Peter D. Easton, Martin M. Kapons, Steven J. Monahan, Harm H. Schütt, Eric H. Weisbrod
ABSTRACT We use a simple k-nearest neighbors algorithm (hereafter, k-NN*) to forecast earnings. k-NN* forecasts of one-, two-, and three-year-ahead earnings are more accurate than those generated by popular extant forecasting approaches. k-NN* forecasts of two- and three-year (one-year)-ahead EPS and aggregate three-year EPS are more (less) accurate than those generated by analysts. The association between the unexpected earnings implied by k-NN* and the contemporaneous market-adjusted return (i.e., the earnings association coefficient (EAC)) is positive and exceeds the EAC on unexpected earnings implied by alternate approaches. A trading strategy that is long (short) firms for which k-NN* predicts positive (negative) earnings growth earns positive risk-adjusted returns that exceed those earned by similar trading strategies that are based on alternate forecasts. The k-NN* algorithm generates an empirically reliable ex ante indicator of forecast accuracy that identifies situations when the k-NN* EAC is larger and the k-NN* trading strategy is more profitable. Data Availability: Data are available from the public sources described in the text. JEL Classifications: C21; C53; G17; M41.
{"title":"Forecasting Earnings Using k-Nearest Neighbors","authors":"Peter D. Easton, Martin M. Kapons, Steven J. Monahan, Harm H. Schütt, Eric H. Weisbrod","doi":"10.2308/tar-2021-0478","DOIUrl":"https://doi.org/10.2308/tar-2021-0478","url":null,"abstract":"ABSTRACT We use a simple k-nearest neighbors algorithm (hereafter, k-NN*) to forecast earnings. k-NN* forecasts of one-, two-, and three-year-ahead earnings are more accurate than those generated by popular extant forecasting approaches. k-NN* forecasts of two- and three-year (one-year)-ahead EPS and aggregate three-year EPS are more (less) accurate than those generated by analysts. The association between the unexpected earnings implied by k-NN* and the contemporaneous market-adjusted return (i.e., the earnings association coefficient (EAC)) is positive and exceeds the EAC on unexpected earnings implied by alternate approaches. A trading strategy that is long (short) firms for which k-NN* predicts positive (negative) earnings growth earns positive risk-adjusted returns that exceed those earned by similar trading strategies that are based on alternate forecasts. The k-NN* algorithm generates an empirically reliable ex ante indicator of forecast accuracy that identifies situations when the k-NN* EAC is larger and the k-NN* trading strategy is more profitable. Data Availability: Data are available from the public sources described in the text. JEL Classifications: C21; C53; G17; M41.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135714491","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}
ABSTRACT Auditors collect evidence from clients that vary in social status. I investigate how these status differences interact with the costliness of auditor requests, thereby influencing client cooperation during evidence collection. I develop theory predicting that higher-status clients’ cooperation decisions will be more sensitive to differences in the costliness of requests than lower-status clients’ decisions. I test this theory across two experiments using multiple methods, leveraging the complementary strengths of each method. Experiment 1 is a more abstract experiment in the tradition of experimental economics, and Experiment 2 is a more contextualized experiment using participants with prior experience interacting with auditors. Results from both experiments support the theorized interaction between the costliness of audit requests and client social status. This conclusion carries implications for practitioners in assessing strategic tactics that will efficiently and effectively increase client cooperation. Data Availability: Contact the author. JEL Classifications: C91; D70; M41; M42.
{"title":"Client Social Status and Cooperation with Audit Requests","authors":"Dan Rimkus","doi":"10.2308/tar-2022-0307","DOIUrl":"https://doi.org/10.2308/tar-2022-0307","url":null,"abstract":"ABSTRACT Auditors collect evidence from clients that vary in social status. I investigate how these status differences interact with the costliness of auditor requests, thereby influencing client cooperation during evidence collection. I develop theory predicting that higher-status clients’ cooperation decisions will be more sensitive to differences in the costliness of requests than lower-status clients’ decisions. I test this theory across two experiments using multiple methods, leveraging the complementary strengths of each method. Experiment 1 is a more abstract experiment in the tradition of experimental economics, and Experiment 2 is a more contextualized experiment using participants with prior experience interacting with auditors. Results from both experiments support the theorized interaction between the costliness of audit requests and client social status. This conclusion carries implications for practitioners in assessing strategic tactics that will efficiently and effectively increase client cooperation. Data Availability: Contact the author. JEL Classifications: C91; D70; M41; M42.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135371991","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}
Jaewoo Kim, B. Schonberger, Charles E. Wasley, Yucheng Yang
This study examines whether information revealed by firms’ earnings announcements (EAs) forecasts short-run market-wide volatility in equity index prices. Using an exponential generalized autoregressive conditional heteroskedasticity model that includes controls for the information in an array of macroeconomic announcements, we find that EA information aggregated across firms forecasts market volatility at daily and weekly intervals. EA information’s forecasting power is greatest when more firms announce earnings on a given day, when EAs convey negative news, and for EA information about core earnings. Out-of-sample tests confirm that forecasts incorporating EA information better predict short-run market volatility than forecasts omitting EA information. We conclude that firm-level EAs are a significant source of systematic, market-wide information relevant for predicting near-term market volatility. Data Availability: All data are publicly available from sources cited in the text. JEL Classifications: E44; G12; M41.
