We investigate whether and how information about one stock’s future volatility is transferred to other related stocks along the supply chain. The supply chain setting offers an ideal setting to study the effect of cross-firm volatility information transfer because customers and suppliers are closely related. Earnings announcements can have an impact on the announcing firm's short-term, long-term, and forward expected volatility. We find that, on average, the announcing firms’ short-term expected volatility decreases substantially after earnings announcements, while the change of their forward expected volatility is close to zero. Regression analysis shows that the change of the announcing firm’s short-term (forward) volatility has a significant effect on the change of its supply chain partner’s short-term (forward) volatility. The effect is economically meaningful and becomes stronger if customers and suppliers are more closely related. Our results yield new insights on the transfer of volatility related information among firms.
{"title":"Volatility Information Transfer along the Supply Chain","authors":"Wenli Huang, Gang Li, Shaojun Zhang","doi":"10.2139/ssrn.3822362","DOIUrl":"https://doi.org/10.2139/ssrn.3822362","url":null,"abstract":"We investigate whether and how information about one stock’s future volatility is transferred to other related stocks along the supply chain. The supply chain setting offers an ideal setting to study the effect of cross-firm volatility information transfer because customers and suppliers are closely related. Earnings announcements can have an impact on the announcing firm's short-term, long-term, and forward expected volatility. We find that, on average, the announcing firms’ short-term expected volatility decreases substantially after earnings announcements, while the change of their forward expected volatility is close to zero. Regression analysis shows that the change of the announcing firm’s short-term (forward) volatility has a significant effect on the change of its supply chain partner’s short-term (forward) volatility. The effect is economically meaningful and becomes stronger if customers and suppliers are more closely related. Our results yield new insights on the transfer of volatility related information among firms.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-04-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76802857","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sarah E. McVay, E. Rodriguez-Vazquez, Sara Toynbee
Earnings are an important input for equity investors’ valuation decisions. Managers and analysts increasingly report non-GAAP earnings on an ongoing basis, routinely removing recurring items, such as amortization and stock-based compensation, from GAAP earnings. We document that by 2019, non-GAAP earnings were used in all prior eight quarters for 38 percent of firms. The routine use of non-GAAP earnings for the same firm quarter after quarter suggests that non-GAAP has become the “generally accepted” earnings measure for valuation purposes for a significant portion of publicly-traded firms. We provide evidence that routine non-GAAP usage allows investors to gain experience with non-GAAP earnings that facilitates their pricing of non-GAAP exclusions. Our findings point to a capital markets consequence of the shift from the traditional use of non-GAAP, in which adjustments are made for transitory earnings shocks, to the routine use of non-GAAP, in which adjustments are made for both recurring and transitory components of earnings.
{"title":"Taking the 'Non' Out of Non-GAAP: Routine Non-GAAP Usage and Investor Pricing","authors":"Sarah E. McVay, E. Rodriguez-Vazquez, Sara Toynbee","doi":"10.2139/ssrn.3820094","DOIUrl":"https://doi.org/10.2139/ssrn.3820094","url":null,"abstract":"Earnings are an important input for equity investors’ valuation decisions. Managers and analysts increasingly report non-GAAP earnings on an ongoing basis, routinely removing recurring items, such as amortization and stock-based compensation, from GAAP earnings. We document that by 2019, non-GAAP earnings were used in all prior eight quarters for 38 percent of firms. The routine use of non-GAAP earnings for the same firm quarter after quarter suggests that non-GAAP has become the “generally accepted” earnings measure for valuation purposes for a significant portion of publicly-traded firms. We provide evidence that routine non-GAAP usage allows investors to gain experience with non-GAAP earnings that facilitates their pricing of non-GAAP exclusions. Our findings point to a capital markets consequence of the shift from the traditional use of non-GAAP, in which adjustments are made for transitory earnings shocks, to the routine use of non-GAAP, in which adjustments are made for both recurring and transitory components of earnings.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"8 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-04-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81494884","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The new accounting standards of IFRS 9 and US GAAP adopt the Expected Loss (EL) approach for loan loss recognition. We investigate the effect of the EL approach on bank loan supply and stability. When a bank is unable to anticipate a downturn in the business cycle, it ends up recognizing the bulk of expected losses after the arrival of a contraction. This aggravates lending procyclicality and can potentially worsen bank stability. We develop a dynamic model of a bank to quantitatively assess these effects and show that they are economically significant.
