This study investigates the effects of the organizational ethical context (ethical climate and ethical culture) in Chinese enterprises on accounting professionals’ perceptions of earnings management, organizational-professional conflict (OPC) and affective organizational commitment (OC). We also test the effects of Machiavellianism on these factors, and the interactive effects of Machiavellianism and ethical context on OPC and OC. The findings, based on responses from 89 accounting professionals employed by Chinese enterprises at staff, supervisor and manager levels, indicate that in general the perceived ethical context did not affect judgments of the acceptability of earnings management. However, as anticipated, perceptions of a stronger benevolent/cosmopolitan climate (one that places more emphasis on the public interest) were associated with harsher judgments of accounting earnings management. Machiavellianism also had a marginally significant effect on judgments of accounting earnings management and a significant effect on judgments of operating earnings management, with high Machiavellians judging the actions to be more ethical. Two aspects of ethical culture, obedience to authority and ethical norms, were found to be significantly associated with organizational-professional conflict and affective organizational commitment. Contrary to our expectations, high Machiavellians appeared to be more, rather than less, sensitive to the perceived ethical context in their organization. Specifically, the perceived organizational ethical culture had a greater (lesser) impact on affective organizational commitment for high (low) Machiavellians.

Earnings conference calls are salient sources of firm-specific information that provide both hard and soft information to investors. In this paper, I find that institutional investors participate more actively in earnings conference calls held by firms that receive less attention than their peers prior to conference calls. I construct a measure of relative inattention using the Bloomberg Heat Score, which captures the aggregate search activities of institutional investors at the firm level. Using a broad set of earnings conference call transcripts, I identify participants affiliated with institutional investors and their dialogue to examine the association between institutional investors' inattention and their activities during earnings conference calls. I show that institutional investors appear more often, ask more questions, and request more guidance in conference calls held by firms that receive less attention before the calls. Collectively, the results indicate that institutional investors compensate for the lack of firm-specific information with conference call participation, despite potential costs of publicly revealing their information acquisition.

The goal of this dissertation is to improve financial statement fraud detection using a cross-functional research approach. The efficacy of financial statement fraud detection depends on the classification algorithms and the fraud predictors used and how they are combined. Essay I introduces IMF, a novel combiner method classification algorithm. The results show that IMF performs well relative to existing combiner methods over a wide range of domains. This research contributes to combiner method research and, thereby, to the broader research stream of ensemble-based classification and to classification algorithm research in general. Essay II develops three novel fraud predictors: total discretionary accruals, meeting or beating analyst forecasts and unexpected employee productivity. The results show that the three variables are significant predictors of fraud. Hence Essay II provides insights into (1) conditions under which fraud is more likely to occur (total discretionary accruals is high), (2) incentives for fraud (firms desire to meet or beat analyst forecasts), and (3) how fraud is committed and can be detected (revenue fraud detection using unexpected employee productivity). This essay contributes to confirmatory fraud predictor research, which is a sub-stream of research that focuses on developing and testing financial statement fraud predictors. Essay III compares the utility of artifacts developed in the broader research streams to which the first two essays contribute, i.e., classification algorithm and fraud predictor research in detecting financial statement fraud. The results show that logistic regression and SVM perform well, and that out of 41 variables found to be good predictors in prior fraud research, only six variables are selected by three or more classifiers: auditor turnover, Big 4 auditor, accounts receivable and the three variables introduced in Essay II. Together, the results from Essay I and Essay III show that IMF performs better than existing combiner methods in a wide range of domains and better than stacking, an ensemble-based classification algorithm, in fraud detection. The results from Essay II and Essay III show that the three predictors created in Essay II are significant predictors of fraud and, when evaluated together with 38 other predictors, provide utility to classification algorithms.

This paper examines the effect of the mandatory adoption of the International Financial Reporting Standards (IFRS) on transparency for investors by measuring the increase in earnings management during the post-adoption period of IFRS. One sign of earnings management is current year earnings being only slightly higher than the previous year’s earnings. An increase in earnings management means a decrease in accounting quality and a decrease of transparency for investors. By comparing firms that mandatorily adopted IFRS to similar benchmark firms in terms of strength of legal enforcement, book-to-market ratios, market values and net incomes, I am able to run empirical regressions examining variables of growth, equity issuance, leverage, debt issuance, turnover, size, cash flow, and time period in order to determine the effect of the adoption on IFRS on earnings growth. After looking at 516 firms from 20 countries for the years of 2002-2007, I conclude that IFRS is decreasing financial reporting quality and decreasing transparency for the investing public, and therefore is not accomplishing its goal of bringing efficiency, accountability, and transparency to global financial markets.

In this paper, I talk about Section 965, also known as the transition tax, enacted in the Tax Cuts and Jobs Act (TCJA). First, I examine loopholes under the old tax regime that allowed for the accumulation of offshore earnings and how the TCJA closes those loopholes. After detailing the legislation of the transition tax and a comparison with Section 965 included in the American Jobs Creation Act in 2004, I compare firms’ recorded provisions of the transition tax with an estimation based on the past disclosures of firms’ permanently reinvested earnings and finds that the transition tax will generate an estimated $308 billion in tax revenue. Lastly, I propose three alternate scenarios to the transition tax: taxing all offshore earnings under the GILTI regime, treating offshore cash as eligible for the 21% corporate rate, and a ratable payment plan compared to the current phase-in payment plan.

