Individualism and collectivism

We investigate the conventional wisdom that competition among interested parties attempting to influence a decision maker by providing verifiable information brings out all the relevant information. We find that, if the decision maker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties, competition may be unnecessary; while if the decision maker is unsophisticated or not well informed, competition is not generally sufficient. However, if the interested parties' interests are sufficiently opposed, or if the decision maker is seeking to advance the parties' decision maker's need for prior knowledge about the relevant variables and for strategic sophistication. In other settings, only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow defective decision making.

Relying on the Information of Interested Parties

Despite the many undesirable outcomes of corporate misconduct, scholars have an inadequate understanding of corporate misconduct's causes and mechanisms. We extend the behavioral theory of the firm, which traditionally assumes away the possibility of firm impropriety, to develop hypotheses predicting that top management incentive compensation and poor organizational performance relative to aspirations increase the likelihood of financial misrepresentation. Using a sample of financial restatements prompted by accounting irregularities and identified by the U.S. Government Accountability Office, we find empirical support for both incentive and relative performance influences on financial statement misrepresentation.

Incentives to Cheat: The Influence of Executive Compensation and Firm Performance on Financial Misrepresentation

The Wealth and Poverty of Nations

In this study, we analyse compliance for a large sample of European companies mandatorily applying International Financial Reporting Standards (IFRS). Focusing on disclosures required by IFRS 3 Business Combinations and International Accounting Standard 36 Impairment of Assets, we find substantial non-compliance. Compliance levels are determined jointly by company- and country-level variables, indicating that accounting traditions and other country-specific factors continue to play a role despite the use of common reporting standards under IFRS. At the company level, we identify the importance of goodwill positions, prior experience with IFRS, type of auditor, the existence of audit committees, the issuance of equity shares or bonds in the reporting period or in the subsequent period, ownership structure and the financial services industry as influential factors. At the country level, the strength of the enforcement system and the size of the national stock market are associated with compliance. Both fact...

Compliance with IFRS 3- and IAS 36-required disclosures across 17 European countries: company- and country-level determinants

The Importance of Earnings.- Definition of Earnings Management.- The Management.- Users.- Gatekeepers.- Truth-Telling.- Smoothing.- Maximization and Minimization.- The Accruals Process.- The Accruals Methodology.- Modifications to the Jones Model and Alternative Methodologies.

Earnings management : emerging insights in theory, practice, and research

The effect of directors’ equity incentives on earnings management

http://people.stern.nyu.edu/jronen/articles/incentives_voluntary.pdf

Incentives for voluntary disclosure

Rule l0b-5 of the 1934 Securities and Exchange Act allows investors to sue firms for misrepresentation or omission. Since firms are principal-agent contracts between owners, contract designers and privately informed managers, owners are the ultimate firms' voluntary disclosure strategists. We analyze voluntary disclosure equilibrium in a game with two types of owners: expected liquidating dividends motivated (VMO) and expected price motivated (PMO). We find that Rule l0b-5: (i) does not deter misrepresentation and may suppress voluntary disclosure or, (ii) induces some firms to adopt a partial disclosure policy of disclosing only bad news or only good news.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID155328_code010402510.pdf?abstractid=155328&rulid=5156548&mirid=4

Incentives for Voluntary Disclosure

The recent accounting scandals brought into light the failure of corporate governance mechanisms to curbing earnings management. This study focuses on the insiders who design the managers’ compensation contracts. The contract designers are seen as lacking the financial expertise to correctly uncover the true outcome. However by virtue of their knowledge of the contract details, they can discern the likelihood that the firm’s public report is not truthful. Modeling the firm as a principal-agent contract, we show that insiders induce earnings management and make trading gains by designing suboptimal incentives. Given that our results are driven largely by the lack of these directors’ financial expertise, our study has the policy implication that inclusion of financial experts in compensation committees can contribute to transparencies under the current insider trading rules in place.

https://pages.stern.nyu.edu/~jronen/articles/Legal_Insider_Trading.pdf

Varda Yaari

Papers

Earnings management : emerging insights in theory, practice, and research

The effect of directors’ equity incentives on earnings management

Incentives for voluntary disclosure

Incentives for Voluntary Disclosure

Legal insider trading, ceo’s incentives, and quality of earnings