in controlling consumption diminishes with risk aversion.

This paper investigates factors that influence the amount of foreign retained earnings permanently reinvested abroad and the market valuation of these earnings. I examine the effects of repatriation taxes and the difference between foreign and domestic profitability on the amount of foreign subsidiary earnings that firms reinvest abroad using the permanently reinvested earnings designation as a proxy for foreign retained earnings. This extends prior work that examines the effect of repatriation taxes on repatriations by including both foreign and domestic profitability and by allowing the effects to vary by the firm's foreign tax credit position. The results are consistent with the hypotheses and indicate that foreign retained earnings increase with the difference between foreign and domestic after-tax-returns. Foreign retained earnings decrease with the foreign tax rate for firms in binding foreign tax credit positions, but are not related to the foreign tax rate for firms in nonbinding foreign tax credit positions. Next, I examine how earnings management incentives affect the amount of foreign subsidiary earnings designated as permanently reinvested, controlling for the effects of profitability and repatriation taxes. I examine whether firms that are close to debt covenant violation or that fail to meet their target earnings have higher permanently reinvested earnings. The permanently reinvested earnings designation provides the opportunity to manage earnings because U.S. repatriation taxes need not be recognized in financial statement income if the earnings are designated as permanently reinvested. I find no evidence of earnings management to meet debt covenants; however, I do find evidence of earnings management to meet target earnings. Finally, I examine the market valuation of taxes on permanently reinvested earnings and whether this valuation differs for earnings managers and non-earnings managers. I hypothesize that because the tax estimate is undiscounted, the market values taxes on permanently reinvested earnings more negatively for earnings managers than for non-earnings managers because it perceives the investment to be of a shorter duration. The results support this hypothesis and suggest that the market recognizes earnings management attempts and values the tax estimate as if the reinvestment of foreign subsidiary earnings by earnings managers is not permanent.

This paper examines how the multinational firm's choice of debt or internal funds as a method of financing depends upon the cost of using internal funds. I extend prior research by differentiating between the cost of using domestic versus foreign internal funds for additional investments for multinational enterprises. I predict that foreign funds are more costly than domestic funds because of potential differential costs, including repatriation tax costs and financial reporting costs. I find that my measure of total funds, the sum of cash and short-term receivables, is negatively related to issuing incremental debt. I also examine whether the proportion of total funds represented by foreign funds affects a firm's decision to use incremental debt financing. My proxy for foreign funds is a rough estimate using available Compustat data (foreign assets divided by total assets multiplied by total funds). I do not find significant results with this general measure of foreign funds. Additionally, I test whether firms' FTC positions affect incremental financing decisions. I do not find results with this measure of foreign funds. I further examine the impact of costly foreign funds on the incremental debt financing decision using alternative measures. I examine the differential costs of a subset of foreign funds with the designation and dollar level of permanently reinvested earnings. My results suggest that the change in debt is positively related to the dollar level of permanently reinvested earnings. In addition, in a model that includes the interaction between the dollar level of permanently reinvested earnings and non-binding FTC status, my results suggest that the magnitude of the relationship between the level of permanent reinvestment of foreign earnings and incremental debt financing is greater for firms with non-binding FTC limitations than for firms with binding FTC limitations. Overall, my findings suggest that the source of internal funds makes a difference in firms' use of debt financing. After controlling for investment opportunities with a measure of the difference between the foreign and domestic after-tax return, I find that financial reporting considerations impact the debt (versus internal funds) financing decision.

This paper uses several approaches to assess the impact of the Security and Exchange Commission's (SEC) scrutiny of firms' purchase accounting and in-process research and development write-offs during 1997 and 1998. Using hand collected data, I examine the characteristics of firms choosing to overstate IPR&D and the market's reaction to the restatement announcements. I discuss the motivations for overstating IPR&D and find evidence consistent with firms using IPR&D write-offs to improve future earnings. I use a partial observability probit model and determine that IPR&D overstatements are related to the market's expectations for the firm's future performance and the materiality of the intangible premium. Finally, using methods to control for the contemporaneous correlation among the restatement announcements, I find that the market reaction to most IPR&D restating events is weak. Few firms reported large negative price reactions to IPR&D restatement events, thus, investors were, for the most part, not mislead by the IPR&D overstatements as claimed by the SEC.

