Predicting Material Accounting Misstatements*: Predicting Material Accounting Misstatements

We find evidence that initial public offering (IPO) firms, on average, have high positive issue-year earnings and abnormal accruals, followed by poor long-run earnings and negative abnormal accruals The IPO-year abnormal, and not expected, accruals explain the cross-sectional variation in post-issue earnings and stock returns The results are robust with respect to alternative abnormal accruals and earnings performance measures IPO firms adopt more income-increasing depreciation policies when they deviate from similar prior performance same industry non-issuers, and they provide significantly less for uncollectible accounts receivable than their matched non-issuers The results taken together suggest opportunistic earnings management partially explains the new issues anomaly

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Are Accruals during Initial Public Offerings Opportunistic

We show that analysts from sell-side firms generally recommend “glamour” (i.e., positive momentum, high growth, high volume, and relatively expensive) stocks. Naive adherence to these recommendations can be costly, because the level of the consensus recommendation adds value only among stocks with favorable quantitative characteristics (i.e., value stocks and positive momentum stocks). In fact, among stocks with unfavorable quantitative characteristics, higher consensus recommendations are associated with worse subsequent returns. In contrast, we find that the quarterly change in consensus recommendations is a robust return predictor that appears to contain information orthogonal to a large range of other predictive variables.

/pdf/analyzing-the-analysts-when-do-recommendations-add-value-13mhvbyj2y.pdf

Analyzing the Analysts: When Do Recommendations Add Value?

The 2001 to 2002 corporate scandals led to the Sarbanes Oxley Act and to various amendments to the U.S. stock exchanges' regulations. We find that the announcement of these rules has a significant effect on firm value. Firms that are less compliant with the provisions of the rules earn positive abnormal returns compared to firms that are more compliant. We also find variation in the response across firm size. Large firms that are less compliant earn positive abnormal returns but small firms that are less compliant earn negative abnormal returns, suggesting that some provisions are detrimental to small firms.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID976161_code328371.pdf?abstractid=556990&mirid=1&type=2

Corporate Governance and Firm Value: the Impact of the 2002 Governance Rules

This paper investigates the press’s role as a monitor or “watchdog” for accounting fraud. I find that the press fulfills this role by rebroadcasting information from other information intermediaries (analysts, auditors, and lawsuits) and by undertaking original investigation and analysis. Articles based on original analysis provide new information to the markets while those that rebroadcast allegations from other intermediaries do not. Consistent with a dual role for the press, I find that business-oriented press is more likely to undertake original analysis while nonbusiness periodicals focus primarily on rebroadcasting. I also investigate the determinates of press coverage, finding systematic biases in the types of firms and frauds for which articles are published. In general, the press covers firms and frauds that will be of interest to a broad set of readers and situations that are lower cost to identify and investigate.

The Press as a Watchdog for Accounting Fraud

Presented are a profile of a sample of earnings manipulators, their distinguishing characteristics, and a suggested model for detecting manipulation. The model's variables are designed to capture either the financial statement distortions that can result from manipulation or preconditions that might prompt companies to engage in such activity. The results suggest a systematic relationship between the probability of manipulation and some financial statement variables. This evidence is consistent with the usefulness of accounting data in detecting manipulation and assessing the reliability of reported earnings. The model identifies approximately half of the companies involved in earnings manipulation prior to public discovery. Because companies that are discovered manipulating earnings see their stocks plummet in value, the model can be a useful screening device for investment professionals. The screening results, however, require determination of whether the distortions in the financial statement numbers r...

D BeneishMessod

Papers

The Detection of Earnings Manipulation