Showing papers on "Earnings published in 2009"
Book•
15 May 2009
TL;DR: In this paper, the effects of investment in education and training on earnings and employment are discussed. But the authors focus on the relationship between age and earnings and do not explore the relation between education and fertility.
Abstract: "Human Capital" is Becker's study of how investment in an individual's education and training is similar to business investments in equipment. Becker looks at the effects of investment in education on earnings and employment, and shows how his theory measures the incentive for such investment, as well as the costs and returns from college and high school education. Another part of the study explores the relation between age and earnings. This edition includes four new chapters, covering recent ideas about human capital, fertility and economic growth, the division of labour, economic considerations within the family, and inequality in earnings.
12,071 citations
TL;DR: The value-in-diversity perspective argues that a diverse workforce, relative to a homogeneous one, is generally beneficial for business, including but not limited to corporate profits and earnings.
Abstract: The value-in-diversity perspective argues that a diverse workforce, relative to a homogeneous one, is generally beneficial for business, including but not limited to corporate profits and earnings. This is in contrast to other accounts that view diversity as either nonconsequential to business success or actually detrimental by creating conflict, undermining cohesion, and thus decreasing productivity. Using data from the 1996 to 1997 National Organizations Survey, a national sample of for-profit business organizations, this article tests eight hypotheses derived from the value-in-diversity thesis. The results support seven of these hypotheses: racial diversity is associated with increased sales revenue, more customers, greater market share, and greater relative profits. Gender diversity is associated with increased sales revenue, more customers, and greater relative profits. I discuss the implications of these findings relative to alternative views of diversity in the workplace.
876 citations
TL;DR: This article used administrative data on the quarterly employment and earnings of Pennsylvanian workers in the 1970s and 1980s matched to Social Security Administration death records covering 1980-2006 to estimate the effects of job displacement on mortality.
Abstract: We use administrative data on the quarterly employment and earnings of Pennsylvanian workers in the 1970s and 1980s matched to Social Security Administration death records covering 1980–2006 to estimate the effects of job displacement on mortality. We find that for high-seniority male workers, mortality rates in the year after displacement are 50%–100% higher than would otherwise have been expected. The effect on mortality hazards declines sharply over time, but even twenty years after displacement, we estimate a 10%–15% increase in annual death hazards. If such increases were sustained indefinitely, they would imply a loss in life expectancy of 1.0–1.5 years for a worker displaced at age forty. We show that these results are not due to selective displacement of less healthy workers or to unstable industries or firms offering less healthy work environments. We also show that workers with larger losses in earnings tend to suffer greater increases in mortality. This correlation remains when we examine predicted earnings declines based on losses in industry, firm, or firm-size wage premiums.
858 citations
TL;DR: In this article, the authors focus on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms and find that negative news has a stronger effect on firms that receive positive than negative earnings surprises.
Abstract: Psychological evidence indicates that it is hard to process multiple stimuli and perform multiple tasks at the same time. This paper tests the INVESTOR DISTRACTION HYPOTHESIS, which holds that the arrival of extraneous news causes trading and market prices to react sluggishly to relevant news about a firm. Our test focuses on the competition for investor attention between a firm's earnings announcements and the earnings announcements of other firms. We find that the immediate stock price and volume reaction to a firm's earnings
surprise is weaker, and post-earnings announcement drift is stronger, when a greater number of earnings announcements by other firms are made on the same day. Distracting news has a stronger effect on firms that receive positive than negative earnings surprises. Industry-unrelated news has a stronger distracting effect than related news. A trading strategy that exploits post-earnings announcement drift is unprofitable for announcements made on days with little competing news.
854 citations
TL;DR: In this article, the causal impact of media reporting from the impact of the events being reported is disentangled by comparing the behaviors of investors with access to different media coverage of the same information event by using zip codes to identify 19 mutually exclusive trading regions, corresponding to 19 large U.S. cities and local newspapers.
