The Effect of Earnings Management on the Value Relevance of Accounting Information

This study investigates whether opportunistic earnings management affects the value relevance of net income and book value in determining stock price. We document a decrease in the value relevance of earnings in the year of an equity offering for a group of firms with ex post evidence of earnings management. This decrease is greater for the discretionary component of earnings than for the non‐discretionary component. These results are robust to model specification and the type of offering. However, the results are sensitive to firms' disclosure activity prior to the offering.     

The Commitment to Income-Decreasing Accounting Choices as a Credible Signal to Reducing Information Asymmetry: The Case of Asset Revaluations*

Bagnoli and Watts (2005) proposed that a manager could reduce information asymmetry by choosing an income-decreasing accounting choice that signals the firm's relatively good future prospects. A limitation in testing this theory is that most income-decreasing accounting choices over time reverse such that aggregated earnings would be the same, regardless of the choice. One income-decreasing accounting choice that never reverses is the choice of upward asset revaluation, where the resulting gains are recognized through other comprehensive income and reduce future earnings by increasing future depreciation expense. In the United Kingdom, prior to FRS15, firms had the option to upwardly revalue on a one-time basis. FRS15, and subsequently International Financial Reporting Standards, however, require those firms that upwardly revalue precommit to revalue on a consistent basis. This precommitment sacrifices future reporting discretion, which, according to the aforementioned study, serves as a costly signal of a firm's relatively good future prospects that reduces information asymmetry. The choice not to upwardly revalue, therefore, serves as a signal of a firm's relatively poor future prospects and also reduces information asymmetry, but this choice does not require precommitment such that the reduction in information asymmetry would be less than the choice to precommit to upward revaluations. Using a propensity-score matched-pair design on a sample of United Kingdom firms to test our predictions during the period requiring precommitment, we find lower forecast dispersion, lower return volatility, and a lower cost of capital for firms that precommit to upward asset revaluations, relative to those firms that choose not to upwardly revalue their operating assets. Keywords: upward asset revaluations, income-decreasing accounting choice, information asymmetry, precommitment     

Firms’ heterogeneity,demand accumulating,and exchange rate pass-through

In this article, we study how the export behaviors of new and incumbent exporters differentially respond to exchange rate shocks. We establish a dynamic model, in which new exporters strategically charge a lower price than incumbent exporters to grow their customer base and increase future sales. The model predicts that new exporters adjust their prices more aggressively relative to their incumbent counterparts in response to exchange rate fluctuations. Using a transaction-level data set containing all Chinese exporters during the 2000–2009 period, we find supporting evidence for the model's predictions: new exporters adjust their price 1.5 times more than incumbent exporters. This, in turn, results in export quantities being less responsive to exchange rate shocks among new exporters. The result holds for a series of robustness checks. The findings imply that there are different degrees of exchange rate pass-through among new and incumbent exporters.     

Succession planning vs. agency theory: a test of Harris and Helfat's interpretation of plurality announcement market returns

In this note we respond to Harris and Helfat's (1998) reinterpretation of the results in Worrell, Nemec, and Davidson (1997) . Harris and Helfat argued that the negative stock market response associated with plurality announcements could be the result of inadequate corporate succession planning rather than with the agency cost explanation. Our results, here, show that duality and plurality announcements do not hurt shareholder wealth as long as there is an heir apparent and, therefore, are more consistent with the succession planning explanation than with agency theory. Copyright © 2001 John Wiley & Sons, Ltd.     

Food choice and school meals: primary schoolchildren's perceptions of the healthiness of foods and the nutritional implications of food choices

Since the 1980 Education Act, school caterers have been operating within a commercial context and therefore can only provide the foods that they know that children will eat. At the same time, nutritionists have been concerned that the greater degree of choice that children now have at lunchtime is resulting in the more frequent consumption of meals of poor nutritional quality. A knowledge of children's food preferences, the factors influencing them, and their perceptions of the healthiness of foods is needed if school caterers and those involved in nutrition education are to work together to help children choose a nutritionally balanced meal. This paper reports on children's perceptions of the healthiness or otherwise of foods commonly served at school lunches and the reasons for these perceptions. Children's knowledge of the sources of nutrients, their understanding of the relationship between food and health, and how their perceptions of healthiness relate to their preferences for the foods are also explored. The nutritional implications of food choices made by primary school children on the basis of preference rather than healthiness are examined. One hundred and twenty three children aged between nine and eleven from 14 different primary schools in SouthEast England took part. Using photographs of foods commonly served at school lunches, the children were asked to rank the foods in order of preference and then according to their perceptions of the healthiness of the foods and give their reasons in each case. The rankings were analysed numerically and the Wilcoxon's pairs signed rank test was used to determine the significance of the difference. The qualitative data on the reasons given for the rankings were analysed by assigning them to categories. The children were also asked which foods they would choose for the meal that they would be most likely to eat, and which ones for the meal that they thought would be the most healthy. The nutritional value of the two sets of meals were determined and compared. A student T- test was used to determine the significance of any difference between the two sets of meals.It was found that the children had a clear perception of the healthiness or otherwise of the foods. However, understanding of the relationship between foods or nutrients and health was only occasionally evident, as was the idea of moderation or balance. Some children perceived healthiness as the absence of fat while others saw it in terms of the presence of vitamins. It was also found that there was a strongly inverse relationship between children's perceptions of the healthiness of foods and their preferences for them. It was found that while the foods chosen for the ‘healthy’ meal were chosen least frequently for the ‘preferred’ meal, there was no significant difference between the percentage of energy provided by fat in the two sets of meals. However the ‘preferred’ meals did in fact provide a significantly higher percentage of the energy as starch, as well as containing greater amounts of some micronutrients. In other respects the ‘healthy’ meals were indeed ‘healthier’, in that they provided greater amounts per megajoule of some important nutrients.It was concluded that teaching about food in primary schools needs to focus on helping children of this age make balanced food choices. It was suggested that the ‘tilted plate’ model, adapted to use foods that children frequently eat and enjoy, could be the basis of such teaching. Such a model could also be used to help caterers plan menus and as the basis of co-operation between nutrition educators and caterers.     

Regime dependent determinants of credit default swap spreads

Credit default swap (CDS) spreads display pronounced regime specific behaviour. A Markov switching model of the determinants of changes in the iTraxx Europe indices demonstrates that they are extremely sensitive to stock volatility during periods of CDS market turbulence. But in ordinary market circumstances CDS spreads are more sensitive to stock returns than they are to stock volatility. Equity hedge ratios are three or four times larger during the turbulent period, which explains why previous research on single-regime models finds stock positions to be ineffective hedges for default swaps. Interest rate movements do not affect the financial sector iTraxx indices and they only have a significant effect on the other indices when the spreads are not excessively volatile. Raising interest rates may decrease the probability of credit spreads entering a volatile period.