A considerable body of evidence, both archival and experimental, suggests that accounting accruals are heterogeneously interpreted by investors. In this study, I examine whether the information asymmetry among investors arising from this heterogeneous interpretation, implied in these empirical results, affects transactions costs in the form of the bid-ask spread and its adverse selection component. I examine this impact both, in general, for all trading activity occurring for a firm over a continuous flow of information during the year and around the first release of accrual information for each quarter. The results of the study provide empirical evidence of a positive association between the adverse selection component of the bid-ask spread and accruals in the yearly analysis. The results of the quarterly event tests conducted both around earnings announcements and the 10-Q/10-K filing dates indicate that the increase in the adverse selection component of the spread is positively linked to the absolute magnitude of total accruals. Documenting the existence of such a real cost of accruals provides a transactions cost basis for understanding why cost of capital increases with accrual activity (Dechow et al. 1996, Francis et al. 2005) as well as suggesting that the information asymmetries associated with such activity merit serious attention of accounting policy makers

Whenever there is a merger between two publicly held companies in the form of a stock transaction, the companies must provide a proxy-prospectus to their shareholders with enough information to vote on the proposed merger. The proxy-prospectus contains mandatory pro forma financial statements as if the firms had merged as of the end of the previous year. Occasionally, the proxy-prospectus contains voluntary, forward-looking information, such as projected earnings per share (EPS) or price-to-earnings (PE) ratios of the combined firm. There are two reasons that management may provide this voluntary forward-looking information: 1) management could be providing an optimistic view of the new firm to persuade the shareholders to vote in favor of the merger or 2) the information could be used to provide a clearer picture to help management reduce the information asymmetry between management and shareholders. This study investigates the factors that increase the likelihood of a merger being completed. Second, this study examines the impact that important reporting incentives and firm characteristics have on whether or not firms choose to voluntarily disclose earnings estimates. Lastly, this study examines earnings forecast bias and the factors related to the accuracy and bias of the voluntarily disclosed earnings estimates. Results indicate that shareholders of bidder firms that are weaker financially are more likely to approve a merger suggesting that shareholders of weaker firms might be trying to get stronger by merging with another firm. Second, bidder firms with stronger financial characteristics and target firms with weaker financial characteristics are more apt to voluntarily disclose earnings estimates. Additionally, for those firms that provided EPS forecasts, the forecasts were positively biased. These findings indicate that management of bidder firms that are stronger financially may use these voluntary EPS forecasts to enhance the future outlook of the firm. Lastly, firms that provided voluntary earnings estimates were examined. Results indicate that firms with stronger corporate governance provided more accurate and less biased EPS forecasts. This suggests that corporate governance, which is in place to protect shareholder rights, is doing its job.

Although accounting research continues to focus on earnings management, few studies have done so within the context of a single industry, and only one study to date (Paek 2001) has investigated this phenomenon within the context of U.S. rate-regulated electric utilities. Most utilities are viewed as natural monopolies, and therefore are subjected to rate regulation. These firms are permitted to earn a prescribed rate of return on an approved rate base. Although utilities are subjected to greater scrutiny than non-regulated public companies, regulatory restraint may create incentives to manage earnings (Healy and Whalen 1999), especially coincident with a utilitys request to regulators for a rate increase. I use samples drawn from the electric utility and manufacturing industries to examine the following three research questions. First, does earnings management in rate-regulated electric utilities, as represented by the magnitude of discretionary accruals, significantly differ from that observed in comparable non-regulated companies? The second question probes whether the deregulation of the generation and marketing of electricity within the electric utility industry that began in the late 1990s, significantly altered the opportunity to observe earnings management. The third question focuses on whether rate-regulated electric utilities manage earnings downward in the year that they file for a rate increase? And, if indications of earnings management are observed, is industry-specific GAAP used to decrease earnings? I estimate the earnings management metric, discretionary accruals, using accrual expectation models from prior research. Results indicate the magnitude of discretionary accruals, on average, is significantly smaller for rate-regulated electric utilities than for non-regulated companies suggesting that rate regulation is adequate in constraining earnings management. This is corroborated by the finding that earnings management metric increased for those utilities affected by deregulation. Finally, in an intra-industry comparison, I observe significantly lower discretionary accruals for utilities in the year they request rate increases when compared to years in which rate increases are not requested. This result is consistent with opportunistic earnings management and raises a social welfare issue. Evidence that industry-specific GAAP is used to manage earnings downward is inconclusive.

This study examines the relation between accruals quality and price synchronicity, a measure of the relative amount of firm-specific information reflected in price. Higher accruals quality imply better quality earnings news, hence, more firm-specific information is incorporated into price for firms with higher accruals quality. More firm-specific information reduces price synchronicity, hence, we hypothesize a negative relation between accruals quality and price synchronicity. On the other hand, literature shows that accruals quality reduces idiosyncratic volatility which tends to be negatively correlated with price synchronicity. If the latter effects dominate the relation between accruals quality and price synchronicity, we should observe a positive relationship between accruals quality and price synchronicity. Controlling for idiosyncratic volatility, we find a significant negative relation between accruals quality and price synchronicity after controlling for idiosyncratic volatility. We investigate this further by partitioning the sample by analyst following. If earnings information complements analysts information, we expect to find a stronger negative relation between accruals quality and price synchronicity for firms that are followed by analysts. If, on the other hand, earnings information and analysts information are substitutes, we expect to find a stronger negative relation between accruals quality and price synchronicity for those firms that are not followed by analysts. We find that accruals quality has a greater impact on price synchronicity for firms with an analyst following compared to firm that do not have an analyst following. This is consistent with the notion that earnings information complements analyst information.

