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Thomas Z Lys - One of the best experts on this subject based on the ideXlab platform.
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real and Accrual based earnings management in the pre and post sarbanes oxley periods
The Accounting Review, 2008Co-Authors: Daniel Cohen, Aiyesha Dey, Thomas Z LysAbstract: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...
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real and Accrual based earnings management in the pre and post sarbanes oxley periods
Social Science Research Network, 2007Co-Authors: Daniel Cohen, Aiyesha Dey, Thomas Z LysAbstract: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 find evidence 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. Finally, our analysis provides evidence that the increases in Accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.
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weighing the evidence on the relation between external corporate financing activities Accruals and stock returns
Journal of Accounting and Economics, 2006Co-Authors: Daniel Cohen, Thomas Z LysAbstract:Abstract Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting Accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the ‘external financing anomaly’ documented by BRS and the ‘Accrual anomaly’ first documented by Sloan [1996. Do stock prices fully reflect information in Accruals and cash flows about future earnings? The Accounting Review 71, 289–315]. We show that once controlling for total Accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan [2003. External financing, capital investment and future stock returns. Working Paper, University of Pennsylvania and University of Michigan].
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weighing the evidence on the relation between external corporate financing activities Accruals and stock returns
Social Science Research Network, 2006Co-Authors: Daniel Cohen, Thomas Z LysAbstract:Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting Accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the 'external financing anomaly' documented by BRS and the 'Accrual anomaly' first documented by Sloan (1996). We show that once controlling for total Accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan (2003).
Siew Hong Teoh - One of the best experts on this subject based on the ideXlab platform.
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the Accrual anomaly risk or mispricing
Management Science, 2012Co-Authors: David Hirshleifer, Kewei Hou, Siew Hong TeohAbstract:We document considerable return comovement associated with Accruals after controlling for other common factors. An Accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.16, higher than that of the market factor or the SMB and HML factors of Fama and French. According to rational frictionless asset pricing models, the ability of Accruals to predict returns should come from the loadings on this Accrual factor-mimicking portfolio. However, our tests indicate that it is the Accrual characteristic rather than the Accrual factor loading that predicts returns. These findings suggest that investors misvalue the Accrual characteristic and cast doubt on the rational risk explanation. This paper was accepted by Brad Barber, Teck Ho, and Terrance Odean, special issue editors.
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short arbitrage return asymmetry and the Accrual anomaly
Review of Financial Studies, 2011Co-Authors: David Hirshleifer, Siew Hong TeohAbstract:We find a positive association between short-selling and Accruals during 1988-2003. Short arbitrage occurs primarily among firms in the top Accrual decile, and firms with sufficiently high supply of loanable shares (proxied by institutional holdings). Consistent with limits to short arbitrage, there is an asymmetry between the up- and down- sides of the Accrual anomaly. Asymmetry is only present on NASDAQ, and is significantly stronger among firms with low institutional holdings, low liquidity (turnover and size), and high residual volatility. Thus, there is short arbitrage of the Accrual anomaly, but short sale constraints limit its effectiveness.
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short arbitrage return asymmetry and the Accrual anomaly
Social Science Research Network, 2010Co-Authors: David Hirshleifer, Siew Hong TeohAbstract:We find a positive association between short-selling and Accruals during 1988-2009, and that asymmetry between the long and short sides of the Accrual anomaly is stronger when constraints on short-arbitrage are more severe (low availability of loanable shares as proxied by institutional holdings). Short arbitrage occurs primarily among firms in the top Accrual decile. Asymmetry is only present on NASDAQ. Thus, there is short arbitrage of the Accrual anomaly, but short sale constraints limit its effectiveness.
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the Accrual anomaly risk or mispricing
Social Science Research Network, 2010Co-Authors: David Hirshleifer, Kewei Hou, Siew Hong TeohAbstract:We document considerable return comovement associated with Accruals after controlling for other common factors. An Accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.16, higher than that of the market factor or the SMB and HML factors of Fama and French (1993). According to rational frictionless asset pricing models, the ability of Accruals to predict returns should come from the loadings on this Accrual factor-mimicking portfolio. However, our tests indicate that it is the Accrual characteristic rather than the Accrual factor loading that predicts returns. These findings suggest that investors misvalue the Accrual characteristic, and cast doubt on the rational risk explanation.
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the Accrual anomaly risk or mispricing
Research Papers in Economics, 2006Co-Authors: David Hirshleifer, Kewei Hou, Siew Hong TeohAbstract:We document considerable return comovement associated with Accruals after controlling for other common factors. An Accrual-based factor-mimicking portfolio has a Sharpe ratio of 0.15, higher than that of the market factor or the HML factor of Fama and French (1993). In time series regressions, a model that includes the Fama-French factors and the additional Accrual factor captures the Accrual anomaly in average returns. However, further time series and cross-sectional tests indicate that it is the Accrual characteristic rather than the Accrual factor loading that predicts returns. These findings favor a behavioral explanation for the Accrual anomaly.