Abstract: It is challenging to disentangle the causal impact of media reporting from the impact of the events being reported. We solve this problem by comparing the behaviors of investors with access to different media coverage of the same information event. We use zip codes to identify 19 mutually exclusive trading regions, corresponding to 19 large U.S. cities and local newspapers (e.g., the Houston Chronicle). For all earnings announcements of S&P 500 Index firms, we find that local media coverage strongly predicts local trading, after controlling for characteristics of the earnings surprise, firm, local investors, and reporting newspaper(s). Moreover, the local trading-local coverage effect: 1) depends precisely on the specific timing of local reporting (e.g., one day after the earnings announcement, two days afterward, etc.) and 2) disappears entirely during extreme weather events, which leaves media content unchanged, but disrupts transmission to investors.
709 citations
Posted Content•
TL;DR: In this paper, the authors examined the effect of the readability of firm written communication on the behavior of sell-side financial analysts and found that less readable 10-Ks are associated with greater dispersion, lower accuracy, and greater overall uncertainty in analyst earnings forecasts.
Abstract: This study examines the effect of the readability of firm written communication on the behavior of sell-side financial analysts. Using a measure of the readability of corporate 10-K filings, we document that analyst following, the amount of effort incurred to generate their reports, and the informativeness of their reports are greater for firms with less readable 10-Ks. Additionally, we find that less readable 10-Ks are associated with greater dispersion, lower accuracy, and greater overall uncertainty in analyst earnings forecasts. Overall, our results are consistent with the prediction of an increasing demand for analyst services for firms with less readable communication and a greater collective effort by analysts for firms with less readable disclosures. Our results contribute to the understanding of the role of analysts as information intermediaries for investors and the effect of the complexity of written financial communication on the usefulness of this information.
698 citations
TL;DR: In this article, the consequences of real activities manipulation are examined and the extent to which such manipulation affects subsequent performance is examined, and it is shown that firms that engage in such manipulation are associated with higher subsequent firm performance.
Abstract: This paper examines the consequences of real activities manipulation. Using financial statement data, I identify firms that appear to engage in any of the following real activities manipulation (RM): reducing R&D to increase income, reducing SG&A to increase income, timing of income recognition from the disposal of long-lived assets and investments, and cutting prices to boost sales in the current period and/or overproducing to decrease COGS expense. I then examine whether RM is associated with firms just meeting two earnings benchmarks (zero and last year’s earnings). The results indicate that real activities manipulation of R&D, SG&A, and production are positively associated with firms just meeting these earnings benchmarks. Next, I examine the extent to which real activities manipulation affects subsequent performance. A negative association between just meeting earnings benchmarks by using RM and subsequent performance supports prior research suggesting managers opportunistically use earnings management to the detriment of shareholders (i.e., managerial opportunism). A positive association is consistent with managers using operational discretion to attain benefits that allow better future performance or to signal future firm value. I find that firm-years reflecting RM to just meet earnings benchmarks have higher subsequent firm performance (compared to firm-years that do not engage in RM and miss or just meet the earnings benchmarks). In this setting, using RM to influence the output of the accounting system is not opportunistic, but consistent with managers attaining benefits that allow better future performance or signaling.
633 citations
TL;DR: The authors investigated whether the business press serves as an information intermediary and found that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information.
Abstract: This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms’ information environments by packaging and disseminating information, as well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information. These results are robust to controlling for firm-initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements.
579 citations
TL;DR: In this paper, the authors examined the relationship between institutions' investment horizons and their informational roles in the stock market and found that short-term institutions' trading is also positively related to future earnings surprises.
