This paper examines how earnings performance relates to firms' narrative R&D disclosure decisions. The unique nature of R&D investments and financial statements' limited ability to communicate the ...value of such investments highlight the role of narrative disclosure as a supplement to the financial statements. I predict and find that current earnings performance (adjusted for R&D expense) is negatively related to the quantity of narrative R&D disclosure. Conducting a content analysis of the detail, tone, and readability of narrative R&D disclosures, I find that managers adjust R&D disclosures based on earnings performance to provide relevant information rather than to obfuscate performance. Finally, I provide evidence that market participants find narrative R&D disclosure informative because it significantly affects sell-side analyst behavior, disclosure information content, and information asymmetry.
We examine changes in the scope of the sell-side analyst industry and whether these changes impact information dissemination and the quality of analysts' reports. Our findings suggest that changes in ...the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts' forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell-side analyst industry presence has positive externalities that can result in better functioning capital markets.
ABSTRACT
We examine whether securities lawyers involved in SEC comment letter inquiries act as client advocates by resisting disclosure changes or as gatekeepers by encouraging disclosure ...transparency. Consistent with an advocacy role, we find that securities lawyers' involvement in SEC comment letters is associated with resisting disclosure inquiries through redacting information from filings and issuing fewer amendments to previous disclosures. Our evidence also supports the view that the role of securities lawyers extends beyond the specific inquiry; their involvement is associated with improved readability and more cautionary language in the subsequent 10-K, and fewer future restatements and comment letters. Last, we find that securities lawyers serve more of an advocacy role when proprietary costs are high and when the inquiry involves a possible amendment, but more of a gatekeeper role when an inquiry is more complex.
JEL Classifications: M41
ABSTRACT
In this study, we examine whether firms respond to internal control weaknesses (ICWs) by requiring accounting-specific skills when hiring rank-and-file employees. Using unique data ...containing an extensive collection of job postings, we document significant increases in firms’ job postings that list accounting skills after the disclosure of an ICW. This effect is more pronounced for firms with better financial resources and when ICWs are more severe or personnel-related. In addition, our results extend to employees that are not specifically designated as accountants, suggesting a broader role for rank-and-file employees in influencing internal control quality. Finally, we find that increases in job postings with accounting skill requirements are associated with improvements in internal controls and a higher likelihood of ICW remediation. Overall, our findings shed new light on how firms respond to ineffective internal controls by increasing their emphasis on accounting skills in their workforce.
Data Availability: Data are publicly available from the sources identified in the text.
JEL Classifications: G30; J23; M41; M42.
ABSTRACT
Prior research finds that positive tone in firms' qualitative disclosures increases the risk of shareholder lawsuits. However, federal securities laws provide a safe harbor intended to ...shield firms' forward-looking statements from legal liability. One implication of this safe harbor is that litigation risk potentially varies between qualitative forward- and non-forward-looking statements. Consistent with this implication, we find that positive tone in forward-looking qualitative statements is significantly less related to the likelihood of subsequent litigation than is positive tone in non-forward-looking qualitative statements. On average, we fail to find a significant association between qualitative forward-looking statements and subsequent litigation. We do find evidence, however, that positive tone in qualitative forward-looking statements relates positively to subsequent litigation in two U.S. circuits in which court rulings reduced safe harbor protections for forward-looking statements. Overall, our results are consistent with the safe harbor effectively shielding firms' qualitative forward-looking statements from litigation risk.
Audit personnel salaries and audit quality Hoopes, Jeffrey L.; Merkley, Kenneth J.; Pacelli, Joseph ...
Review of accounting studies,
09/2018, Letnik:
23, Številka:
3
Journal Article
Recenzirano
This study examines the relation between audit personnel salaries and office-level audit quality. We measure audit personnel salaries at the associate, senior, and manager ranks for Big 4 audit ...offices from 2004 to 2013, using unique individual-auditor-level data obtained from the U.S. Department of Labor. We find that offices that pay lower salaries have a higher percentage of clients that experience restatements. In related analyses, we also find lower levels of audit quality when audit employees are paid less, relative to other lines of service in accounting firms. Finally, we document positive and significant associations between salary and fees, suggesting that audit offices pass some of the cost of higher labor onto their clients. Overall, our findings provide important initial evidence on the role of audit salary and its relation to audit quality and audit fees.
We examine the joint effects of litigation risk and regulation in shaping firms’ financial reporting decisions. Specifically, we investigate how these disciplining mechanisms influence firms’ ...disclosure of non‐GAAP earnings metrics, which have been at the forefront of the SEC's regulatory concerns in recent years. We employ a plausibly exogenous shock to litigation risk based on a US circuit court ruling to explore how litigation risk influences firms’ non‐GAAP earnings disclosures. We find a robust negative relation between litigation risk and both the likelihood and aggressiveness of non‐GAAP reporting. However, we find a significant attenuation in the sensitivity of non‐GAAP disclosure to litigation risk after the implementation of Regulation G (Reg G), despite evidence that aggressive non‐GAAP reporting persists in the post‐Reg G environment. Additional analyses indicate that this attenuation is actually the net result of two unique effects. First, we find that Reg G created a de facto “safe harbor” for non‐GAAP reporting among firms in circuits with higher litigation risk and a “curtailment effect” among firms in the circuit with the lowest litigation risk. Overall, Reg G led to a convergence in non‐GAAP reporting practices irrespective of firms’ circuit‐specific litigation risk. We posit that this net attenuation of litigation risk's influence on non‐GAAP reporting is likely an unintended consequence of Reg G.
Government Guarantees and Banks’ Income Smoothing Dantas, Manuela M.; Merkley, Kenneth J.; Silva, Felipe B. G.
Journal of financial services research,
04/2023, Letnik:
63, Številka:
2
Journal Article
Recenzirano
Odprti dostop
We propose four channels through which government guarantees affect banks’ incentives to smooth income. Empirically, we exploit two complementary settings that represent plausible exogenous changes ...in government guarantees: the
increase
in
implicit
guarantees following the creation of the Eurozone and the
removal
of
explicit
guarantees granted to the Landesbanken. We show that increases (decreases) in government guarantees are associated with significant decreases (increases) in banks’ income smoothing. Taken together, our results largely corroborate the predominance of a tail-risk channel, wherein government guarantees reduce banks’ tail risk, thereby reducing managers’ incentives to engage in income smoothing.
Despite the apparent importance of “street earnings” to investors, we know relatively little about the process through which this earnings metric is determined. The limited evidence in the extant ...literature provides analyst-centric explanations, suggesting that analysts’ abilities and incentives influence which line items forecast-tracking services exclude from GAAP earnings to arrive at street earnings. We propose an alternative explanation: managers actively influence analysts’ forecast exclusion decisions via earnings guidance. We test this explanation by examining how earnings guidance influences two aspects of analysts’ exclusions: (1) special item exclusions (i.e., nonrecurring items) and (2) incremental exclusions (i.e., recurring items). We find that for firms with no special items in the previous year, when managers guide, analysts exclude almost all current-year special items, whereas when managers do not guide, the proportion that analysts exclude is significantly lower. More importantly, we that analysts’ incremental exclusions are significantly higher when managers guide than when they do not guide. Overall, our evidence suggests that managers play an active role in influencing the composition of street earnings via earnings guidance.
SYNOPSIS
In October 2019, the Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association submitted a comment letter to the Financial ...Accounting Standards Board regarding the accounting for certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. This paper summarizes the content of the comment letter and discusses opportunities for future research on intangible assets that may inform accounting standard-setting decisions.
JEL Classifications: M40.
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