Author
Ilia D. Dichev
Other affiliations: University of Michigan
Bio: Ilia D. Dichev is an academic researcher from Emory University. The author has contributed to research in topics: Earnings & Earnings response coefficient. The author has an hindex of 33, co-authored 57 publications receiving 17624 citations. Previous affiliations of Ilia D. Dichev include University of Michigan.
Papers published on a yearly basis
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TL;DR: In this article, the authors proposed a new measure of one aspect of the quality of accruals and earnings, which is the residual from firm-specific regressions of changes in working capital on past, present, and future operating cash flow realizations.
Abstract: This paper suggests a new measure of one aspect of the quality of accruals and earnings. The major benefit of accruals is to reduce timing and mismatching problems in the underlying cash flows. However, accruals accomplish this benefit at the cost of making assumptions and estimates about future cash flows, which implies that accruals include errors of estimation or noise. Since estimation noise reduces the beneficial role of accruals, this study suggests that the quality of accruals and earnings is decreasing in the magnitude of estimation noise in accruals. More specifically, we develop a simple model of working capital accruals where accruals correct the timing problems in cash flows at the cost of including errors in estimation. Based on the model, we derive an empirical measure of accrual quality as the residual from firm-specific regressions of changes in working capital on past, present, and future operating cash flow realizations. The study concludes with two empirical applications that illustrate the usefulness of our measure of accrual quality. First, we explore the relation of accrual quality to economic fundamentals. We find that accrual quality is negatively related to the magnitude of total accruals, length of the operating cycle, and the standard deviation of sales, cash flows, and earnings, while it is positively related to firm size. Second, we show a strong positive relation between accrual quality and earnings persistence.
3,698 citations
TL;DR: In this article, the authors provide evidence that firms manage reported earnings to avoid earnings decreases and losses and find evidence that two components of earnings, cash flow from operations and changes in working capital, are used to achieve increases in earnings.
3,645 citations
TL;DR: In this paper, the authors suggest a new measure of one aspect of the quality of working capital accruals and earnings, i.e., the ability to shift or adjust the recognition of cash flows over time so that t...
Abstract: This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that t...
3,578 citations
TL;DR: In this article, the authors investigated the importance of the firm distress risk factor and its relation to size and book-to-market effects and found that firms with high bankruptcy risk earn lower than average returns.
Abstract: Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, resullts demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence. SEVERAL STUDIES SUGGEST that the effects of firm size and book-to-market, probably the two most powerful predictors of stock returns, could be related to some sort of a firm distress risk factor. For example, Chan and Chen (1991) find that "marginal" firms, or inefficient firms with high leverage and cash flow problems, seem to drive the small firm effect. Fama and French (1992) conjecture that the book-to-market effect might be due to the risk of distress. Chan, Chen, and Hsieh (1985) show that much of the size effect is explained by a default factor, computed as the difference between high-grade and low-grade bond returns. Fama and French (1993) and Chen, Roll, and Ross (1986) find that a similarly defined default factor is significant in explaining stock returns. This study investigates the importance of the firm distress risk factor and its relation to size and book-to-market effects. Probability of bankruptcy is a natural proxy for firm distress, and there is a well-developed literature on bankruptcy prediction that provides powerful measures of ex ante bankruptcy risk (see Altman (1993) for a review). Evidence that bankruptcy risk is systematic would support a distress factor explanation for the size and the book-to-market effects. Existing evidence on the relation of bankruptcy risk to systematic risk is mostly circumstantial and often contradictory. Lang and Stulz (1992) and Denis and Denis (1995) demonstrate that bankruptcy risk is related to aggregate factors, which implies that bankruptcy risk could be positively related
1,056 citations
TL;DR: In this article, a survey of CFOs of public companies and interviews with 12 CFO and two standard setters was conducted to understand their views on the quality of their own earnings.
862 citations
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TL;DR: This paper found that the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter's consensus earnings, and more than three-fourths of the surveyed executives would give up economic value in exchange for smooth earnings.
4,341 citations
TL;DR: In this paper, the authors examine systematic differences in earnings management across 31 countries and propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders.
3,662 citations
Book•
01 Jul 2002TL;DR: In this article, a review is presented of the book "Heuristics and Biases: The Psychology of Intuitive Judgment, edited by Thomas Gilovich, Dale Griffin, and Daniel Kahneman".
Abstract: A review is presented of the book “Heuristics and Biases: The Psychology of Intuitive Judgment,” edited by Thomas Gilovich, Dale Griffin, and Daniel Kahneman.
3,642 citations
TL;DR: In this paper, the authors examined the implica- tions of individual differences in performance for each of the four explanations of the normative/descriptive gap, including performance errors, computational limitations, the wrong norm being applied by the experi- menter, and a different construal of the task by the subject.
Abstract: Much research in the last two decades has demon- strated that human responses deviate from the performance deemed normative according to various models of decision mak- ing and rational judgment (e.g., the basic axioms of utility theory). This gap between the normative and the descriptive can be inter- preted as indicating systematic irrationalities in human cognition. However, four alternative interpretations preserve the assumption that human behavior and cognition is largely rational. These posit that the gap is due to (1) performance errors, (2) computational limitations, (3) the wrong norm being applied by the experi- menter, and (4) a different construal of the task by the subject. In the debates about the viability of these alternative explanations, attention has been focused too narrowly on the modal response. In a series of experiments involving most of the classic tasks in the heuristics and biases literature, we have examined the implica- tions of individual differences in performance for each of the four explanations of the normative/descriptive gap. Performance er- rors are a minor factor in the gap; computational limitations un- derlie non-normative responding on several tasks, particularly those that involve some type of cognitive decontextualization. Un- expected patterns of covariance can suggest when the wrong norm is being applied to a task or when an alternative construal of the task should be considered appropriate.
3,068 citations
TL;DR: Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities as discussed by the authors, where outcomes are perceived and experienced, and how decisions are made and subsequently evaluated.
Abstract: Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities Making use of research on this topic over the past decade, this paper summarizes the current state of our knowledge about how people engage in mental accounting activities Three components of mental accounting receive the most attention This first captures how outcomes are perceived and experienced, and how decisions are made and subsequently evaluated The accounting system provides the inputs to be both ex ante and ex post cost–benefit analyses A second component of mental accounting involves the assignment of activities to specific accounts Both the sources and uses of funds are labeled in real as well as in mental accounting systems Expenditures are grouped into categories (housing, food, etc) and spending is sometimes constrained by implicit or explicit budgets The third component of mental accounting concerns the frequency with which accounts are evaluated and ‘choice bracketing’ Accounts can be balanced daily, weekly, yearly, and so on, and can be defined narrowly or broadly Each of the components of mental accounting violates the economic principle of fungibility As a result, mental accounting influences choice, that is, it matters Copyright © 1999 John Wiley & Sons, Ltd
2,943 citations