{"title":"Still 'Too Much, Too Late': Provisioning for Expected Loan Losses","authors":"Roman Goncharenko, Asad Rauf","doi":"10.2139/ssrn.3247631","DOIUrl":"https://doi.org/10.2139/ssrn.3247631","url":null,"abstract":"The new accounting standards of IFRS 9 and US GAAP adopt the Expected Loss (EL) approach for loan loss recognition. We investigate the effect of the EL approach on bank loan supply and stability. When a bank is unable to anticipate a downturn in the business cycle, it ends up recognizing the bulk of expected losses after the arrival of a contraction. This aggravates lending procyclicality and can potentially worsen bank stability. We develop a dynamic model of a bank to quantitatively assess these effects and show that they are economically significant.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"106 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-04-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86249084","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using several audit quality measures, Minutti-Meza (2013, MM) argues that controlling for client characteristics through matching eliminates the association between auditor industry specialization and audit quality. Gaver and Utke (2019, GU) argue that this result is unstable across matching techniques and, after considering specialist tenure, seasoned specialists generally provide higher audit quality than unseasoned auditors or non-specialists. Eshleman and Guo (2020, EG) propose that – for accruals-based audit quality measures only – industry fixed effects, not client characteristics, eliminate the association between specialization and audit quality. We note that EG’s (and MM’s) conclusions rely on a misinterpretation of p-values, where an insignificant p-value is taken as evidence of no effect (Cready 2020). We then revisit GU after including industry fixed effects and find that GU’s main conclusions generally hold: 1) descriptively, auditors tend to fall backwards into specialization rather than building specialization to attract clients, so that knowledge likely develops over time, 2) propensity score matching should be used with caution or not at all, and 3) specialist tenure generally plays a role in the relation between specialization and audit quality. We find new evidence that the effect of an additional year of specialist tenure is similar to the effect of an additional year of auditor tenure. Finally, we discuss future research opportunities regarding auditor industry specialization.
{"title":"Do Seasoned Industry Specialists Provide Higher Audit Quality? A Response","authors":"Jennifer J. Gaver, Steven Utke","doi":"10.2139/ssrn.3745140","DOIUrl":"https://doi.org/10.2139/ssrn.3745140","url":null,"abstract":"Using several audit quality measures, Minutti-Meza (2013, MM) argues that controlling for client characteristics through matching eliminates the association between auditor industry specialization and audit quality. Gaver and Utke (2019, GU) argue that this result is unstable across matching techniques and, after considering specialist tenure, seasoned specialists generally provide higher audit quality than unseasoned auditors or non-specialists. Eshleman and Guo (2020, EG) propose that – for accruals-based audit quality measures only – industry fixed effects, not client characteristics, eliminate the association between specialization and audit quality. We note that EG’s (and MM’s) conclusions rely on a misinterpretation of p-values, where an insignificant p-value is taken as evidence of no effect (Cready 2020). We then revisit GU after including industry fixed effects and find that GU’s main conclusions generally hold: 1) descriptively, auditors tend to fall backwards into specialization rather than building specialization to attract clients, so that knowledge likely develops over time, 2) propensity score matching should be used with caution or not at all, and 3) specialist tenure generally plays a role in the relation between specialization and audit quality. We find new evidence that the effect of an additional year of specialist tenure is similar to the effect of an additional year of auditor tenure. Finally, we discuss future research opportunities regarding auditor industry specialization.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"118 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89121145","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines whether issuing management earnings guidance motivates a firm to raise its level of performance. The failure of management to attain a forecast may reflect poorly on its industry understanding, knowledge of the firm, and management capability. Accordingly, we hypothesize and find that management, having issued guidance, are motivated to hone the firm’s production function to raise firm performance. We find that firms alter their operating activities to increase performance rather than manipulating their accruals. The enhancement in firm performance from using managerial earnings guidance as a commitment device is accomplished by reductions in operating leverage and is strongest among firms issuing moderately aggressive forecasts. Inconsistent with concerns that forecasting causes myopia, performance improvements persist for several years.
