Contemporary Accounting Research 

About: Contemporary Accounting Research is an academic journal published by Wiley-Blackwell. The journal publishes majorly in the area(s): Earnings & Audit. It has an ISSN identifier of 0823-9150. Over the lifetime, 1770 publications have been published receiving 116620 citations. The journal is also known as: Recherche comptable contemporaine & CAR.

Earnings, Book Values, and Dividends in Equity Valuation*

Abstract: . The paper develops and analyzes a model of a firm's market value as it relates to contemporaneous and future earnings, book values, and dividends. Two owners' equity accounting constructs provide the underpinnings of the model: the clean surplus relation applies, and dividends reduce current book value but do not affect current earnings. The model satisfies many appealing properties, and it provides a useful benchmark when one conceptualizes how market value relates to accounting data and other information. Resume. L'auteur elabore et analyse un modele dans lequel il conceptualise la relation entre la valeur marchande d'une entreprise et ses benefices, ses valeurs comptables et ses dividendes actuels et futurs. Deux postulats de la comptabilisation des capitaux propres servent de charpente au modele: a) la relation du resultat global s'applique et b) les dividendes reduisent la valeur comptable actuelle sans influer, cependant, sur les benefices actuels. Le modele presente de nombreuses proprietes interessantes et il peut, fort utilement, servir de repere dans la conceptualisation de la relation entre la valeur marchande et les donnees comptables et autres renseignements.

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

Abstract: . 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.

The Effect of Audit Quality on Earnings Management

Abstract: This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross-sectional version of the Jones 1991 model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10,379 Big Six and 2,179 non-Big Six firm years. Specifically, clients of non-Big Six auditors report discretionary accruals that are, on average, 1.5-2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non-Big Six auditors. This result also indicates that lower audit quality is associated with more “accounting flexibility”.

Valuation and Clean Surplus Accounting for Operating and Financial Activities

Abstract: . This paper models the relation between a firm's market value and accounting data concerning operating and financial activities. Book value equals market value for financial activities, but they can differ for operating activities. Market value is assumed to equal the net present value of expected future dividends, and is shown, under clean surplus accounting, to also equal book value plus the net present value of expected future abnormal earnings (which equals accounting earnings minus an interest charge on opening book value). A linear model specifies the dynamics of an information set that includes book value and abnormal earnings for operating activities. Model parameters represent persistence of abnormal earnings, growth, and accounting conservatism. The model is sufficiently simple to permit derivation of closed form expressions relating market value to accounting data and other information. Three kinds of analyses develop from the model. The first set deals with value as it relates to anticipated realizations of accounting data. The second set examines in precise terms how value depends on contemporaneous realizations of accounting data. The third set examines asymptotic relations comparing market value to earnings and book values, and how earnings relate to beginning of period book values. The paper demonstrates that in all three sets of analyses the conclusions hinge on the extent to which the accounting is conservative as opposed to unbiased. Further, the absence/presence of growth in operating activities is relevant if, and only if, the accounting is conservative. Resume. Les auteurs presentent sous forme de modele la relation entre la valeur marchande d'une entreprise et les donnees comptables relatives a ses activites d'exploitation et ses activites financieres. La valeur comptable est egale a la valeur marchande lorsqu'il s'agit d'activites financieres, mais elle peut etre differente dans le cas des activites d'exploitation. Les auteurs supposent que la valeur marchande est egale a la valeur actualisee nette des dividendes futurs prevus et demontrent que, lorsqu'on applique la methode du resultat global, la valeur marchande est aussi egale a la valeur comptable additionnee de la valeur actualisee nette des benefices extraordinaires futurs prevus (qui sont egaux aux benefices comptables diminues de frais d'interet implicites sur la valeur comptable nette). Un modele lineaire precise la dynamique d'un ensemble de donnees, incluant la valeur comptable et les benefices extraordinaires, relatives aux activites d'exploitation. Les parametres du modele traduisent la persistance des benefices extraordinaires, la croissance et le principe de prudence. Le modele est suffisamment simple pour permettre de deriver des expressions fermees qui mettent en relation la valeur marchande et les donnees comptables et autres. Du modele se degagent trois formes d'analyses. La premiere porte sur la valeur, dans sa relation avec la materialisation anticipee des donnees comptables. La deuxieme porte sur l'examen precis du lien entre la valeur et la materialisation actuelle des donnees comptables. Enfin, la troisieme porte sur l'examen des relations asymptotiques a travers lesquelles se comparent la valeur marchande, d'une part, et les benefices et la valeur comptable, d'autre part, ainsi que sur la facon dont les benefices se rattachent aux valeurs comptables du debut de l'exercice. Les auteurs etablissent que dans les trois formes d'analyses, les conclusions s'orientent vers la mesure dans laquelle, dans le domaine comptable, l'accent est mis sur la prudence par opposition a l'impartialite. En outre, l'absence ou la presence de croissance dans les activites d'exploitation n'est pertinente que si et seulement si le principe de prudence est applique a la comptabilite.

Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure

Abstract: This paper investigates whether firms benefit from expanded voluntary disclosure by examining changes in capital market factors associated with increases in analyst disclosure ratings for 97 firms. The disclosure rating increases are accompanied by increases in sample firms' stock returns, institutional ownership, analyst following, and stock liquidity. These findings persist after controlling for contemporaneous earnings performance and other potentially influential variables, such as risk, growth, and firm size. While it is difficult to draw unambiguous causal conclusions, these results are consistent with disclosure model predictions that expanded disclosure leads investors to revise upward valuations of the sample firms' stocks, increases stock liquidity, and creates additional institutional and analyst interest in the stocks.