Financial accounting standards permit managers to exercise discretion on reporting therefore provide space for earnings management. Managers can strategically manipulate earnings to affect perceptions of other stakeholders. Earnings management has been an active research field in accounting for decades. Recent scandal of Enron and Worldcom raised public concern about earnings management activities. My dissertation addresses two issues about earnings management My first essay investigates the relationship between timeliness and earnings quality. Timeliness and earnings quality are two essential qualitative properties incorporated in GAAP. However managers can affect them by exercising discretion on reporting dates and accruals. The literature has documented systematic behavior in timing and accruals as independent phenomena, and found significant market reactions to each. In this study, we examine the timing and accruals as a joint phenomenon and finds significant interaction between them. Our study also shows that the market assessment of earnings quality is affected by the timeliness of disclosure. The information relevance of earnings quality and earnings performance is associated with disclosure timing. The evidence indicates that report timing and accrual adjustments are joint disclosure strategy. Hence, timeliness and earnings quality should be considered as a joint issue in the deliberation of GAAP My second essay examines the effects of firm performance and growth on managers' decision of earnings management. We construct a simple model in which the market's price mechanism and managers' choice of earnings management are determined simultaneously. In the equilibrium, the level of earnings management increases with reported earnings and future growth, while the proportion of earnings managements in reported earnings decreases with reported earnings and increases in future growth. The model also predicts that the value relevance of earnings, as measured by the coefficients of price regress on earnings, increases with reported earnings and future growth. In the extension, we introduce uncertainty about the costs of earnings management into the basic model. Under this setting, the variance of earnings management increases with reported earnings and future growth. We empirically test those propositions and find strongly supporting results. Our study explicitly relates earnings management with firm performance and future growth and provides a new explanation to why discretionary accruals estimated from Jones (1991) model are related to firm performance and future growth as documented in Dechow, Sloan and Sweedney (1995) and McNichols (2000) / acase@tulane.edu

Managers and security analysts play important roles in conveying information concerning firms' future to investors. Both mangers and security analysts have certain freedom to choose the form, timing, and content of their disclosure or forecasts. This dissertation studies rational expectation of economic parties, including managers, analysts, the equity market and the labor market, as potential explanations for managers' and analysts' disclosure behavior The first essay studies the relation between security analysts' forecasting abilities and their strategic timing decisions. I model analyst behavior in a dynamic setting where incentives are provided by the market's evaluation of an analyst's ability. Under this setting, both forecast timing and forecast accuracy affect the market's perception. The paper demonstrates that analysts delay revealing private information or make early uninformative forecasts to influence the market's evaluation of their abilities. The model predicts that analysts with more precise private information forecast more timely and more frequently than analysts with less precise private information. Using quarterly earnings forecasts in I/B/E/S from 1993 to 2004, I find supporting evidence for the prediction The second essay studies the relationship between the amount of managed earnings and firms' earnings performance and expected growth in a reporting model, where managers manipulate earnings to influence the valuation of firms' equity while bearing a cost that is increasing and convex in the amount of managed earnings. In the unique revealing equilibrium to the model, firms with higher performance and growth over-report earnings by a larger amount because price responsiveness increases with earnings performance and growth. And earnings quality, defined as the proportion of true economic earnings in total reported earnings, increases with earnings performance but decreases with earnings growth. Empirical tests are conducted on a large sample and a restatement sample using different proxies for earnings management. Results from the large sample tests support the model's predictions while results from the restatement sample tests are mixed. This study provides an alternative explanation to the positive relationship between discretionary accruals estimated from the Jones model and firms' performance and growth / acase@tulane.edu