本研究探讨了企业盈利公告（EA）所揭示的信息是否能预测股票指数价格的短期全市场波动。通过使用一个指数广义自回归条件异方差模型（该模型包含了对一系列宏观经济公告信息的控制），我们发现，各公司的盈利公告信息总和可以预测每日和每周的市场波动。当某一天有更多公司公布盈利、当 EA 传达负面消息以及当 EA 信息涉及核心盈利时，EA 信息的预测能力最强。样本外测试证实，与忽略 EA 信息的预测相比，包含 EA 信息的预测能更好地预测短期市场波动。我们的结论是，公司层面的 EA 是与预测近期市场波动相关的系统性、全市场信息的重要来源。 数据可用性：所有数据均可通过文中引用的来源公开获取。 JEL 分类：E44; G12; M41.
{"title":"Forecasting Market Volatility: The Role of Earnings Announcements","authors":"Jaewoo Kim, B. Schonberger, Charles E. Wasley, Yucheng Yang","doi":"10.2308/tar-2021-0351","DOIUrl":"https://doi.org/10.2308/tar-2021-0351","url":null,"abstract":"This study examines whether information revealed by firms’ earnings announcements (EAs) forecasts short-run market-wide volatility in equity index prices. Using an exponential generalized autoregressive conditional heteroskedasticity model that includes controls for the information in an array of macroeconomic announcements, we find that EA information aggregated across firms forecasts market volatility at daily and weekly intervals. EA information’s forecasting power is greatest when more firms announce earnings on a given day, when EAs convey negative news, and for EA information about core earnings. Out-of-sample tests confirm that forecasts incorporating EA information better predict short-run market volatility than forecasts omitting EA information. We conclude that firm-level EAs are a significant source of systematic, market-wide information relevant for predicting near-term market volatility. Data Availability: All data are publicly available from sources cited in the text. JEL Classifications: E44; G12; M41.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139295027","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}
Zachary T. Kowaleski, Andrew G. Sutherland, Felix W. Vetter
We study the influence of supervisors on employee misconduct at branches of U.S. financial institutions. Individual supervisor fixed effects explain twice as much variation in branch misconduct as firm fixed effects. Supervisor influence is concentrated in firms that theory suggests are most likely to delegate authority—firms with complex operations, distant branches, and trustworthy supervisors. Supervisors affect misconduct through their personnel decisions, attention to employees with past misbehavior, and ethics and industry rules training. After major internal control improvements, supervisor influence declines. Our results illustrate how supervisors influence misconduct above and beyond firm-level factors. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D21; D82; G20, L22; L23; M12; M40.
{"title":"The Effect of Supervisors on Employee Misconduct","authors":"Zachary T. Kowaleski, Andrew G. Sutherland, Felix W. Vetter","doi":"10.2308/tar-2022-0411","DOIUrl":"https://doi.org/10.2308/tar-2022-0411","url":null,"abstract":"We study the influence of supervisors on employee misconduct at branches of U.S. financial institutions. Individual supervisor fixed effects explain twice as much variation in branch misconduct as firm fixed effects. Supervisor influence is concentrated in firms that theory suggests are most likely to delegate authority—firms with complex operations, distant branches, and trustworthy supervisors. Supervisors affect misconduct through their personnel decisions, attention to employees with past misbehavior, and ethics and industry rules training. After major internal control improvements, supervisor influence declines. Our results illustrate how supervisors influence misconduct above and beyond firm-level factors. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D21; D82; G20, L22; L23; M12; M40.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139298975","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 : 2023-10-23DOI: 10.2308/0001-4826-98.7.i
{"title":"Covers and Front Matter","authors":"","doi":"10.2308/0001-4826-98.7.i","DOIUrl":"https://doi.org/10.2308/0001-4826-98.7.i","url":null,"abstract":"","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135459849","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}
Chunfang Cao, C. S. Agnes Cheng, Changyuan Xia, Jing Xie, Cheng Zeng
ABSTRACT This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when those leaders have strong hometown preferences and weaker when they have a strong incentive to seek promotion, suggesting that social incentives are the primary drivers of the effects on corporate tax benefits of hometown favoritism by politicians. Moreover, this effect is intensified when members of senior management have personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities. Data Availability: Data are available from the public sources cited in the text. JEL Classification: H26; H71; M48.