{"title":"Management Earnings Guidance as a Commitment Device","authors":"Dirk E. Black, Brandon Gipper, Phillip C. Stocken","doi":"10.2139/ssrn.3837650","DOIUrl":"https://doi.org/10.2139/ssrn.3837650","url":null,"abstract":"This paper examines whether issuing management earnings guidance motivates a firm to raise its level of performance. The failure of management to attain a forecast may reflect poorly on its industry understanding, knowledge of the firm, and management capability. Accordingly, we hypothesize and find that management, having issued guidance, are motivated to hone the firm’s production function to raise firm performance. We find that firms alter their operating activities to increase performance rather than manipulating their accruals. The enhancement in firm performance from using managerial earnings guidance as a commitment device is accomplished by reductions in operating leverage and is strongest among firms issuing moderately aggressive forecasts. Inconsistent with concerns that forecasting causes myopia, performance improvements persist for several years.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"101 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79348618","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Indian companies use non-GAAP financial measures in addition to GAAP measures. Unlike GAAP measures, non-GAAP measures are not defined well. This creates conditions for managers to use these measures opportunistically to distort performance reporting and analysis. A relatively weak legal system and the absence of shareholder litigation in India make the abuse of these measures more likely than in developed countries. This study provides preliminary evidence based on annual reports for 187 firm-years for 54 firms about the use of non-GAAP measures in India. The evidence includes archival and anecdotal data. The evidence indicates that managers often use such measures opportunistically when faced with decline in sales or profit growth.
{"title":"The Use and Abuse of Non-GAAP Financial Measures: An Exploratory Study of Indian Companies","authors":"R. Narayanaswamy","doi":"10.2139/ssrn.3807818","DOIUrl":"https://doi.org/10.2139/ssrn.3807818","url":null,"abstract":"Indian companies use non-GAAP financial measures in addition to GAAP measures. Unlike GAAP measures, non-GAAP measures are not defined well. This creates conditions for managers to use these measures opportunistically to distort performance reporting and analysis. A relatively weak legal system and the absence of shareholder litigation in India make the abuse of these measures more likely than in developed countries. This study provides preliminary evidence based on annual reports for 187 firm-years for 54 firms about the use of non-GAAP measures in India. The evidence includes archival and anecdotal data. The evidence indicates that managers often use such measures opportunistically when faced with decline in sales or profit growth.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78904671","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2021-03-08DOI: 10.1016/J.JACCECO.2021.101404
A. Beyer, Kevin C. Smith
{"title":"Learning about Risk-Factor Exposures from Earnings: Implications for Asset Pricing and Manipulation","authors":"A. Beyer, Kevin C. Smith","doi":"10.1016/J.JACCECO.2021.101404","DOIUrl":"https://doi.org/10.1016/J.JACCECO.2021.101404","url":null,"abstract":"","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"20 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73435653","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Vehicle firms strategically delay large-scaled, safety-related recalls to refinance their historically issued long-term debt prescheduled to mature by the end of the fiscal year in which manufacturing commences. The results are not driven by firms being differentially informed about defects because manufacturing starts at different time points. The effect of maturing debt on recall delay is economically large, strikingly robust to a broad array of checks, and survives from a difference-in-differences design. NHTSA does not time investigations based on corporate debt maturity structure. Firms' self-reported event chronologies to the NHTSA are consistent with their recall timing strategies.
