Showing papers on "Earnings published in 2008"
TL;DR: In this article, the authors found that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after the passage of the Sarbanes-Oxley Act (SOX) when compared to similar firms before SOX.
Abstract: We document that accrual‐based earnings management increased steadily from 1987 until the passage of the Sarbanes‐Oxley Act (SOX) in 2002, followed by a significant decline after the passage of SOX. Conversely, the level of real earnings management activities declined prior to SOX and increased significantly after the passage of SOX, suggesting that firms switched from accrual‐based to real earnings management methods after the passage of SOX. We also document that the accrual‐based earnings management activities were particularly high in the period immediately preceding SOX. Consistent with these results, we find that firms that just achieved important earnings benchmarks used less accruals and more real earnings management after SOX when compared to similar firms before SOX. In addition, our analysis provides evidence that the increases in accrual‐based earnings management in the period preceding SOX were concurrent with increases in equity‐based compensation. Our results suggest that stock‐option compo...
1,863 citations
TL;DR: The authors examined whether a simple quantitative measure of language can be used to predict individual firms' accounting earnings and stock returns and found that the fraction of negative words in firm-specific news stories predicts low firm earnings.
Abstract: We examine whether a simple quantitative measure of language can be used to predict individual firms’ accounting earnings and stock returns. Our three main findings are: (1) the fraction of negative words in firm-specific news stories forecasts low firm earnings; (2) firms’ stock prices briefly underreact to the information embedded in negative words; and (3) the earnings and return predictability from negative words is largest for the stories that focus on fundamentals. Together these findings suggest that linguistic media content captures otherwise hard-to-quantify aspects of firms’ fundamentals, which investors quickly incorporate into stock prices. Language is conceived in sin and science is its redemption
1,383 citations
TL;DR: In this paper, the authors examined the relation between annual report readability and firm performance and earnings persistence and found that firms with lower earnings are harder to read (i.e., they have a higher Fog index and are longer).
1,330 citations
TL;DR: This paper reviewed the results from experimental measures of risk aversion for evidence of systematic differences in the behavior of men and women, and found that women are more averse to risk than men.
Abstract: Publisher Summary This chapter reviews the results from experimental measures of risk aversion for evidence of systematic differences in the behavior of men and women. In most studies, women are found to be more averse to risk than men. Studies with contextual frames show less consistent results. Whether men and women systematically differ in their responses to risk is an important economic question. If women are more sensitive to risk than men, this will be reflected in all aspects of their decision making, including choice of profession (and so earnings), investment decisions, and what products to buy. Several recent studies investigate this difference directly. Most experiments that investigate preferences over risky choices deal with the question of whether people make choices that are consistent with expected utility maximization.
1,127 citations
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TL;DR: The authors examined the influence of analysts' influence on managers' earnings management decisions and found that firms followed by more analysts manage their earnings less, while firms with more experienced analysts perform better than firms with less experienced analysts.
Abstract: What is the role of information intermediaries in corporate governance? This paper examines equity analysts' influence on managers' earnings management decisions. Do analysts serve as external monitors to managers, or do they put excessive pressure on managers? Using multiple measures of earnings management, I find that firms followed by more analysts manage their earnings less. To address potential endogeneity problem of analyst coverage, I use two instrumental variables that are based on change in broker size and on firm's inclusion in the S&P 500 index, and find that the result is robust. Finally, given the size of coverage, analysts from top brokers and more experienced analysts have stronger effect against earnings management.
1,055 citations
TL;DR: In this article, a new measure of long-run corporate tax avoidance is proposed based on the ability to pay a low amount of cash taxes per dollar of pre-tax earnings over long time periods.
Abstract: We develop and describe a new measure of long‐run corporate tax avoidance that is based on the ability to pay a low amount of cash taxes per dollar of pre‐tax earnings over long time periods. We label this measure the “long‐run cash effective tax rate.” We use the long‐run cash effective tax rate to examine (1) the extent to which some firms are able to avoid taxes over periods as long as ten years, and (2) how predictive one‐year tax rates are for long‐run tax avoidance. In our sample of 2,077 firms, we find there is considerable cross‐sectional variation in tax avoidance. For example, approximately one‐fourth of our sample firms are able to maintain long‐run cash effective tax rates below 20 percent, compared to a sample mean tax rate of approximately 30 percent. We also find that annual cash effective tax rates are not very good predictors of long‐run cash effective tax rates and, thus, are not accurate proxies for long‐run tax avoidance. While there is some evidence of persistence in annual cash effec...