{"title":"Corporate Tax Benefits from Hometown-Connected Politicians","authors":"Chunfang Cao, C. S. Agnes Cheng, Changyuan Xia, Jing Xie, Cheng Zeng","doi":"10.2308/tar-2020-0162","DOIUrl":"https://doi.org/10.2308/tar-2020-0162","url":null,"abstract":"ABSTRACT This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when those leaders have strong hometown preferences and weaker when they have a strong incentive to seek promotion, suggesting that social incentives are the primary drivers of the effects on corporate tax benefits of hometown favoritism by politicians. Moreover, this effect is intensified when members of senior management have personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities. Data Availability: Data are available from the public sources cited in the text. JEL Classification: H26; H71; M48.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136128569","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}
Brian D. Cadman, John L. Campbell, Ryan G. Johnson
ABSTRACT Boards of directors encourage risk-averse managers to take risky actions by providing stock options and severance pay. We demonstrate that the ability of these incentives to encourage risk-taking hinges on the level of uncertainty facing the manager. We confirm prior findings that stock option convexity encourages risk-taking but find that this relation only holds when market-wide uncertainty is low. We also confirm prior findings that severance pay encourages risk-taking but find that this relation only holds during high market-wide uncertainty and negative market-wide performance. Finally, we find that compensation committees respond to variation in uncertainty by adjusting the level of option grants. Our results suggest that the effectiveness of incentives to take risk varies with the market-wide uncertainty, and that boards consider this in annual compensation design. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G30; G34; K22; M40; M46.
{"title":"Time Series Variation in the Efficacy of Executive Risk-Taking Incentives: The Role of Market-Wide Uncertainty","authors":"Brian D. Cadman, John L. Campbell, Ryan G. Johnson","doi":"10.2308/tar-2021-0149","DOIUrl":"https://doi.org/10.2308/tar-2021-0149","url":null,"abstract":"ABSTRACT Boards of directors encourage risk-averse managers to take risky actions by providing stock options and severance pay. We demonstrate that the ability of these incentives to encourage risk-taking hinges on the level of uncertainty facing the manager. We confirm prior findings that stock option convexity encourages risk-taking but find that this relation only holds when market-wide uncertainty is low. We also confirm prior findings that severance pay encourages risk-taking but find that this relation only holds during high market-wide uncertainty and negative market-wide performance. Finally, we find that compensation committees respond to variation in uncertainty by adjusting the level of option grants. Our results suggest that the effectiveness of incentives to take risk varies with the market-wide uncertainty, and that boards consider this in annual compensation design. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G30; G34; K22; M40; M46.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135663609","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, Edgar A. Rodriguez-Vazquez, Sara M. Toynbee
ABSTRACT Although the increase in non-GAAP earnings metrics has drawn unfavorable attention from regulators and standard setters, it can provide valuable experience for investors. We investigate whether experience with non-GAAP earnings metrics influences investors’ pricing of non-GAAP exclusions. We measure experience as the frequency with which managers or analysts provide non-GAAP earnings over the prior eight quarters and find that experience aids in the pricing of non-GAAP exclusions. Absent prior experience with non-GAAP earnings metrics, investors appear to overestimate the persistence of exclusions at the earnings announcement, which corrects in the following months. Cross-sectional tests suggest that experience facilitates investors’ pricing of non-GAAP exclusions by reducing their information processing costs. JEL Classifications: M40.
{"title":"Experience with Non-GAAP Earnings and Investors’ Pricing of Exclusions","authors":"Sarah E. McVay, Edgar A. Rodriguez-Vazquez, Sara M. Toynbee","doi":"10.2308/tar-2021-0645","DOIUrl":"https://doi.org/10.2308/tar-2021-0645","url":null,"abstract":"ABSTRACT Although the increase in non-GAAP earnings metrics has drawn unfavorable attention from regulators and standard setters, it can provide valuable experience for investors. We investigate whether experience with non-GAAP earnings metrics influences investors’ pricing of non-GAAP exclusions. We measure experience as the frequency with which managers or analysts provide non-GAAP earnings over the prior eight quarters and find that experience aids in the pricing of non-GAAP exclusions. Absent prior experience with non-GAAP earnings metrics, investors appear to overestimate the persistence of exclusions at the earnings announcement, which corrects in the following months. Cross-sectional tests suggest that experience facilitates investors’ pricing of non-GAAP exclusions by reducing their information processing costs. JEL Classifications: M40.","PeriodicalId":22240,"journal":{"name":"The Accounting Review","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135963430","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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