The Effects of Taxes,Agency Costs and Information Asymmetry on Earnings Management: A Comparison of Public and Private Firms

The realization of securities gains and losses to manage earnings in publicly-traded bank holding companies has been documented in a large number of studies, but very little is known about why managers engage in this behavior. Two possible explanations for earnings management put forth by Warfield, Wild, and Wild (1995) are that managers engage in this behavior either to circumvent accounting-based contracts designed to mitigate agency problems, or to reduce information asymmetry.We compare public and private banks' realizations of securities gains and losses to determine how their earnings management differs. We find that public banks consistently engage in more earnings management than private banks, and that the portion of their current period securities gains and losses attributable to earnings management is more positively associated with next period's earnings before securities gains and losses. These findings are consistent with earnings management occurring due to greater information asymmetry in public firms, and suggest that earnings management may not necessarily lead to the erosion in the quality of earnings suggested by Levitt (1998).     

Nonrecurring Items in Debt Contracts

Using a large sample of debt contracts, we study the determinants of excluding nonrecurring items from covenant calculations. We investigate this choice across firms, across items, and through time. We find that nonrecurring items are more likely to be excluded when the agency costs of debt are higher and less likely to be excluded when they predict borrowers' performance. Our evidence further suggests that the interplay between agency costs and nonrecurring items' predictive ability affects the decision to exclude these items from covenant computations. Finally, when examining the exclusion by different nonrecurring item types, we find confirmatory evidence that the probability of exclusion decreases with the predictive ability for borrowers' future performance of major nonrecurring item types. Overall, our research extends the literature on the determinants of contract design and improves understanding of the usefulness of accounting information in debt contracting.     

Comparing measures of persuasion knowledge adapted for young children

Young children under 8 years old are viewed as especially vulnerable to marketing communications because they do not have sufficient knowledge about the purpose of persuasive advertising messages, also known as children's persuasion knowledge (CPK). However, a review of 25 studies that have tested CPK effects, on primarily older children, finds inconsistent or no support for CPK. The lack of support depends on the effect studied, and a measurement challenge because of young children's limited capabilities in reading and responding to questions from interviewers. Thirteen measures of CPK have been tested but not compared for CPK effects. These measures were simplified to nonverbal options for young children and tested on a sample of 4‐ to 7‐year‐old North East Chinese children (n = 233). These measures were each tested in relation to the children's age (positive), their skepticism toward advertising (positive), their disbelief of false claims in a TV commercial (TVC) (positive) and their affect toward the TVC (negative). Only two measures of CPK show any expected associated responses with “knowing the source” of advertisements the best measure. Perceived marketer intentions had no expected associations, nor did the age of the child. The implications of these findings are discussed in terms of theory, measurement, and applications for marketers and public policy.     

Emotions, store-environmental cues, store-choice criteria, and marketing outcomes

This study integrates extant research relating to store-related cognitions, customer emotions (arousal and pleasure), satisfaction, and loyalty into one framework. The researchers administer a survey to 274 customers in four coffee shops of a major chain. Using these data, the researchers test the hypotheses and model with structural equation modelling. The findings suggest that (a) store-related cognitions differentially affect emotions and customer outcomes (satisfaction and loyalty) and (b) the two emotions of arousal and pleasure differentially mediate the relationships between store-related cognitions and customer outcomes.     

DDB Greater China Group

在2010年中,你们得到了哪些收获,做成了哪些值得您记忆和书写的事情？     

Using Engel curves to estimate bias in the Canadian CPI as a cost of living index

Abstract.  Semiparametric Engel curves are used to infer bias in the Canadian CPI as a Cost of Living Index. The budget share of food has long been used as an indicator of welfare. We compare households with the same levels of CPI deflated total expenditure over the period 1978–2000. Differences in the expenditure share of food are attributed to the CPI failing to capture changes in costs of living. We employ a novel econometric approach using a single index penalized linear spline model. Over the period, we find that the CPI overstated changes in the cost of living between 1.33 and 1.86% for the four household types considered. JEL classification: D1, C1     

The spillover effect of fraudulent financial reporting on peer firms' investments

We investigate how high-profile accounting frauds affect peer firms' investment. We document that peers react to the fraudulent reports by increasing investment during fraud periods. We show that this finding is not driven by frauds that have a higher ex ante likelihood of detection or by an association between fraud and investment booms. In addition, we find that peers’ investments increase in fraudulent earnings overstatements, and in industries with higher investor sentiment, lower cost of capital and higher private benefits of control. We also find evidence consistent with equity analysts potentially facilitating the spillover effect.