This study examines the effects of three variables, owner involvement, compensation contracts, and accounting-monitoring systems on the success of a firm's transition from a two-tier to a three-tier hierarchy. An illustrative model of the decision-making process is suggested The effects and relative importance of these three variables are studied through field studies of seven firms in the water treatment industry. The findings provide evidence that, at least for these firms, owner involvement can have a negative association with company profits, but this effect may be mitigated by the presence of well-designed accounting-monitoring systems and, to a lesser degree, by carefully constructed compensation contracts / acase@tulane.edu

acase@tulane.edu

The focus of this research is on management's communication of uncertainty (attested to by auditors) and the potential for miscommunication due to the communication mode used in accounting disclosures. The following two research questions are addressed: First, do users of financial statements differentiate between the three levels of uncertainty from SFAS No. 5 when either specific verbal expressions or corresponding numerical probability ranges are used? Second, are there decision or judgment differences when numerical probabilities replace verbal expressions in communicating these uncertainties? / The above two research questions are investigated using a between-subject 3 x 2 factorial design. The first independent variable is the level of uncertainty. It has three levels which correspond to the three levels defined in SFAS No. 5--remote, reasonable possible, and probable. The second independent variable is the mode of communication. It has two levels--verbal expression and numerical probability range. The dependent variable is the revised risk assessment, which is defined as the risk assessment made by the loan officers after they received the uncertainty information. The subjects for this study were commercial loan officers from a major regional bank. / The statistical analysis of variance was performed to test both research questions. The level of uncertainty and the mode of communication main effects were significant for the amount of risk revision as the dependent variable (the difference between the initial risk assessment and the revised risk assessment). / Source: Dissertation Abstracts International, Volume: 53-03, Section: A, page: 0872. / Major Professor: Rhoda C. Icerman. / Thesis (Ph.D.)--The Florida State University, 1992.

Prior research on market reactions to bankruptcy filings has treated bankrupt firms as a uniform group with respect to the timing and manner of the bankruptcy filing disclosure. This view is limiting because important differences exist in the timing and manner of bankruptcy filing disclosure. For example, some firms never experience disclosure of their filing via the Wall Street Journal (WSJ) (absent disclosure firms). Other firms experience immediate disclosure of their filing in the WSJ (immediate disclosure firms), while the remaining firms experience a delay in disclosure of their filing (delayed disclosure firms). This study partitions firms into the three groups to investigate market reactions to bankruptcy filings and their relation to financial distress indicators. / Research question one assesses when the reach group's bankruptcy filings have information content, whether differences exist in the information content of each group's bankruptcy filings, and whether a directional relationship exists between groups with respect to the information content of their bankruptcy filings. Research question two assesses the strength of the relationship between market reactions to bankruptcy filings and the richness of firms' predisclosure information environment by examining the relationship between market reactions and WSJ attention measures. Research question three assesses whether a relationship exists between auditors' issuing or failing to issue going-concern modifications, subsequent bankruptcy filings, and the resulting market reactions for absent disclosure, immediate disclosure, and delayed disclosure firms. / Results for research question one indicate that bankruptcy filings appear to have information content, that the information content of the bankruptcy filings differs across groups, and that a directional relationship exists between groups with respect to the information content of their bankruptcy filings. Results for research question two indicate that an inverse relationship exists between abnormal price reactions to bankruptcy filings and WSJ attention measures, whereas a direct relationship exists between abnormal volume reactions to bankruptcy filings and WSJ attention measures. Results for research question three support the existence of a relationship between auditors' issuing or failing to issue going-concern modifications, subsequent bankruptcy filings, and the resulting abnormal volume reactions for absent disclosure and delayed disclosure firms. / Source: Dissertation Abstracts International, Volume: 56-01, Section: A, page: 0258. / Major Professor: Thomas F. Schaefer. / Thesis (Ph.D.)--The Florida State University, 1994.

In this dissertation, I develop analytical models to examine how price impact and reputational ranking incentives influence the forecasting behavior of sell-side analysts. First, I analyze the equilibrium behavior of an analyst when he is concerned with maximizing his short-term price impact and long-term reputational value in the market. Second, I discuss how the equilibrium forecasting behavior of an analyst changes in the presence of a second analyst, when each analyst is concerned with maximizing not only his own reputation, but also his relative reputation (i.e., reputational ranking) compared to the other analyst. Two key results emerge : (i) Positive role of short-term price-impact. Short-term price-impact motives, together with reputational concerns, provide better incentives for honest forecasting than reputational concerns or price-impact profits alone; (ii)Convexity of reputational ranking payoff function decreases the information content of analyst forecasts. The greater the ratio of reputational reward for being ranked higher to reputational penalty for being ranked lower is, the lesser the information content of analyst forecasts.