1,005 citations
TL;DR: This paper examined the influence of analysts' influence on managers' earnings management decisions and found that firms followed by more analysts manage their earnings less, and that analysts from top brokers and more experienced analysts have stronger effects against earnings management.
936 citations
TL;DR: In this paper, the authors introduce a nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra-day level, and demonstrate that the likelihood of misclassification of jumps becomes negligible when using high-frequency returns.
Abstract: This paper introduces a new nonparametric test to detect jump arrival times and realized jump sizes in asset prices up to the intra-day level. We demonstrate that the likelihood of misclassiflcation of jumps becomes negligible when we use high-frequency returns. Using our test, we examine jump dynamics and their distributions in the U.S. equity markets. The results show that individual stock jumps are associated with prescheduled earnings announcements and other company-speciflc news events. Additionally, S&P 500 Index jumps are associated with general market news announcements. This suggests difierent pricing models for individual equity options versus index op
810 citations
TL;DR: This paper showed that taller children have higher average cognitive test scores and that these test scores explain a large portion of the height premium in earnings, and that children who have higher test scores also experience earlier adolescent growth spurts, so that height in adolescence serves as a marker of cognitive ability.
Abstract: The well-known association between height and earnings is often thought to reflect factors such as self-esteem, social dominance, and discrimination. We offer a simpler explanation: height is positively associated with cognitive ability, which is rewarded in the labor market. Using data from the United States and the United Kingdom, we show that taller children have higher average cognitive test scores and that these test scores explain a large portion of the height premium in earnings. Children who have higher test scores also experience earlier adolescent growth spurts, so that height in adolescence serves as a marker of cognitive ability.
704 citations
TL;DR: In this paper, the association of a country's investor protection regime with the quality of reported earnings is examined for a large sample of firms from 42 countries, and three attributes of earnings are evaluated: the magnitude of abnormal accruals, the likelihood of reporting losses, and earnings conservatism (timely loss recognition).
Abstract: The association of a country's investor protection regime with the quality of reported earnings is examined for a large sample of firms from 42 countries. Three attributes of earnings are evaluated: the magnitude of abnormal accruals, the likelihood of reporting losses, and earnings conservatism (timely loss recognition). We find that earnings quality increases for firms with Big 4 auditors when a country's investor protection regime gives stronger protection to investors; specifically, abnormal accruals are smaller, there is a greater likelihood of reporting losses, and earnings conservatism is greater. In contrast, earnings of firms with non-Big 4 auditors are largely unaffected by different investor protection regimes. The study adds to a growing body of research showing that accounting practices are influenced by a country's institutions. However, our results differ from prior studies by demonstrating that country-level effects are mediated by audit enforcement, and in particular the incentives of Big 4 auditors to perform higher quality audits in countries with stricter investor protection regimes.
702 citations
TL;DR: In this paper, the authors investigated the connection between earnings management and corporate social responsibility (CSR) and found that earnings management practices damage the collective interests of stakeholders; hence, managers who manipulate earnings can deal with stakeholder activism and vigilance by resorting to CSR practices.
Abstract: Manuscript Type: Empirical Research Question/Issue: This paper investigates the connection between earnings management and corporate social responsibility (CSR). We argue that earnings management practices damage the collective interests of stakeholders; hence, managers who manipulate earnings can deal with stakeholder activism and vigilance by resorting to CSR practices. Research Findings/Insights: Using archival data from a multi-national panel sample of 593 firms from 26 countries between 2002 and 2004, we find a positive impact of earnings management practices on CSR; this relationship holds for different robustness checks. Also, we demonstrate that the combination of earnings management and CSR has a negative impact on financial performance. Theoretical/Academic Implications: This study draws on a generalized agency theory where managers are seen as the agents of all stakeholders and the earnings management literature to highlight that CSR can be used to garner support from stakeholders and, therefore, provides an opportunity for entrenchment to those managers that manipulate earnings. As such, it suggests new avenues of research for both the corporate governance literature, as well as for the stakeholder perspective. Practitioner/Policy Implications: This study offers insights for policy makers and managers interested in enhancing CSR. For managers, our findings suggest that projecting a socially-friendly image in order to disguise earnings management cannot be sustained over time due to the detrimental effect on financial performance. In addition, this study provides a warning signal to policy makers that certain practices geared toward raising a firm’s CSR may simply be a mechanism for hindering other devious practices.