There is widespread recognition in the accounting literature that properly directed audit effort is critical to an effective and efficient engagement. Auditors assess the risks of managerial misstatements and use these risks to plan audit procedures. Prior studies examining the linkage between assessed risk and audit effort report weak and conflicting results. The unobservable nature of the audit process necessitates the use of proxies to capture assessed risks and audit effort. This study utilizes proprietary audit workpaper data to obtain better measurement of assessed risks and effort. These improved measurements provide stronger evidence on whether changes in assessed risks will affect the nature, timing, and extent of audit testing. This linkage is examined first using OLS and then an instrumental variables approach to address potential simultaneity in determining the nature, timing, and extent of substantive effort. In contrast to prior research, results suggest that auditors vary the nature, timing, and extent of substantive effort in response to assessed auditee risks.

It is widely held that the auditor's experience is the most important factor leading to the development and organization of the auditor's knowledge base (Waller and Felix 1984; Gibbins 1984). This study extends prior research by examining knowledge differences between auditors with similar amounts of public accounting experience (general domain experience) but with differing specific audit experiences and training. The study examines the association between experience and training and the auditors knowledge of the effectiveness of internal control and audit procedures to prevent and detect potential misstatements of financial statements. This particular knowledge is important in the performance of audit risk assessment and audit planning tasks. Risk assessment and audit planning tasks are important tasks that auditors begin to perform early in their auditing careers. In order to test these relationships, 60 subjects with approximately one to two years of public accounting experience performed a knowledge retrieval task to assess their knowledge of the relationship between common financial statement misstatements and the control and audit procedures that would prevent or detect those misstatements. Self-reported measures of public accounting experience and estimates of experience and training relevant to various industries and audit activities were collected to develop measures of task-relevant experience and training. The resulting evidence of this study provides limited support that differences in audit-cycle experience results in differences in the auditor's knowledge of effective internal control procedures. The study also provides evidence that the knowledge of the relationships between internal control and audit procedures and potential misstatements to financial statements is acquired, at least in part, prior to obtaining significant experience in performing audit planning tasks.

The ASB recently proposed that auditors explicitly assess fraud risk and document their planned response to the level of fraud risk. Researchers and practitioners have recommended that auditors perform separate risk assessments for intentional misstatements (e.g., management fraud) and unintentional misstatements (e.g., errors) in order to improve auditors' ability to detect fraud. This study examines the effects of this requirement on auditors' planning decisions. In comparison with auditors who make combined inherent risk assessments, auditors who make a separate inherent risk assessment are expected to spend more time attending to fraud cues and react to changes in fraud risk indicators more readily. Additionally, auditors who make separate risk assessments are expected to report less confidence in their fraud risk assessment when compared to their error risk assessment due to the difficulty of interpreting the implications of strategic behavior. A computerized test instrument monitored auditors' time attending to fraud cues. Four versions of the software manipulated, between subjects, the type of inherent risk assessment required (i.e., separate assessments for intentional and unintentional misstatements or a combined assessment) and the indicators of fraud risk in an audit case (i.e. 'low' or 'high' fraud risk). Auditors' planning decisions are used to measure their response to the indicators of fraud risk. Evidence of the effects of performing a separate fraud risk assessment may provide policy makers with information to evaluate the economics of the ASB's proposed policy change. Data analyses indicate that auditors who separately assessed fraud risk used significantly more time attending to the fraud cues. Additionally, the group who separately assessed fraud risk budgeted significantly more hours for the case that indicated higher fraud risk than the lower fraud risk case while the other group reported no significant difference in planned hours. Analyses of audit procedure selections revealed no significant differences between groups suggesting that auditors do not modify the nature of their audit tests as a response to perceived fraud risk. Finally, comparisons of auditors' confidence in their risk assessments showed that they were significantly less confident in their fraud risk assessment than in their error risk assessment.

<p> This paper uses the collapse of the junk bond market in the early 1990s as a natural experiment to examine the effect of asymmetric timely loss recognition (ATLR) on speculative-grade (SPG) firms' access to private debt markets and underinvestment. For a sample of 450 firm-years over the period 1988-1991, I find that SPG firms that recognize economic losses in a timelier fashion experience a smaller reduction in debt financing and investment from the pre- to post-collapse period relative to SPG firms that recognize economic losses in a less timely fashion. I also document that the effect of ATLR on debt financing and investment is more pronounced for SPG firms that lack collateral and are not followed by sell-side equity analysts. These findings support the notion that ATLR improves a firm's ability to access private debt markets, thereby attenuating underinvestment. They also suggest that both collateral and sell-side equity analysts serve as substitutes for ATLR to facilitate SPG firms' access to private debt markets. Further analyses reveal that ATLR increases for SPG firms from the pre- to post-collapse period and this increase is more pronounced for SPG firms with net issuance of debt. This evidence suggests that firms adjust ATLR to obtain debt financing in response to private lenders' demand for it.</p>