This study uses a field method to examine the effects of a group compensation plan on labor productivity, product quality, and organizational performance, in three independent subunits of the same manufacturing plant. More specifically, the study investigates whether the use of two budget-based incentives, a group output-target based scheme and a gain-sharing scheme offered in combination, motivates production teams to improve economic performance in this manufacturing setting. The output-target based scheme is a linear budget-based incentive that rewards individual team performance, providing a cash bonus when quantity meets or exceeds a target and a low (penalty) wage when quantity or product quality falls short of a target. The gain-sharing scheme (also a budget-based scheme) rewards production teams for achieving plant-level quarterly targets for labor productivity and product quality. After controlling for numerous factors that influence labor productivity and product quality in a multivariate regression model, I find that the combination of incentives schemes is associated with improvements in performance. Labor productivity increases by sixty eight percent and the defects rate decreases by ninety five percent following implementation of the incentive scheme. I also found a reduction in absenteeism and turnover, as well as improvements in the percentage of work orders completed on schedule. Although I cannot attribute the observed performance improvements to a specific scheme, nor discern whether the improvements are causally linked in some proportion to greater worker effort, improved peer monitoring, improved team cooperation, or better strategy development (i.e., worker learning); the empirical results of the study suggest that team (and group) performance is enhanced through the use of standard-based incentives contracts. Moreover, the results suggest that both schemes offered jointly with mechanisms to prevent free-riding and promote worker learning (timely performance feedback) create synergies in this particular setting that motivate production teams to improve performance. These findings suggest that this combination is effective in motivating group effort, promoting cooperation, and encouraging peer monitoring within and across production teams. All these factors leading to improvements of the firm's economic performance.

This study incorporates concepts from accounting and criminology literatures to develop a model of financial statement variables that provides researchers and auditors with information about the likelihood of fraudulent financial reporting. This study is also one of the first to test whether the predictive ability of fraud indicators has changed over time. Game theory suggests that if fraud firms consistently manifest similar characteristics then auditors will isolate those fraud indicators and react to them. The results show that accruals, market-to-book ratio, and lack of a Big Four auditor are the most influential fraud risk indicators. Fraud firms generally have higher abnormal market returns in the year of the fraud and larger market-to-book ratios compared to nonfraud firms. This finding suggests that managers who commit fraud generally attempt to preempt bad earnings news rather than react to bad news in the form of low company stock price. The results do not suggest a fundamental shift in fraud risk indicators. However, while the lack of a Big Four auditor was not significant in the 1970's and 1980's, it was significant in the 1990's. Fraud firms in the 1970's and 1980's appear to have more debt relative to the industry but are not more profitable. Frauds in the 1990's appear to be more profitable relative to the industry but do not have more debt. This finding may be due to more stock options and other performance-based incentives in the 1990's and a greater emphasis on beating analysts' expectations.

This project clarifies previous ambiguity about the role of tax and financial reporting concerns in lessee firms' lease-type decisions. A private data set provided by anonymous lessor firms is used to accurately identify for the first time the lessee's lease-type and its use of related tax deductions. This project also considers for the first time the role of hybrid lease products such as the synthetic lease in managers' ability to balance firms' tax versus financial reporting concerns. Prior research even in the period after synthetic leases were introduced to the market relied on noisy public data that was unable to parse out lease-types and tax deduction use with unambiguous tax versus financial incentives. Contrary to prior studies, consistent strong evidence is provided indicating that lease choice varies with proxies for lessee firms' marginal tax rates (MTR's). Also contrary to previous research, only weak evidence is found for the role of financial reporting concerns as proxied by leverage measures. The strong results on the MTR variable, taken with the weak results on the leverage variable suggest that tax costs are a stronger influence on leasing choice than financial incentives. This general conclusion about the stronger role of tax incentives in comparison to financial reporting incentives is not consistent with the summary findings of previous research. However, these results support widely held expectations by leasing industry experts. This evidence is also consistent with beliefs about the relative efficiency of the financial market to appropriately value disclosed accounting information.