Analyst reputation and management earnings forecasts

Prior studies show that analysts with high reputation are influential in the market. This paper examines whether managers consider analyst reputation in shaping their voluntary disclosure strategy. Using Institutional Investor magazine’s All-American (AA) rankings as a proxy for analyst reputation, we find that the coverage of AA analysts is positively associated with the likelihood of quarterly management earnings forecasts (MEFs). We also find that AA analysts’ forecast optimism is more positively associated with the likelihood of MEFs than non-AA analysts’ forecast optimism when the firm is covered by AA analysts. Analyses based on AA analyst coverage changes and AA status changes confirm the relation between analyst reputation and MEFs. We further find that analyst reputation influences other MEF properties, such as forecast news, bias, and revisions, and that our results are robust to alternative measures of analyst reputation. Further analyses show that market reactions at quarterly earnings announcements are more positive (negative) when firms meet/beat (miss) AA analysts’ forecasts than when firms meet/beat (miss) non-AA analysts’ forecasts. Collectively, our findings suggest that managers strategically provide voluntary forecasts by taking into account the reputation of individual analysts following their firms.     

Bank Earnings Management and Tail Risk during the Financial Crisis

We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings management prior to 2007 exhibit substantially higher stock market risk once the financial crisis begins as measured by the incidence of large weekly stock price “crashes” as well as by the pattern of full‐year returns. Stock price crashes also predict future deterioration in operating performance. Bank regulators may therefore interpret them as early warning signs of impending problems.     

Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Unmanaged” Earnings

We explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully, with the market pricing the firm based on those reported earnings. We generate benchmarks against which empirically observed earnings‐returns relations and aggregate earnings distributions can be evaluated. This parsimonious model shows a coherent set of results: reported losses are less persistent than reported gains, decision making diminishes the S‐shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by Basu [1997]. Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single‐peaked. Instead, it may exhibit a kink at zero and look similar to the plots reported by Burgstahler and Dichev [1997]. However, within our model, none of these phenomena are due to reporting noise, bias, or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based.     

Corporate Loan Securitization and the Standardization of Financial Covenants

We examine whether syndicated loans securitized through collateralized loan obligations (CLOs) have more standardized financial covenants. We proxy for the standardization of covenants using the textual similarity of their contractual definitions. We find that securitized loans are associated with higher covenant standardization than nonsecuritized institutional loans. In addition, we show that CLOs with more diverse or frequently rebalanced portfolios are more likely to purchase loans with standardized covenants, potentially because standardization alleviates information processing costs related to loan monitoring and screening. We also document that covenant standardization is associated with greater loan and CLO note rating agreement between credit rating agencies, further supporting the relation between lower information costs and covenant standardization. Overall, our study provides evidence that loan securitization is related to the design of standardized financial covenants.     

CFO Narcissism and Financial Reporting Quality

We investigate the effect of CFO narcissism, as measured by signature size, on financial reporting quality. Experimentally, we validate that narcissism predicts misreporting behavior, and that signature size predicts misreporting through its association with narcissism. Empirically, we examine notarized CFO signatures and find CFO narcissism is associated with more earnings management, less timely loss recognition, weaker internal control quality, and a higher probability of restatements. The results are consistent for within‐firm comparisons focusing on CFO changes and are robust to controlling for CFO overconfidence and CEO narcissism. The results highlight the importance of CFO characteristics in the domain of financial reporting decisions.     

Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years

We commemorate the 50th anniversary of Ball and Brown [1968] by chronicling its impact on capital market research in accounting. We trace the evolution of various research paths that post–Ball and Brown [1968] researchers took as they sought to build on the foundation laid by Ball and Brown [1968] to create a body of research on the usefulness, timeliness, and other properties of accounting numbers. We discuss how those paths often link back to the groundwork laid and questions originally posed in Ball and Brown [1968].     

New development: Lessons and recommendations from South Korea’s experiences with integrated financial management information systems

ABSTRACT

The South Korean government has been reforming its public expenditure management system since 2004. During this time, South Korea adopted new budgeting processes (for example mid-term expenditure framework, top-down budgeting, performance-based budgeting) and developed a new integrated financial information management system. In the course of implementing these reforms, South Korea has important insights and lessons to share with developing countries.     

Persistent public management reform: an egregore of liberal authoritarianism?

This paper explores how we may better understand public administration and public sector management reform. We often interpret our world through stories and this allows us to mentally map where we have been and where we are going to. The paper explores developments in understanding public awareness and that of policy-makers and its impact on policy. It uses the financial crisis and reforms implemented 10 years on to illustrate the points and explore the use of the term ‘egregore’ as a tool for understanding change. A mature free economy requires a strong state to balance deregulation for economic growth with regulation for the public good, necessitating improved policy capacity and good governance. It also needs public administrations staffed with competent, honest officials skilled in the art of statehood. The story of the financial crisis, and how we got there, conveys how to avoid future dangers.