Abstract: We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by shortterm institutions. Furthermore, short-term institutions’ trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions’ trading is also positively related to future earnings surprises. By contrast, long-term institutions’ trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage. (JEL G12, G14, G20) This article examines the relation between institutions’ investment horizons and their informational roles in the stock market. Although a large body of literature has studied the behavior of institutional trading and its impact on asset prices and returns, 1 the informational role of institutional investors remains an open question. Gompers and Metrick (2001) document a positive relation between institutional ownership and future stock returns. However, they attribute this relation to temporal demand shocks rather than institutions’ informational advantage. Nofsinger and Sias (1999) find that changes in institutional ownership forecast next year’s returns, suggesting that institutional trading contains information about future returns. In contrast, Cai and Zheng (2004) find that institutional trading
560 citations
TL;DR: In this article, independent corporate boards of Hong Kong firms provide effective monitoring of earnings management, which suggests that despite differences in institutional environments, corporate board independence is important to ensure high-quality financial reporting.
545 citations
TL;DR: The authors examined the effect of attending the flagship state university on the earnings of 28 to 33 year olds by combining confidential admissions records from a large state university with earnings data collected through the state's unemployment insurance program.
Abstract: This paper examines the effect of attending the flagship state university on the earnings of 28 to 33 year olds by combining confidential admissions records from a large state university with earnings data collected through the state's unemployment insurance program. To distinguish the effect of attending the flagship state university from the effects of confounding factors correlated with the university's admission decision or the applicant's enrollment decision, I exploit a large discontinuity in the probability of enrollment at the admission cutoff. The results indicate that attending the most selective state university causes earnings to be approximately 20% higher for white men.
TL;DR: The authors found that foreign investors invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are conducive to governance problems, indicating that information asymmetry and monitoring costs faced by foreign investors likely drive the results.
Abstract: As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4,409 firms from twenty-nine countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are conducive to governance problems. This effect is particularly pronounced when earnings are opaque, indicating that information asymmetry and monitoring costs faced by foreign investors likely drive the results. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
TL;DR: In this paper, the authors predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism, and study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures.
Abstract: We predict that firms with stronger corporate governance will exhibit a higher degree of accounting conservatism. Governance level is assessed using a composite measure that incorporates several internal and external characteristics. Consistent with our prediction, strong governance firms show significantly higher levels of conditional accounting conservatism. Our tests take into account the endogenous nature of corporate governance, and the results are robust to the use of several measures of conservatism (market-based and nonmarket-based). Our evidence is consistent with the direction of causality flowing from governance to conservatism, and not vice versa, indicating that governance and conservatism are not substitutes. Finally, we study the impact of earnings discretion on the sensitivity of earnings to bad news across governance structures. We find that, on average, strong-governance firms appear to use discretionary accruals to inform investors about bad news in a timelier manner.
TL;DR: In this article, the authors estimate the role played by three key variables (namely expected earnings, the desire for independence and the ability to find paid employment) on the paid employee/self-employment decision using a simple three stage utility maximization model.
Abstract: This paper attempts to estimate the role played by three key variables (namely expected earnings, the desire for independence and the ability to find paid employment) on the paid employee/self-employment decision using a simple three stage utility maximization model. The empirical results suggest that individuals are attracted to self-employment because of higher expected earnings relative to paid employment and by the freedom from managerial constraints that it offers. Evidence is also produced supporting the prosperity pull argument for self-employment. Marital status, parents employment status, housing equity and occupational status clearly emerge as significant determinants of labour market choice.
TL;DR: In this article, the authors examined whether corporate governance mechanisms affect earnings and earnings management at the largest publicly traded bank holding companies in the United States and found that performance, earnings management, and corporate governance are endogenously determined.
TL;DR: Using linked employee-employer data from the U.S. Census Bureau on legal services, it is found that employees with higher earnings are less likely to leave relative to employees with lower earnings, but if they do leave, they are more likely to move to a spin-out instead of an incumbent firm.
