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.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

Offering a unifying theoretical perspective not readily available in any other text, this innovative guide to econometrics uses simple geometrical arguments to develop students' intuitive understanding of basic and advanced topics, emphasizing throughout the practical applications of modern theory and nonlinear techniques of estimation. One theme of the text is the use of artificial regressions for estimation, reference, and specification testing of nonlinear models, including diagnostic tests for parameter constancy, serial correlation, heteroscedasticity, and other types of mis-specification. Explaining how estimates can be obtained and tests can be carried out, the authors go beyond a mere algebraic description to one that can be easily translated into the commands of a standard econometric software package. Covering an unprecedented range of problems with a consistent emphasis on those that arise in applied work, this accessible and coherent guide to the most vital topics in econometrics today is indispensable for advanced students of econometrics and students of statistics interested in regression and related topics. It will also suit practising econometricians who want to update their skills. Flexibly designed to accommodate a variety of course levels, it offers both complete coverage of the basic material and separate chapters on areas of specialized interest.

Estimation and Inference in Econometrics

. This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public.

Resume. Les auteurs analysent les entreprises assujetties aux mesures d'execution prises par la Securities and Exchange Commission dans les cas de presomption de transgression des principes comptables generalement reconnus. Ils s'interessent aux aspects suivants de la question: i) la mesure dans laquelle les presomptions de manipulations des benefices peuvent etre expliquees par les hypotheses existantes de gestion des benefices; ii) la relation entre les manipulations de benefices et les faiblesses des structures de regie interne des entreprises; et iii) la reaction du marche financier a l'endroit des entreprises au sujet desquelles les presomptions de manipulation des benefices sont rendues publiques. Les auteurs constatent qu'un incitatif majeur a la manipulation des benefices est le desir d'obtenir du financement externe a moindre cout. Ils demontrent que cet incitatif demeure important meme apres le controle des motifs contractuels que mettent de l'avant les travaux theoriques. Ils constatent egalement que les entreprises qui manipulent les benefices sont: i) davantage susceptibles d'avoir des conseils d'administration domines par la direction; ii) davantage susceptibles d'avoir un chef de la direction qui joue simultanement le role de president du conseil; iii) davantage susceptibles d'avoir un chef de la direction qui est egalement le fondateur de l'entreprise; iv) moins susceptibles d'avoir un comite de verification; et v) moins susceptibles d'avoir un bloc de titres detenus par un actionnaire exterieur. Enfin, les auteurs etablissent le fait que le cout du capital, pour les entreprises qui manipulent les benefices, enregistre des hausses appreciables lorsque ces manipulations sont rendues publiques.

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Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.

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Do Stock Prices Fully Reflect Information in Accruals and Cash flows about Future Earnings

This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to fully reflect information in the accrual and cash flow components of current earnings until it impacts future earnings.

Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings

Earnings management and the performance of seasoned equity offerings1

In this article we examine whether insider share selling in an initial public offering (IPO) influences R&D expenditures Insiders (managers and venture capitalists) who sell their pre-offering shareholdings might try to increase the IPO offer price (1) by overinvesting in R&D to signal the firm`s prospects (the signaling hypothesis) or (2) by underinvesting in R&D to increase current reported earnings (the earnings fixation hypothesis) We find that, for a sample of 243 IPOs from 1986 to 1990, change in R&D spending in the year of the IPO is negatively related to managerial selling Because reductions in R&D spending increase current earnings at the expense of future earnings, our evidence suggests that managers believe that investors place more emphasis on current earnings and less emphasis on R&D and therefore spend less on R&D We also document a positive association between discretionary current accruals in the offering year and managerial selling, suggesting that selling managers manipulate accruals as well

Do Insiders Manipulate Earnings when they Sell their Shares in an Initial Public Offering

In this article we examine whether insider share selling in an initial public offering (IPO) influences R&D expenditures. Insiders (managers and venture capitalists) who sell their pre-offering shareholdings might try to increase the IPO offer price (1) by overinvesting in R&D to signal the firm's prospects (the signaling hypothesis) or (2) by underinvesting in R&D to increase current reported earnings (the earnings fixation hypothesis). We find that, for a sample of 243 IPOs from 1986 to 1990, change in R&D spending in the year of the IPO is negatively related to managerial selling. Because reductions in R&D spending increase current earnings at the expense of future earnings, our evidence suggests that managers believe that investors place more emphasis on current earnings and less emphasis on R&D and therefore spend less on R&D. We also document a positive association between discretionary current accruals in the offering year and managerial selling, suggesting that selling managers manipulate accruals as well.

Do Insiders Manipulate Earnings When They Sell Their Shares in an Initial Public Offering

We provide evidence that the auto-regressive structure of seasonally differenced quarterly earnings is consistent with the requirements of the integral approach to interim reporting. In particular, we show that the auto-regressive coefficients for standardized seasonally differenced quarterly earnings are larger when the quarters employed in the auto-regressions belong to the same fiscal year than when they belong to different fiscal years. We then show that the signs and magnitudes of abnormal stock returns following earnings announcements are systematically related to these differences in the auto-regressive structure of seasonally differenced quarterly earnings. Specifically, stock returns act as if investors underestimate the larger auto-regressive coefficients between quarters in the same fiscal year. Thus, we corroborate and extend the Bernard and Thomas (1990) hypothesis that stock prices fail to reflect the extent to which quarterly earnings series differ from a seasonal random walk.

Implications of the Integral Approach to Quarterly Reporting for the Post-Earnings-Accouncement Drift

We examine how initial public offering (IPO) valuation has changed over time by focusing on three time periods: 1986-1990, January 1997 to March 2000 (designated as the boom period), and April 2000 to December 2001 (designated as the crash period). Using a sample of 1,655 IPOs, we find that firms with more negative earnings have higher valuations than do firms with less negative earnings and firms with more positive earnings have higher valuations than firms with less positive earnings. Our results suggest that negative earnings are a proxy for growth opportunities for Internet firms and that such growth options are a significant component of IPO firm value.

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Srinivasan Rangan

Papers

Earnings management and the performance of seasoned equity offerings1

Do Insiders Manipulate Earnings when they Sell their Shares in an Initial Public Offering

Do Insiders Manipulate Earnings When They Sell Their Shares in an Initial Public Offering

Implications of the Integral Approach to Quarterly Reporting for the Post-Earnings-Accouncement Drift

The Impact of Fundamentals on IPO Valuation