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TL;DR: This article proposed a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes.
Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ("momentum"), short-run earnings "drift," but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.
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TL;DR: A taxonomy of research examining the role of financial analysts in capital markets is presented in this paper, where the authors categorize papers published since 1992, describe the research questions addressed, and suggest avenues for further research in seven broad areas: analysts' decision processes, the nature of analyst expertise and the distributions of earnings forecasts; information content of analyst research; analyst and market efficiency; analysts' incentives and behavioral biases; the effects of the institutional and regulatory environment (including cross-country comparisons); and research design issues.
Abstract: This paper develops a taxonomy of research examining the role of financial analysts in capital markets. The paper builds on the perspectives provided by Schipper [Schipper, K. (1991). Analysts' forecasts. Accounting Horizons, 5, 105-131] and Brown [Brown, L. (1993). Earnings forecasting research: Its implications for capital markets research. International Journal of Forecasting, 9, 295-320]. We categorize papers published since 1992, describe the research questions addressed, and suggest avenues for further research in seven broad areas: (1) analysts' decision processes; (2) the nature of analyst expertise and the distributions of earnings forecasts; (3) the information content of analyst research; (4) analyst and market efficiency; (5) analysts' incentives and behavioral biases; (6) the effects of the institutional and regulatory environment (including cross-country comparisons); and (7) research design issues.
TL;DR: This article used exogenous increases in agricultural income caused by post-Mao reforms in China to estimate the effects of total income and sex-specific income on sex-differential survival of children.
Abstract: Economists have long argued that the sex imbalance in developing countries is caused by underlying economic conditions. This paper uses exogenous increases in sex-specific agricultural income caused by post-Mao reforms in China to estimate the effects of total income and sex-specific income on sex-differential survival of children. Increasing female income, holding male income constant, improves survival rates for girls, whereas increasing male income, holding female income constant, worsens survival rates for girls. Increasing female income increases educational attainment of all children, whereas increasing male income decreases educational attainment for girls and has no effect on boys' educational attainment.
TL;DR: In this paper, the effect of audit effort on earnings management using a unique database of hours worked by auditors on 9,738 audits in Greece between 1994 and 2002 was investigated.
TL;DR: In this article, a review of empirical studies into the impact of formal schooling on entrepreneurship selection and performance in industrial countries is presented, and the main effects found in the literature, as well as the variance in results across almost a hundred studies, are explained.
Abstract: This paper provides a review of empirical studies into the impact of formal schooling on entrepreneurship selection and performance in industrial countries. We describe the main effects found in the literature, we explain the variance in results across almost a hundred studies, and we put the empirical results in the context of related economic theory and the much further developed literature in labor economics (studying the rate of return to education among wage employees). Five main conclusions result from this meta-analysis. First, the impact of education on selection into entrepreneurship is insignificant. Second, the effect of education on performance is positive and significant. Third, the return to a marginal year of schooling is 6.1% for an entrepreneur. Fourth, the effect of education on earnings is smaller for entrepreneurs than for employees in Europe, but larger in the USA. Fifth, the returns to schooling in entrepreneurship are higher in the USA than in Europe, higher for females than for males, and lower for non-whites or immigrants. In conclusion, we offer a number of suggestions to move the research frontier in this area of inquiry. The entrepreneurship literature on education can benefit from the technical sophistication used to estimate the returns to schooling for employees.
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TL;DR: In this article, the authors investigated whether annual earnings follow a seasonal random walk or an IMA (1, 1) model, does this mean that earnings changes cannot be predicted?
Abstract: Since the early 198Os, earnings forecasting research has become much more closely aligned with capital markets research. Capital markets research requires a proxy for the (unobservable) market earnings expectation and earnings forecasting research has provided such proxy measures. Questions considered in this paper include: (1) if annual earnings follow a random walk or an IMA (1, 1) model, does this mean that earnings changes cannot be predicted? (2) Do stock prices act as if quarterly earnings follow a seasonal random walk with drift process? (3) Is the predictive mode1 which is best on the forecast accuracy dimension also best on the market association dimension? (4) How do analysts formulate their earnings expectations? (5) What is the role of earnings forecasting in `earnings response coefficient' and `post-earnings announcement drift' studies? (6) What is the likely role of earnings forecasting research in future capital market studies?