Daniel Cohen - One of the best experts on this subject based on the ideXlab platform.
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real and Accrual based earnings management in the pre and post sarbanes oxley periods
The Accounting Review, 2008Co-Authors: Daniel Cohen, Aiyesha Dey, Thomas Z LysAbstract: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...
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real and Accrual based earnings management in the pre and post sarbanes oxley periods
Social Science Research Network, 2007Co-Authors: Daniel Cohen, Aiyesha Dey, Thomas Z LysAbstract: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 find evidence 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. Finally, our analysis provides evidence that the increases in Accrual-based earnings management in the period preceding SOX were concurrent with increases in the fraction of equity based compensation.
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weighing the evidence on the relation between external corporate financing activities Accruals and stock returns
Journal of Accounting and Economics, 2006Co-Authors: Daniel Cohen, Thomas Z LysAbstract:Abstract Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting Accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the ‘external financing anomaly’ documented by BRS and the ‘Accrual anomaly’ first documented by Sloan [1996. Do stock prices fully reflect information in Accruals and cash flows about future earnings? The Accounting Review 71, 289–315]. We show that once controlling for total Accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan [2003. External financing, capital investment and future stock returns. Working Paper, University of Pennsylvania and University of Michigan].
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weighing the evidence on the relation between external corporate financing activities Accruals and stock returns
Social Science Research Network, 2006Co-Authors: Daniel Cohen, Thomas Z LysAbstract:Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting Accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the 'external financing anomaly' documented by BRS and the 'Accrual anomaly' first documented by Sloan (1996). We show that once controlling for total Accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan (2003).
Patricia M Dechow - One of the best experts on this subject based on the ideXlab platform.
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The persistence of earnings and cash flows and the role of special items: Implications for the Accrual anomaly
Review of Accounting Studies, 2006Co-Authors: Patricia M DechowAbstract:We argue that high Accruals are likely to be the outcome of rules with an income statement perspective, while low Accruals are likely to be the outcome of rules with a balance sheet perspective, and that this has implications for the properties of earnings. Specifically, earnings persistence is affected both by the magnitude and sign of the Accruals. Accruals improve the persistence of earnings relative to cash flows in high Accrual firms, but reduce earnings persistence in low Accrual firms. We show that the low persistence of earnings in low Accrual firms is primarily driven by special items. We then show that special item-low Accrual firms have higher future stock returns than other low Accrual firms. This is consistent with investors misunderstanding the transitory nature of special items. Further analysis reveals that special item-low Accrual firms have poor past performance and declines in investor recognition (analyst coverage and institutional holdings). Special items continue to explain future returns after controlling for these factors.
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the persistence of earnings and cash flows and the role of special items implications for the Accrual anomaly
Social Science Research Network, 2005Co-Authors: Patricia M DechowAbstract:We argue that high Accruals are likely to be the outcome of rules with an income statement perspective, while low Accruals are likely to be the outcome of rules with a balance sheet perspective and that this has implications for the properties of earnings. Specifically, earnings persistence is affected both by the magnitude and sign of the Accruals. Accruals improve the persistence of earnings relative to cash flows in high Accrual firms, but reduce earnings persistence in low Accrual firms. We show that the low persistence of earnings in low Accrual firms is primarily driven by balance sheet adjustments relating to special items. We then show that low Accrual firms with special items have higher future stock returns than other low Accrual firms. This is consistent with investors misunderstanding the transitory nature of special items. Further analysis reveals that special item-low Accrual firms have performed poorly, are financially distressed, and have declines in investor recognition (analysts coverage and institutional holdings). We find that special items continue to explain future returns after controlling for these factors. Our results suggest that investors underestimate the probability that special item-low Accrual firms will successfully turn themselves around.
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the quality of Accruals and earnings the role of Accrual estimation errors
The Accounting Review, 2002Co-Authors: Patricia M Dechow, Ilia D DichevAbstract:This paper suggests a new measure of one aspect of the quality of working capital Accruals and earnings. One role of Accruals is to shift or adjust the recognition of cash flows over time so that t...
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the quality of Accruals and earnings the role of Accrual estimation errors
Social Science Research Network, 2001Co-Authors: Ilia D Dichev, Patricia M DechowAbstract:This paper suggests a new measure of one aspect of the quality of Accruals and earnings. The major benefit of Accruals is to reduce timing and mismatching problems in the underlying cash flows. However, Accruals accomplish this benefit at the cost of making assumptions and estimates about future cash flows, which implies that Accruals include errors of estimation or noise. Since estimation noise reduces the beneficial role of Accruals, this study suggests that the quality of Accruals and earnings is decreasing in the magnitude of estimation noise in Accruals. More specifically, we develop a simple model of working capital Accruals where Accruals correct the timing problems in cash flows at the cost of including errors in estimation. Based on the model, we derive an empirical measure of Accrual quality as the residual from firm-specific regressions of changes in working capital on past, present, and future operating cash flow realizations. The study concludes with two empirical applications that illustrate the usefulness of our measure of Accrual quality. First, we explore the relation of Accrual quality to economic fundamentals. We find that Accrual quality is negatively related to the magnitude of total Accruals, length of the operating cycle, and the standard deviation of sales, cash flows, and earnings, while it is positively related to firm size. Second, we show a strong positive relation between Accrual quality and earnings persistence.