This paper investigates a potential cause of the observed growth in the magnitude of earnings response coefficients over time since 2001. I hypothesize that the growth is explained by increasing investor reliance on Wall Street analyst earnings per share (“EPS”) estimates to form their next-period EPS expectations. To test my hypothesis, I regress 3-day cumulative abnormal market returns following earnings announcements on an interaction term between the earnings surprise and the number of analyst EPS estimates along with several control variables. I ultimately find no evidence of increasing investor reliance on Wall Street analyst estimates. Furthermore, I fail to replicate the results of prior literature that found an upward trend in earnings response coefficients over time from 2001 to 2011. These contradictory results merit further investigation in future research.

In filling their armed forces, many countries rely on conscription, which interrupts conscripts’ labor market participation and accumulation of human capital. Thus, conscription likely affects one’s future earnings. In this paper, I investigate the effects of conscription eligibility in the Netherlands and in Italy on subsequent future earnings. I use a difference-in-difference method, using women as the counterfactual, on Luxembourg Income Study data to calculate the effects of conscription eligibility. I find no systematic earnings effects of conscription. While the existence of educational deferments increase the demand for postsecondary education and hence increase future earnings, factors like military culture, military philosophy, and jobs assigned to conscripts produce different results in the two countries. I find that the Dutch conscription increased (by 6-17%) eligible young men’s earnings while the Italian conscription had no effect or slightly decreased eligible young men’s earnings.

<div>In my main dissertation essay, I investigate advertising spending during a recession. Advertising plays an important role in creating awareness, preference and purchase intent for many products and services. However, advertising is often cut when a firm needs to control costs. This empirical study examines a unique set of factors which motivated 553 firms to change their advertising spending during the Great Recession. The first half of the Great Recession had a moderate 2% decline in GDP and 1% to 2% cuts in advertising spending. The seasonality effect was weaker, which indicates that firms were not as likely to carryover spending from the prior year. The peak of the Great Recession had a GDP decline as high as 7%, which is considered severe. Average advertising spending declined by 13%. In addition to the seasonality effect, decreasing sales decreased advertising spending. Increasing firm risk tends to decrease advertising spending during the peak of the Great Recession, but not before. Finally, firms in high advertising intensity industries, where advertising is strategically important, had modest budget cuts. In contrast, firms in low-intensity industries had much larger percentage cuts.</div><div>The second essay examines real earnings management using advertising budgets” examines. Real earnings management occurs when managers change real activities to meet or beat important earnings benchmarks. Advertising has a limited short-term impact on firm sales for many products. Therefore, when a firm’s earnings are below key benchmarks for a fiscal quarter (year), managers are compelled to reduce advertising expenditures to boost earnings. This study examines factors which persuade firms to manage earnings using advertising budgets. Similar to earlier studies, we find firms suspect of managing earnings upwards reducing advertising expenses. The findings indicate that B2C firms are more likely to manage earnings by reducing advertising expenses than B2B firms. The findings also reveal that suspect firms which spend more in high advertising elasticity mediums such as TV do not reduce advertising spending as much as firms which spend more in low advertising elasticity mediums such as newspapers and magazines. The study also find evidence to suggest that suspect firms which report advertising expenditure in their income statement make smaller advertising spending cuts than firms which don’t report advertising expenditure. Finally, earnings management activity is much stronger during the last quarter of the fiscal year.</div>

I examine the effect analysts have on the price response to earnings announcements. To address this question, I exploit an exogenous shock to analyst coverage to show that, following the loss of an analyst, the market reaction to earnings announcements decreases. In cross-sectional analyses, I show that the magnitude of the negative effect is decreasing in information asymmetry and the likelihood that a firm’s earnings are used more for contracting purposes. I further show that the magnitude of the negative effect is increasing in the readability of the financial statements and financial reporting comparability. This study contributes to the literature by providing a deeper understanding of the effect analysts have on the pricing of information contained in earnings announcements. As such, the results of this study should be of interest to regulators, researchers, and investors.

This dissertation consists of two chapters. In the first chapter, I explain changes in the life-cycle earnings profile for different birth cohorts. The second chapter assesses the quantitative importance of federal aid for college education in explaining college premium. In the first chapter, I document the life-cycle earnings profile for the 25-year- old college- and high school-educated white men in 1940, 1950, 1960 and 1970. I find that later cohorts have flatter average life-cycle earnings profile. Using a version of the Ben-Porath model, I propose an explanation based on the composition effect. In my model, all individuals have a high school diploma and are differentiated by their ability. They must decide whether to work or go to a four-year college. There is a threshold ability above which individuals choose to attend college and below which they work. All cohorts face the same ability distribution and an exogenous sequence of wage rate per unit of human capital that grows at a constant rate. A higher initial level of wage rate increases college attainment implying that the average ability is lower for both college- and high school-educated individuals. From the Ben- Porath model, lower ability individuals have less steep increment in their earnings. This implies that the average college (and high school) life-cycle earnings profile for the 1970 cohort will be flatter than that of the 1940 cohort. My model is able to quantitatively explain 67 and 35 percent of the flattening in the average life-cycle earnings profile for college and high school-educated individuals, respectively. Since the late 1970s, there has been a strong increase in the college premium. While most papers focus on skill-biased technical change, the second chapter explores the role of federal aid as a possible source of inequality. I build a model where all individuals have a high-school diploma but are heterogeneous with respect to their innate abilities and initial human capital. They decide whether to attend college to accumulate more human capital before working, or to start working right away. The production function for human capital in college requires two inputs: human capital and goods. In this context, two mechanisms are key for the behavior of the college premium. First, federal aid makes it easier to afford the goods input in the human capital technology. This induces college students to accumulate more human capital and consequently, they have higher earnings. Second, as more individuals attend college due to rising income, the composition of college graduates changes: more low- ability individuals attend college, implying a decrease in average college earnings. A calibrated version of the model accounts fully for the rise in the college premium. Federal aid alone accounts for about 70 percent of the rise.