TL;DR: In this article, the authors examine the effect of managerial ownership on financial reporting conservatism and find that, as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism.
Abstract: In this paper we examine the effect of managerial ownership on financial reporting conservatism. Separation of ownership and control gives rise to agency problems between managers and shareholders. Financial reporting conservatism is one potential mechanism to address these agency problems. We hypothesize that, as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism. Consistent with our hypothesis, we find that conservatism as measured by the asymmetric timeliness of earnings declines with managerial ownership. The negative association between managerial ownership and asymmetric timeliness of earnings is robust to various controls, in particular, for the investment opportunity set. We thus provide evidence of a demand for conservatism from the firm's shareholders.
TL;DR: A taxonomy of research examining the role of financial analysts in capital markets is presented in this paper, where the authors categorize papers published since 1992, describe the research questions addressed, and suggest avenues for further research in seven broad areas: analysts' decision processes, the nature of analyst expertise and the distributions of earnings forecasts; information content of analyst research; analyst and market efficiency; analysts' incentives and behavioral biases; the effects of the institutional and regulatory environment (including cross-country comparisons); and research design issues.
TL;DR: This article examined how the relation between earnings and payout policy has evolved over the last three decades and found that repurchases are increasingly used in place of dividends, even for firms that continue to pay dividends.
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TL;DR: In this article, the authors provided evidence of security analyst (SA) superiority relative to univariate time-series (TS) models in predicting firms' quarterly earnings numbers, and they demonstrated that SA forecast superiority in the sample is attributable to: 1. better use of information that exists on the date that TS model forecasts can be initiated, a contemporaneous advantage, and 2. Use of information acquired between the date of initiation of TS model forecast and the date when SA forecasts are published, a timing advantage.
Abstract: Evidence is provided of security analyst (SA) superiority relative to univariate time-series (TS) models in predicting firms' quarterly earnings numbers. It is demonstrated that SA forecast superiority in the sample is attributable to: 1. better use of information that exists on the date that TS model forecasts can be initiated, a contemporaneous advantage, and 2. use of information acquired between the date of initiation of TS model forecasts and the date when SA forecasts are published, a timing advantage.
TL;DR: In this article, the authors find that the consideration of earnings volatility brings substantial improvements in the prediction of both short and long-term earnings, and also identify systematic errors in analyst forecasts, which implies that analysts do not fully understand the implications of the earnings volatility for earnings predictability.
Abstract: Survey evidence indicates widely held managerial beliefs that earnings volatility is negatively related to earnings predictability. In addition, existing research suggests that earnings volatility is determined by economic and accounting factors, and both of these factors reduce earnings predictability. We find that the consideration of earnings volatility brings substantial improvements in the prediction of both short and long-term earnings. Conditioning on volatility information also allows one to identify systematic errors in analyst forecasts, which implies that analysts do not fully understand the implications of earnings volatility for earnings predictability.
TL;DR: Ball et al. as mentioned in this paper show that, contrary to popular belief, initial public offering (IPO) firms report more conservatively, and attribute this to the higher quality reporting demanded of public firms by financial statement users and consequentially higher monitoring by auditors, boards, analysts, rating agencies, press, and litigants, and to greater regulatory scrutiny.
Abstract: This study tests the agency cost hypothesis in the context of geographic earnings disclosures. The agency cost hypothesis predicts that managers, when not monitored by shareholders, make self-maximizing decisions that may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Geographic earnings disclosures provide an interesting context to examine this issue. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such nondisclosure potentially reduces the ability of shareholders to monitor managers' decisions related to foreign operations. Using a sample of U.S. multinationals with substantial foreign operations, we find that nondisclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post–SFAS 131 period. Our conclusions are strengthened by the fact that these differences do not exist in the pre–SFAS 131 period and do not relate to domestic operations. We find differences in the predicted direction only for foreign operations and only after adoption of SFAS 131. Our results are robust to the inclusion of an extensive set of control variables related to alternative corporate governance mechanisms, operating performance, and the firm's information environment. Overall, the results are consistent with the agency cost hypothesis and the important role of financial disclosures in monitoring managers.