{"title":"The Social Cost of Strategic Disclosure Timing: Evidence from Vehicle Safety Recalls","authors":"J. Xie","doi":"10.2139/ssrn.3109409","DOIUrl":"https://doi.org/10.2139/ssrn.3109409","url":null,"abstract":"Vehicle firms strategically delay large-scaled, safety-related recalls to refinance their historically issued long-term debt prescheduled to mature by the end of the fiscal year in which manufacturing commences. The results are not driven by firms being differentially informed about defects because manufacturing starts at different time points. The effect of maturing debt on recall delay is economically large, strikingly robust to a broad array of checks, and survives from a difference-in-differences design. NHTSA does not time investigations based on corporate debt maturity structure. Firms' self-reported event chronologies to the NHTSA are consistent with their recall timing strategies.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75566905","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pass-through businesses (PTBs) generate over 60 percent of U.S. business income. Despite their economic significance, little is known about how individual taxes affect risk-taking by PTBs. This is important because PTBs are subject to a different tax system than traditional corporations, with characteristics that predict divergent relations between tax rates and risk-taking. We study PTBs using the unique setting of thoroughbred racing and examine how taxes affect the decision to enter thoroughbreds in risky stakes races or less risky allowance races. The setting is advantageous because we can observe the choice between two discrete investment options with varying levels of risk. Using multiple difference-in-differences designs that exploit plausibly exogenous changes in federal and state tax rates, we find that higher taxes discourage risk-taking. Our findings suggest that owners of PTBs still face a significant degree of tax loss asymmetry, which affects investment behavior.
{"title":"Raising the Stakes: How Individual Taxes Affect Risk-Taking by Pass-Through Businesses","authors":"Victor Ferguson, Trent Krupa, Rick C. Laux","doi":"10.2139/ssrn.3793969","DOIUrl":"https://doi.org/10.2139/ssrn.3793969","url":null,"abstract":"Pass-through businesses (PTBs) generate over 60 percent of U.S. business income. Despite their economic significance, little is known about how individual taxes affect risk-taking by PTBs. This is important because PTBs are subject to a different tax system than traditional corporations, with characteristics that predict divergent relations between tax rates and risk-taking. We study PTBs using the unique setting of thoroughbred racing and examine how taxes affect the decision to enter thoroughbreds in risky stakes races or less risky allowance races. The setting is advantageous because we can observe the choice between two discrete investment options with varying levels of risk. Using multiple difference-in-differences designs that exploit plausibly exogenous changes in federal and state tax rates, we find that higher taxes discourage risk-taking. Our findings suggest that owners of PTBs still face a significant degree of tax loss asymmetry, which affects investment behavior.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"199 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76644750","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Financial Accounting Standard Board’s Accounting Standards Update No. 2016-02 generated considerable debate between managers and standard setters. The purpose of our study is to understand the reporting effects of ASU 2016-02 and how its issuance and implementation affected managers’ operational behavior and the reported performance of the firm. We find evidence that after issuance, managers changed their operational behavior by decreasing their use of long-term operating leases, and this decrease relates to reporting incentives. However, we find no evidence that investors perceived loss of firm value or that firms suffered a decrease in performance. Thus, our evidence is not consistent with negative views expressed by managers. Our study adds to an interesting literature on the impact of changes in accounting standards on managers’ operating decisions and economic consequences for firms.
{"title":"Economic Consequences of Operating Lease Recognition","authors":"Mark (Shuai) Ma, W. Thomas","doi":"10.2139/ssrn.3793241","DOIUrl":"https://doi.org/10.2139/ssrn.3793241","url":null,"abstract":"The Financial Accounting Standard Board’s Accounting Standards Update No. 2016-02 generated considerable debate between managers and standard setters. The purpose of our study is to understand the reporting effects of ASU 2016-02 and how its issuance and implementation affected managers’ operational behavior and the reported performance of the firm. We find evidence that after issuance, managers changed their operational behavior by decreasing their use of long-term operating leases, and this decrease relates to reporting incentives. However, we find no evidence that investors perceived loss of firm value or that firms suffered a decrease in performance. Thus, our evidence is not consistent with negative views expressed by managers. Our study adds to an interesting literature on the impact of changes in accounting standards on managers’ operating decisions and economic consequences for firms.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-02-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83909363","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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