Abstract: We theorize that differences in human assets’ ability to generate value are linked to exit decisions and their effects on firm performance. Using linked employee-employer data from the U.S. Census Bureau on legal services, we find that employees with higher earnings are less likely to leave relative to employees with lower earnings, but if they do leave, they are more likely to move to a spin-out instead of an incumbent firm. Employee entrepreneurship has a larger adverse impact on source firm performance than moves to established firms, even controlling for observable employee quality. Findings suggest that the transfer of human capital, complementary assets, and opportunities all affect mobility decisions and their impact on source firms.
TL;DR: This article examined the role of investor attention in explaining the profitability of price and earnings momentum strategies and found that price momentum profits were higher among high volume stocks and in up markets, but that earnings momentum profits are higher among low volume stocks in down markets.
Abstract: We examine the role of investor attention in explaining the profitability of price and earnings momentum strategies. Using trading volume and market state to measure cross-sectional and time-series variations of investor attention, we find that price momentum profits are higher among high volume stocks and in up markets, but that earnings momentum profits are higher among low volume stocks and in down markets. In the long run, price momentum profits reverse but earnings momentum profits do not. These results suggest that price underreaction to earnings news weakens with investor attention, but price continuation caused by investors' overreaction strengthens with attention.
Posted Content•
TL;DR: In this paper, the authors examined the relation between internal control quality and the accuracy of management guidance and found that ineffective internal controls have an economically significant effect on internal management reports and thus decisions based on these figures.
Abstract: We examine the relation between internal control quality and the accuracy of management guidance. Consistent with managers in firms with ineffective internal controls relying on erroneous internal management reports when forming guidance, we document less accurate guidance among firms reporting ineffective internal controls. This relation extends to a change analysis, and the impact of ineffective internal controls on forecast accuracy is three times larger when the weakness relates to revenues or cost of goods sold — inputs particularly relevant to forecasting earnings. We conclude that internal control quality has an economically significant effect on internal management reports and thus decisions based on these figures.
TL;DR: In this article, the authors examine whether short sellers detect firms that misrepresent their financial statements and whether their trading conveys external costs or benefits to other investors, and find that abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed.
Abstract: We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time-to-discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values when firms provide incorrect financial information.
TL;DR: In this paper, the authors examined the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts and found that firms that just beat analyst forecasts with low quality earnings exhibit a short-term stock price benefit relative to firms that miss forecasts with high quality earnings.
Abstract: This paper examines the performance consequences of cutting discretionary expenditures and managing accruals to exceed analyst forecasts. We show that firms that just beat analyst forecasts with low quality earnings exhibit a short-term stock price benefit relative to firms that miss forecasts with high quality earnings. This trend, however, reverses over a 3-year horizon. Additionally, firms reducing discretionary expenditures to beat forecasts have significantly greater equity issuances and insider selling in the following year, consistent with managers understanding the myopic nature of their actions. Our results confirm survey evidence suggesting managers engage in myopic behavior to beat benchmarks. THERE IS GROWING EVIDENCE that managers are willing to sacrifice economic value to meet short-run earnings objectives. For example, Graham, Harvey, and Rajagopal (2005) report that a majority of managers would forgo a project with positive net present value (NPV) if the project would cause them to fall short of the current quarter consensus forecast. When asked what actions they might take in order to meet an earnings target, approximately 80% suggest they would decrease discretionary spending, including R&D and advertising expense. This survey evidence is consistent with other research on myopic behavior and real earnings management (e.g., Baber, Fairfield, and Haggard (1991), Bhojraj and Libby (2005), Roychowdhury (2006)). Jensen (2005) attributes this behavior in part to the agency costs of overvalued equity, noting that “when numbers are manipulated to tell the market what they want to hear ... and when real operating decisions that would maximize value are compromised to meet market expectations, real long-term value is being destroyed” (p. 8). In this paper, we provide evidence on the short- and long-term price and profitability
TL;DR: In this paper, the authors find that the consideration of earnings volatility brings substantial improvements in the prediction of both short and long-term earnings, and they also identify systematic errors in analyst forecasts.