Scott A Richardson - One of the best experts on this subject based on the ideXlab platform.
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Accrual reliability earnings persistence and stock prices
Journal of Accounting and Economics, 2005Co-Authors: Scott A Richardson, Richard G Sloan, Mark T Soliman, Irem A TunaAbstract:Abstract This paper extends the work of Sloan (1996. The Accounting Review 71, 289) by linking Accrual reliability to earnings persistence. We construct a model showing that less reliable Accruals lead to lower earnings persistence. We then develop a comprehensive balance sheet categorization of Accruals and rate each category according to the reliability of the underlying Accruals. Empirical tests generally confirm that less reliable Accruals lead to lower earnings persistence and that investors do not fully anticipate the lower earnings persistence, leading to significant security mispricing. These results suggest that there are significant costs associated with incorporating less reliable Accrual information in financial statements.
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Accrual reliability earnings persistence and stock prices
Journal of Accounting and Economics, 2005Co-Authors: Scott A Richardson, Richard G Sloan, Mark T Soliman, Irem A TunaAbstract:This paper extends the work of Sloan (1996) by linking Accrual reliability to earnings persistence. We construct a model showing that less reliable Accruals lead to lower earnings persistence. We then develop a comprehensive balance sheet categorization of Accruals and rate each category according to the reliability of the underlying Accruals. Empirical tests generally confirm that less reliable categories of Accruals lead to lower earnings persistence and that investors do not fully anticipate the lower earnings persistence, leading to significant security mispricing. We conclude that there are significant costs associated with the recognition of unreliable information in financial statements.
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fees paid to audit firms Accrual choices and corporate governance
Journal of Accounting Research, 2004Co-Authors: David F Larcker, Scott A RichardsonAbstract:We examine the relation between the fees paid to auditors for audit and non‐audit services, and the choice of Accrual measures for a large sample of firms. Using our pooled sample, we find that the ratio of non‐audit fees to total fees has a positive relation with the absolute value of Accruals similar to Frankel, Johnson, and Nelson [2002]. However, using latent class mixture models to identify clusters of firms with a homogenous regression structure reveals that this positive association only occurs for about 8.5% of the sample. In contrast to the fee ratio results, we find consistent evidence of a negative relation between the level of fees (both audit and non‐audit) paid to auditors and Accruals (i.e., higher fees are associated with smaller Accruals). The latent class analysis also indicates that this negative relation is strongest for client firms with weak governance. Overall, our results are most consistent with auditor behavior being constrained by the reputation effects associated with allowing clients to engage in unusual Accrual choices.
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fees paid to audit firms Accrual choices and corporate governance
Social Science Research Network, 2004Co-Authors: David F Larcker, Scott A RichardsonAbstract:We examine the relation between the fees paid to auditors for audit and non-audit services and the choice of Accrual measures for a large sample of firms. Using our pooled sample, we find that the ratio of non-audit fees to total fees has a positive relation with the absolute value of Accruals similar to Frankel et al. (2002). However, using latent class mixture models to identify clusters of firms with a homogenous regression structure reveals that this positive association only occurs for about 8.5 percent of the sample. In contrast to the fee ratio results, we find consistent evidence of a negative relation between the level of fees (both audit and non-audit) paid to auditors and Accruals (i.e., higher fees are associated with smaller Accruals). The latent class analysis also indicates that this negative relation is strongest for client firms with weak governance. Overall, our results are most consistent with auditor behavior being constrained by the reputation effects associated with allowing clients to engage in unusual Accrual choices.
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corporate governance fees for non audit services and Accrual choices
2003Co-Authors: David F Larcker, Scott A RichardsonAbstract:We examine the relation between the relative amount of fees paid to auditors for non-audit services and the behavior of Accrual measures. We extend prior research in two important directions. First, using a pooled sample of 2,295 firms for the fiscal year 2000, we find very little evidence of a relation between the provision of non-audit services and measure of Accruals. However, there appears to be three distinct clusters of firms where only one cluster (consisting of only about 20 percent of the sample) exhibits a statistically positive association between non-audit fees and Accrual behavior. Second, we examine the corporate governance characteristics of firms in the cluster with a positive association between non-audit fees and Accrual behavior relative to the remaining firms. We find that this subset of firms have a smaller market capitalization, lower institutional holdings, higher insider holdings, smaller board of directors (and audit committee), and lower percentage of independent board (and audit committee) members. These results suggest that the provision of non-audit services is potentially problematic only for a small subset of firms that appear to be de facto controlled by management.