TL;DR: In this paper, the authors investigated whether the CSR-related features of 1,653 corporations in 46 countries had a positive or negative effect on the quality of their publicly released financial information during the 1993-2002 period.
Abstract: To many, recent allegations of accounting fraud (or earnings management; EM) at Enron, coupled with similar ones at many other corporations, are a strong indication of a serious decay in business ethics. In academics, this raises the concern between EM and corporate social responsibility (CSR). Since it has neither been documented, nor globally tested whether CSR mitigates or increases the extent of EM, three kinds of EM are studied: earnings smoothing, earnings aggressiveness, and earnings losses and decreases avoidance. The extents to which financial characteristics and institutional variables have an impact on the extent to which companies conduct EM are also tested. Our study investigates whether the CSR-related features of 1,653 corporations in 46 countries had a positive or negative effect on the quality of their publicly released financial information during the 1993–2002 period. There is no question that with a greater commitment to CSR, the extent of earnings smoothing is mitigated, that of earnings losses and decreases avoidance is reduced, but the extent of earnings aggressiveness is increased.
TL;DR: These results add to a growing body of evidence that mental disorders are associated with substantial societal-level impairments that should be taken into consideration when making decisions about the allocation of treatment and research resources.
Abstract: Objective: The purpose of this report was to update previous estimates of the association between mental disorders and earnings. Current estimates for 2002 are based on data from the National Comorbidity Survey Replication (NCS-R). Method: The NCS-R is a nationally representative survey of the U.S. household population that was administered from 2001 to 2003. Following the same basic approach as prior studies, with some modifications to improve model fitting, the authors predicted personal earnings in the 12 months before interview from information about 12-month and lifetime DSM-IV mental disorders among respondents ages 18–64, controlling for sociodemographic variables and substance use disorders. The authors used conventional demographic rate standardization methods to distinguish predictive effects of mental disorders on amount earned by persons with earnings from predictive effects on probability of having any earnings. Results: A DSM-IV serious mental illness in the preceding 12 months significantly...
TL;DR: This paper examined whether analysts resident in a country make more precise earnings forecasts for firms in that country than non-resident analysts and found an economically and statistically significant local analyst advantage even after controlling for firm and analyst characteristics.
TL;DR: In this article, a rhetorical analysis of the genre of earnings press releases is performed, and a quantitative analysis uses capital markets data to assess the investor impact of tone and othe...
Abstract: This two-part study begins with a rhetorical analysis of the genre of earnings press releases. Then, a quantitative analysis uses capital markets data to assess the investor impact of tone and othe...
TL;DR: In this paper, a life cycle model of saving and labour supply is proposed to account for dramatic changes in female labour force participation and labor supply over the last 30 years, and the authors explore whether changes to some specific parameters and exogenous variables of this model can generate the patterns observed in the data.
Abstract: Female labour force participation and labour supply, in the US, as in many other developed countries, has changed dramatically over the last 30 years. If one compares cohorts of women born in the 1930s (such as Elizabeth Dole), 1940s (Hillary Clinton) and 1950s (Oprah Winfrey), two main features emerge when considering labour supply in its various dimensions. First, comparing the Elizabeth Dole cohort to the Hillary Clinton one, we can see a substantial shift of the age profile of labour supply. However, the shape of the profile does not change much. In particular, in both profiles we observe a low participation corresponding to child rearing years. When comparing the Hillary Clinton cohort with the Oprah Winfrey one, we see that the low participation rates associated with the 'fertility years' are no longer present. The aim of this paper is to propose a life cycle model of saving and labour supply that could account for these dramatic changes. We explore whether changes to some specific parameters and exogenous variables of this model can generate the patterns observed in the data. Or, to use a different perspective, we want to quantify the size of changes in unobservable factors needed to explain the observed patterns. The main change in labour supply behaviour in the data is on the extensive margin. We consider a number of possible determinants of these changes in participation. First, wages may have increased relative to the fixed cost of participation. For example, the costs of child-care may have fallen. This would lead to greater participation at all ages and especially among mothers of infants. Second, on-the-job learning or the return to experience may have increased. As argued by Olivetti (2001), this increases the opportunity cost of reduced labor supply. Third, the depreciation of skills that occurs if an individual is not participating may have increased. Finally, we look at other possible explanations, such as a delay in the arrival of the first child and an increase in uncertainty over husband's income. Our structural model of life-cycle behaviour attempts to evaluate these alternative