Catherine M. Schrand

Bio: Catherine M. Schrand is an academic researcher from University of Pennsylvania. The author has contributed to research in topics: Financial accounting & Cash flow. The author has an hindex of 29, co-authored 71 publications receiving 10017 citations.

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Abstract: Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.

Why Firms Use Currency Derivatives

Abstract: We examine the use of currency derivatives in order to differentiate among existing theories of hedging hehavior. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This result suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuahle growth opportunities. Firms with extensive foreign exchange-rate exposure and economies of scale in hedging activities are also more likely to use currency derivatives. Finally, the source of foreign exchange-rate exposure is an important factor in the choice among types of currency derivatives. LAKGE U.S. CORPORATIONS INCREASINGLY tum to derivatives to reduce tbeir exposures to a variety of risks. Tbe motives for tbis bebavior are not well understood, and tbe empirical evidence on tbe cbaracteristics of derivatives users is limited. However, tbeoretical researcb provides several explanations for optimal bedging that result from difTerent types of capital market imperfections. To distinguish among tbese explanations, we examine tbe use of currency derivatives for a sample of firms tbat bave ex ante exposure to foreign excbange-rate risk. We also consider bow tbe magnitude of tbis exposure affects tbe level of benefits tbat can be realized from reducing risk and tbe costs associated witb risk reduction. Our sample represents 372 of tbe Fortune 500 nonfinancial firms in 1990. All of our sample firms bave potential exposure to foreign currency risk from foreign operations, foreign-denominated debt, or a bigb concentration of foreign competitors in tbeir industries. Approximately 41 percent of tbese firms use currency swaps, forwards, futures, options, or combinations of tbese instruments. We find tbat firms witb greater growtb opportunities and tighter financial constraints are more likely to use currency derivatives. Tbis result is consistent with tbe notion that firms use derivatives to reduce the variation in

The Impact of Cash Flow Volatility on Discretionary Investment and the Costs of Debt and Equity Financing

Abstract: We document that cash flow volatility is associated with lower levels of investment in capital expenditures, R&D, and advertising. Thus, firms do not turn to external capital markets to fully cover cash-flow short falls. Consistent with this conclusion, we document that the sensitivity of investment to cash flow volatility is greater for firms with higher costs of capital market access. In addition, cash flow and earnings volatility are associated with these higher costs. Thus, volatility not only increases the likelihood that a firm will need to access capital markets, it also increases the costs of doing so.

Executive Overconfidence and the Slippery Slope to Financial Misreporting

Abstract: A detailed analysis of 49 firms subject to AAERs suggests that approximately one-quarter of the misstatements meet the legal standards of intent. In the remaining three quarters, the initial misstatement reflects an optimistic bias that is not necessarily intentional. Because of the bias, however, in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings. Overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements. Evidence from a high-tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and AAERs.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

Abstract: 1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Abstract: Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.