TL;DR: In this article, the authors exploit a natural quasi-experiment to isolate the effects that were uniquely due to Sarbanes-Oxley Act (SOX): US firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million can delay the auditor's attestation requirement.
Abstract: This paper exploits a natural quasi-experiment to isolate the effects that were uniquely due to Sarbanes-Oxley Act (SOX): US firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor’s attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. Net-in-net, SOX compliance reduced the market value of small firms.
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TL;DR: In this article, the authors test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings and find evidence that reliance on covenants is positively associated with the degree of timely loss recognition.
Abstract: Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision-making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers’ abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if the accounting system recognizes economic losses in earnings in a timely fashion. Thus, the demand for timely loss recognition should increase with a contract’s reliance on covenants. Consistent with this conjecture, I find evidence that reliance on covenants in public debt contracts is positively associated with the degree of timely loss recognition. I also find evidence that the presence of prior private debt mitigates this relationship.
TL;DR: This study develops a general equilibrium model with occupation-specific human capital and heterogeneous experience levels within occupations that accounts for changes in within-group wage inequality and the increase in the variability of transitory earnings.
Abstract: In this article we argue that wage inequality and occupational mobility are intimately related. We are motivated by our empirical findings that human capital is occupation specific and that the fraction of workers switching occupations in the U.S. was as high as 16% a year in the early 1970's and had increased to 21% by the mid-1990's. We develop a general equilibrium model with occupation-specific human capital and heterogeneous experience levels within occupations. We find that the model, calibrated to match the level of occupational mobility in the 1970's, accounts quite well for the level of (within-group) wage inequality in that period. Next, we find that the model, calibrated to match the increase in occupational mobility, accounts for over 90% of the increase in wage inequality between the 1970's and the 1990's. The theory is also quantitatively consistent with the level and increase in the short-term variability of earnings. Copyright , Wiley-Blackwell.
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TL;DR: For example, this paper found that daily institutional trades are highly persistent and respond positively to recent daily returns but negatively to longer-term past daily returns, indicating that institutional trades, particularly sells, appear to generate short-term losses, but longerterm profits.
Abstract: Many questions about institutional trading can only be answered if one tracks high-frequency changes in institutional ownership. In the United States, however, institutions are only required to report behavior from the "tape", the Transactions and Quotes database of the New York Stock Exchange, using a sophisticated method that best predicts quarterly 13-F data from trades of different sizes. We find that daily institutional trades are highly persistent and respond positively to recent daily returns but negatively to longer-term past daily returns. Institutional trades, particularly sells, appear to generate short-term losses--possibly reflecting institutional demand for liquidity--but longer-term profits. One source of these profits is that institutions anticipate both earnings surprises and post-earnings-announcement drift. These results are different from those obtained using a standard size cutoff rule for institutional trades.
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TL;DR: In this paper, the authors present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961), concluding that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs does a good job of explaining the main features of observed payout policies.
Abstract: We present a synthesis of academic research on corporate payout policy grounded in the pioneering contributions of Lintner (1956) and Miller and Modigliani (1961). We conclude that a simple asymmetric information framework that emphasizes the need to distribute FCF and that embeds agency costs (as in Jensen (1986)) and security valuation problems (as in Myers and Majluf (1984)) does a good job of explaining the main features of observed payout policies - i.e., the massive size of corporate payouts, their timing and, to a lesser degree, their (dividend versus stock repurchase) form. We also conclude that managerial signaling motives, clientele demands, tax deferral benefits, investors' behavioral heuristics, and investor sentiment have at best minor influences on payout policy, but that behavioral biases at the managerial level (e.g., over-confidence) and the idiosyncratic preferences of controlling stockholders plausibly have a first-order impact. 1 Introduction 2 Basic Theory: The Need to Distribute Free Cash Flow is Foundational 3 Security Valuation Problems, Agency Costs, and Optimal Payout Policy 4 Corporate Payouts: Scale, Concentration, and Earnings Linkage 5 Payouts and Earnings: A Closer Look 6 Are Dividends Disappearing' 7 Why Do Dividends Survive' 8 Signaling and the Information Content of Dividends 9 Behavioral Influences on Payout Policy 10 Clientele Effects: Transaction Costs, Institutional Ownership, and Payout Policy 11 Controlling Stockholders and Payout Policy 12 Taxes and Payout Policy 13 The Advantages of Stock Repurchases 14 Conclusion: What We Know About Payout Policy and Promising Avenues for Future Research
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TL;DR: In this paper, the authors conducted a randomized experiment with 43,000 EITC recipients at H&R Block in which tax preparers gave simple, personalized information to half of their clients and found substantial heterogeneity in treatment effects across the 1,461 tax professionals who assisted the clients involved in the experiment.