I propose that audit quality is likely to increase with audit firm tenure due to a Learning Effect and decrease with audit firm tenure due to a Bonding Effect. The net impact of these two countervailing forces over audit firm tenure dictates whether the relationship between audit firm tenure and audit quality is a concave, convex, or linear function of audit firm tenure. When the Bonding Effect dominates the Learning Effect in the later (earlier) years of tenure, then audit quality is a concave (convex) function of audit firm tenure. Adopting the quadratic model to empirically estimate the audit firm tenure year when audit quality is likely to decline, I first find that the average point when audit quality optimizes is 12 years for a large sample of U.S. firms. Then I investigate how this turning point of audit quality is affected by auditors incentives to counter the negative impact from the Bonding Effect. Consistent with the notion that the Bonding Effect is less severe for high quality auditors, I find that the turning point of audit quality is longer for firms with Big N auditors, specialist auditors, and auditors of high client importance. In the additional analyses, I further examine how the turning point of audit quality varies over time and across industries. I find that, since Sarbanes-Oxley Act of 2002 (SOX, hereafter) was enacted, the turning point gets longer, implying that SOX may have mitigated the Bonding Effect. Moreover, I find that the deterioration of audit quality for extended auditor tenure only exists in low-litigation industries but not in high-litigation industries, suggesting that the incentives argument rather than the cognitive bias argument prevails in explaining the Bonding Effect. My results have implications for the current debate on whether audit firm rotation should be mandatory for the U.S. companies.

The paper investigates the usefulness of accounting comparability for audit engagement. Comparability among peer firms in the same industry reflects the similarity and the relatedness of firms operating environment and accounting reporting. From two perspectives of inherent business risk and external information efficiency, comparability is helpful for auditors to assess client business risk and lowers the cost of information acquisition, processing, and testing. For a given firm, I hypothesize that the availability of information about comparable firms is helpful for auditors by improving audit accuracy and audit efficiency. The comparability proxy is based on a variety of measures including pair-wise earnings-return similarity (De Franco, Kothari and Verdi 2011), historical covariance of stock returns and cash flows, and earnings comparability controlling accounting choice differences. The empirical results show that accounting comparability is positively associated with audit quality and audit reporting accuracy as of a clean or a going-concern opinion. Meanwhile, comparability is negatively related to audit delay, audit fees, and the likelihood of auditors issuing a going-concern opinion. In totality, the study shows that industry-wise comparability enhances the utility of accounting information for external audit.

Thesis (Ph. D.)--Syracuse University, 2009. / "Publication number: AAT 3385830."

Thesis--PlanB (Ed. Spec.)--University of Wisconsin--Stout, 2001. / Includes bibliographical references.

<p> This paper investigates the role of the media as an external deterrence mechanism for firms&rsquo; aggressive reporting practices. Using a sample of firms that filed income-decreasing annual restatements due to financial frauds, irregularities, and misrepresentations between 2000 and 2011, and a matched control sample, I provide evidence that the more media coverage a firm receives in the previous year, the lower likelihood of subsequent misstatements. I then distinguish positive tone from negative tone to examine whether the tone of media content affects firms&rsquo; incentives to misreport. I find that negative tone of media articles is significantly negatively associated with the likelihood of subsequent misstatements, whereas positive tone does not appear to be significant. This paper further examines the relative importance of the deterrence roles that the media and analysts play in firms&rsquo; misstatement behavior, and find that the media play a more important role than financial analysts, although the roles of these two mechanisms are overlapping to some degree.</p>

In this study, I examine whether and how analysts' pre-tax earnings forecasts are informative to investors. Specifically, I first examine the determinants of pre-tax forecast coverage and whether pre-tax forecasts are incrementally informative to investors in evaluating firm performance. Next, I examine whether pre-tax forecasts decrease the transparency of tax-related earnings management. Lastly, I examine how pre-tax earnings forecasts influence management's incentives to avoid taxes. Using I/B/E/S data from 2002-2011, I find pre-tax forecast coverage is associated with firm-level tax characteristics. In addition, I find investors utilize pre-tax earnings forecasts in evaluating firm performance, after controlling for after-tax earnings forecasts. In addition, the results of this study indicate investors more significantly discount earnings which have been managed through the tax account when pre-tax earnings forecasts are available, consistent with increased transparency resulting from detailed forecasting. Lastly, I find some evidence that increases in pre-tax forecast coverage are associated with a decrease in tax avoidance. This result is consistent with a change in management's incentives resulting from the existence of additional performance benchmarks. Collectively, this study provides evidence that pre-tax earnings forecasts are informative in multiple settings. These findings have important implications for academics and practitioners in understanding the role of additional non-EPS income statement forecasts.