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.

/pdf/understanding-earnings-quality-a-review-of-the-proxies-their-1r9rjtuq8l.pdf

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

Earnings Management and Investor Protection: An International Comparison

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1004&context=accounting_papers

We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multi-period contracts among managers, directors, shareholders, and creditors.

/pdf/the-role-of-information-and-financial-reporting-in-corporate-50nxv9rcoq.pdf

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

Over the past few decades, economists and psychologists have accumulated a large body of experimental evidence on attitudes to risk. This evidence reveals that, when people make deci sions under risk, they often depart from the predictions of expected utility. In an effort to cap ture the experimental data more accurately, researchers have developed a number of so-called nonexpected utility models. Perhaps the most prominent of these is Amos Tversky and Daniel Kahneman’s (1992) “cumulative prospect theory.” In this paper, we study the pricing of financial securities when investors make decisions according to cumulative prospect theory. Our goal is to see if a model like cumulative prospect theory, which captures attitudes to risk in experimental settings very well, can also help us understand investor behavior in financial markets. Of course, there is no guarantee that this will be the case. Nonetheless, given the difficulties the expected utility framework has encountered in addressing a number of financial phenomena, it may be useful to document the pricing pre dictions of nonexpected utility models and to see if these predictions shed any light on puzzling aspects of the data. Cumulative prospect theory is a modified version of “prospect theory” (Kahneman and Tversky 1979). Under cumulative prospect theory, people evaluate risk using a value function that is defined over gains and losses, that is concave over gains and convex over losses, and that is kinked at the origin; and using transformed rather than objective probabilities, where the transformed probabilities are obtained from objective probabilities by applying a weighting function. The main effect of the weighting function is to overweight the tails of the distribution it is applied to. The overweighting of tails does not represent a bias in beliefs; it is simply a model

/pdf/stocks-as-lotteries-the-implications-of-probability-gy6160bwoc.pdf

Stocks as Lotteries: The Implications of Probability Weighting for Security Prices

This paper is the first to study the effect of financial restatement on bank loan contracting. Compared with loans initiated before restatement, loans initiated after restatement have significantly higher spreads, shorter maturities, higher likelihood of being secured, and more covenant restrictions. The increase in loan spread is significantly larger for fraudulent restating firms than other restating firms. We also find that after restatement, the number of lenders per loan declines and firms pay higher upfront and annual fees. These results are consistent with the view that banks use tighter loan contract terms to overcome risk and information problems arising from financial restatements.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w13708.pdf?abstractid=1079305&type=2

Corporate Misreporting and Bank Loan Contracting

https://www.nber.org/system/files/working_papers/w13708/w13708.pdf

We study the role of firm- and manager-specific heterogeneities in executive compensation We decompose the variation in executive compensation and find that time invariant firm and especially manager fixed effects explain a majority of the variation in executive pay We then show that in many settings, it is important to include fixed effects to mitigate potential omitted variable bias Furthermore, we find that compensation fixed effects are significantly correlated with management styles (ie, manager fixed effects in corporate policies) Finally, the method used in the paper has a number of potential applications in financial economics

Managerial Attributes and Executive Compensation

We study the role of firm- and manager-specific heterogeneities in executive compensation. We decompose the variation in executive compensation and find that time-invariant firm and, especially, manager fixed effects explain a majority of the variation in executive pay. We then show that in many settings, it is important to include fixed effects to mitigate potential omitted variable bias. Furthermore, we find that compensation fixed effects are significantly correlated with management styles (i.e., manager fixed effects in corporate policies). Finally, the method used in the article has a number of potential applications in financial economics. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

/pdf/managerial-attributes-and-executive-compensation-3t3wxbhbvx.pdf

We provide evidence that the limits of arbitrage approach cannot explain economically important asset pricing anomalies. Anomalous positive stock returns (to small firms, value firms, recent winners, and firms with positive abnormal earnings announcements) are strongest when limits to arbitrage are lowest, directly contrary to the prediction of theories resting on limits to arbitrage. Anomalously poor returns to small growth stocks do occur only when limits to arbitrage are high, consistent with theories resting on limits to arbitrage, but affects less than 1% of the market value of the CRSP universe of United States common stocks.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3816013_code45644.pdf?abstractid=901075&mirid=1

Si Li

Papers

Corporate Misreporting and Bank Loan Contracting

Corporate Misreporting and Bank Loan Contracting

Managerial Attributes and Executive Compensation

Managerial Attributes and Executive Compensation

The Limits of the Limits of Arbitrage