Abstract: This paper tests whether providing information about the Earned Income Tax Credit (EITC) affects EITC recipients' labor supply and earnings decisions. We conducted a randomized experiment with 43,000 EITC recipients at H&R Block in which tax preparers gave simple, personalized information about the EITC schedule to half of their clients. Tracking subsequent earnings, we find substantial heterogeneity in treatment effects across the 1,461 tax professionals who assisted the clients involved in the experiment. Half of the tax professionals, whom we term "compliers", induce treated clients to increase their EITC refunds by choosing an earnings level closer to the peak of the EITC schedule. Clients treated by complying tax professionals are 10% less likely to have very low incomes than control group clients. The remaining tax preparers generate insignificant changes in EITC amounts but increase the probability that their clients have incomes high enough to reach the phase-out region. Treatment effects are larger for the self-employed, but are also substantial among wage earners, suggesting that information provision induced real labor supply responses. When compared with other policy instruments, information has large effects: complying tax preparers generate the same labor supply response along the intensive margin as a 33% expansion of the EITC program, while non-complying tax preparers induce the same response as a 5% tax rate cut.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
TL;DR: In this paper, the authors examine the relation between auditor tenure and a firm's ability to use discretionary accruals to meet or beat analysts' earnings forecasts, and they find that firms with both short (two to three years) and long (13-15 years or more) tenure are more likely to report levels of discretionary accumruals that allow them to meet and beat earnings forecasts.
Abstract: We examine the relation between auditor tenure and a firm's ability to use discretionary accruals to meet or beat analysts' earnings forecasts. Regulators have long expressed concern over the use of earnings management to attain earnings targets. These concerns are compounded by lingering questions over whether long-term auditor-client relationships impair an auditor's ability to independently stem such practices. The profession counter-argues that mandatory auditor rotation reduces auditors' familiarity with the client and adversely affects audit quality. Consistent with both arguments, we find that firms with both short (two to three years) and long (13-15 years or more) tenure are more likely to report levels of discretionary accruals that allow them to meet or beat earnings forecasts. The results suggest that while regulatory mandates for periodic auditor turnover have negative effects, sustained long term auditor-client relationships may be also detrimental to audit quality. The generalizability of our results may not extend to firms that are not covered by analysts, as these firms do not face the same public pressure to manage earnings in order to meet or beat expectations.
TL;DR: This article examined the relationship between equity incentives and earnings management in the banking industry and found that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements.
Abstract: We examine the relationship between equity incentives and earnings management in the banking industry. By focusing on this regulated industry and using industry-specific earnings management proxies, we provide evidence on the impact of regulation on earnings management arising from CEOs' equity incentives. We find that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements. This finding indicates that in the banking industry, potential regulatory intervention induces, rather than mitigates, earnings management arising from equity incentives.
TL;DR: In this paper, the authors examined the relation between internal control quality and the accuracy of management guidance and found that ineffective internal controls have an economically significant effect on internal management reports and thus decisions based on these figures.