explanations. Obviously, wages are likely to be an important determinant of female labour supply. However, by looking at the dynamics of wages alone, it is difficult to disentangle the return to experience, the depreciation rate of human capital and the extent of participation bias (selection). Moreover, the interactions of these effects with other important determinants (such as fertility patterns, the cost of children, uncertainty, and so on) even in a simple life cycle model can be quite complex and difficult to quantify. Furthermore, a simple analysis that relates wages to labour supply, neglects general equilibrium effects that also imply an effect running from labour supply to wages. The main purpose of this paper is to build a realistic life-cycle environment in which we can explicitly model the participation choice. We can then calibrate the model to fit the behaviour of a given cohort and experiment with changes in the basic determinants of labour supply to determine which are more likely to yield the profiles of other cohorts. In our life cycle model households face uncertainty about the wages of the husband and the wife; maternity is exogenously given and children impose some monetary fixed cost when mothers decide to work. Decisions are taken at an annual frequency. The model takes into account returns to experience as a result of participation and depreciation of human capital when labor market interruptions are made. Households are able to save and borrow and women choose whether or not to work. This makes our model different from Keane and Wolpin (1989) and van Der Klaauw (1996), who estimate structural models of females' employment decision in the first case and females' employment and marital status decisions in the second case imposing that consumption coincides with income. Without the saving choice, the only way to intertemporally substitute consumption would be through changing labor supply and hence, in a model with returns to experience, the future wage rate. Saving is potentially a more flexible means of intertemporal substitution and so ignoring savings overstates the importance of the labor supply choice in life-cycle smoothing. We calibrate our model by matching observed participation profiles to simulated participation and observed wage profiles to the simulated wages of those who choose to work. Wage profiles in both the data and in the simulations are subject to selection; that is we only observe the wages of the women who choose to participate. Our selection model enables us to identify the depreciation effect separately from the return to experience. We use observed profiles from the cohort born at the start of the '40s for our calibration. We then explore the role of different factors in shaping changes of the life-cycle wage profile and participation profile. Pencavel (1998) and Coleman and Pencavel (1993) report similar paths for participation to the paths we report. The facts on employment are not in dispute. More controversial is understanding the data on wage profiles, on depreciation of human capital and on the underlying question of why participation has changed. Mincer and Pollachek (1974) and Mincer and Olfek (1982) discuss the extent of human capital depreciation under different assumptions on the permanence of depreciation. We report some statistics on depreciation but without a structural model of participation it is hard to identify the depreciation rate. Olivetti (2000) suggests that changes in wage profiles across cohorts reflect a change in the return to experience. The evidence we present is somewhat weaker: first, the cohort effect which leads to an increase in the return to experience can plausibly be interpreted as a year effect with wages in the 1980s growing faster than in previous periods. Second, wage growth seems to have benefited those who have worked only intermittently as well as those who have worked full time. There is now a substantial literature addressing the underlying question of why participation has changed. For example, Olivetti (2001) uses a four period model and the estimates of the returns to experience in Olivetti (2000) to show the effect that increase in the returns to experience has on hours worked by women. Greenwood and Seshadri (2002) measure the impact of technological progress on the increase in women's participation. Caucutt, Guner and Knowles (2001) explore the interaction between wage inequality and the marriage, fertility and labour supply decisions. The contribution of the current paper is primarily to use a realistic life-cycle model of saving and participation to compare alternative explanations.
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TL;DR: In this paper, the authors investigate the relation between internal audit function (IAF) quality and earnings management and find evidence that IAF quality is associated with a moderation in the level of earnings management as measured by both proxies.
Abstract: Internal auditors often perform work that is relevant to their host entities' financial reporting processes, yet little research attention has focused on the effects of internal auditing on companies' external financial reporting. Using a unique and previously unavailable data set, we investigate the relation between internal audit function (IAF) quality and earnings management. We measure IAF quality using a composite measure comprising six individual components of IAF quality based on SAS No. 65, which guides external auditors in assessing the quality of an IAF with respect to its role in financial reporting. Earnings management is measured using two separate proxies, (1) abnormal accruals and (2) the propensity to meet or barely beat analysts' earnings forecasts. We find evidence that IAF quality is associated with a moderation in the level of earnings management as measured by both proxies.