Good disclosure doesn't cure bad accounting—Or does it?: Evaluating the case for SFAS 158

This paper investigates whether the newly required recognition of the funded status of defined benefit (DB) plans under SFAS 158 is incrementally value relevant in its adoption year (2006) relative to the corresponding amounts which were previously disclosed from both equity investor and credit rating perspectives. In equity valuation models, we use a sample of 878 firms (1756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incrementally significant association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit rating tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the SFAS 158-imposed pension differential while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants in aggregate use pension-related financial statement information.     

What drives firms' decisions to lobby and determinants of their lobbying positions: Evidence from firms' comment letter submissions during FASB's stock option expensing proposal in 2004

I examine what drives firms' decisions on whether or not to lobby and, if so, whether to oppose or support FASB's 2004 option expensing proposal. Given that the accounting treatment in place and the political climate were different in 2004 than in 1993, it becomes interesting to examine whether the incentives driving managerial lobbying process have changed. Indeed, in contrast to prior research that finds top managers' option compensation being the main incentive to oppose option expensing in 1993, firms' closeness to debt constraints is the main incentive to oppose option expensing in 2004. I also find that firms that are smaller, that are in an industry with peers who have lobbied, that have board interlocks with firms that have lobbied, and that have higher board independence are more likely to self-select to lobby. While prior accounting lobbying research has examined firms' decisions to lobby and firms' decision on their lobbying positions independently, this study improves on prior research methodology by using a two-level nested logit model and examines both decisions.     

Improving consistency in interpreting SFAS 5 probability phrases

Statement of Financial Accounting Standard No. 5, Accounting for Contingencies (SFAS No. 5), relies on verbal probability phrases to guide recognition or disclosure decisions for loss contingencies. One of the challenges facing accountants is that verbal probability terms are vague and may have multiple meanings; thus, different accountants may interpret the same probability phrase differently. Given this background, our study addresses the difficulty of interpreting verbal probability phrases and explores a simple way to improve judgment quality. Evidence from our experiment suggests that supplementing verbal probabilities with their corresponding numerical values reduces interpersonal variability in interpreting SFAS No. 5 terms.     

Competitive harm and geographic area disclosure under SFAS 131

Prior research documents considerable diversity in the amount of detail provided by companies in complying with the foreign country disclosure requirements of SFAS 131. We posit that the potential competitive harm associated with country specific disclosures provides an incentive for management to avoid making these disclosures. Specifically, we hypothesize that firms with higher potential competitive harm costs will provide less detailed geographic area disclosures. Our results show that, as expected, firms exposed to greater competitive harm costs provide less detailed country specific revenue disclosures. This study helps to explain the diversity in practice with respect to the level of detail provided by companies in their geographic area disclosures under SFAS 131. In addition, it adds to the literature examining the impact of potential competitive harm on disclosures made by U.S. firms, by extending the line of research to geographic area disclosures.     

Introduction to and overview of SFAS No. 158: A visual presentation

This short teaching note introduces a visual exhibit to help accounting students understand and learn SFAS No. 158 accounting for defined pension plans.     

Did SFAS 166/167 decrease the information asymmetry of securitizing banks?

Beginning in 2010, mandated Financial Accounting Standards No. 166 and 167 (SFAS 166/167) changed the consolidation rules of securitization entities and required more information about their securitization activities. I find that securitizing banks experienced a decrease in information asymmetry from the pre- to the post-SFAS 166/167 periods, and that more visible securitizing banks are less sensitive to SFAS 166/167. These inferences are robust to a number of sensitivity analyses. This study is one of the first to provide evidence of the effects of SFAS 166/167 on the information asymmetry of securitizing banks.     

Managing specific accruals vs. structuring transactions: Evidence from banking industry

This study investigates earnings management through managing specific accruals vs. structuring transactions in the banking industry. This paper explores the circumstances under which banks manipulate loan loss provisions vs. circumstances that lead banks to structure loan sales and securitizations for the purpose of achieving earnings benchmarks. Empirical results show that banks manage earnings through loan loss provisions, before resorting to structuring transactions, to avoid small earnings decreases and or just meet or beat analysts' forecasts. The findings imply that structuring loan sales and securitizations is more likely to be used as a secondary instrument. In addition, I find that the earnings of banks with lower discretionary loan loss provisions and higher discretionary gains from loan sales and securitizations are priced more negatively, suggesting that investors impose incremental penalties on the joint use of loan loss provisions and gains from loan sales and securitization to meet or beat earnings benchmarks.     

The impact of SFAS No. 141 on earnings predictability of merging firms: Evidence from the initial year of implementation

This study examines the impact of SFAS 141 on earnings predictability of merging firms. I expect a relative improvement in analysts’ earnings forecast accuracy for merging firms versus non-merging peers after SFAS 141 adoption. I restrict the post-SFAS 141 sample to the initial year of SFAS 141 implementation. This research design disentangles effects of SFAS No. 141 from those of SFAS No. 142. The evidence from analysis of 48 pairs of merging and matched non-merging firms is consistent with expectations and confirms the increase in earnings predictability for merging firms versus their non-merging peers post-SFAS 141. Results of additional tests suggest that earnings predictability improvement more likely follows from extended disclosure requirements and the other changes in the Purchase Method (“better purchase” issue) than from the elimination of Poolings-of-Interest (“purchase vs. pooling” issue).     

The relative and incremental value relevance of goodwill before and after SFAS No. 142

We explore the value relevance of goodwill against two benchmarks: other accounting information and long-lived tangible assets. Prior research suggests that fair value estimates for goodwill must be inferred from other available information because of the nature of goodwill, including its intangibility. Such inferences are highly discretionary and may limit the usefulness of reported goodwill estimates. Because Statement of Financial Accounting Standards (SFAS) No. 142 relies exclusively on fair value estimates to subsequently measure goodwill, reported values considering management’s increased discretion may be less reliable and less value relevant when presented in conjunction with other accounting information. However, the subsequent accounting measurement for goodwill is not dissimilar from the subsequent measurement for long-lived tangible assets, which are also subject to impairment. In general, impairment measurement is subjective; management may have greater insight, even in the presence of management incentives and other accounting information, that may help confirm or disconfirm investors’ own goodwill estimates. Using other accounting information and long-lived tangible assets as benchmarks for the value relevance of goodwill, we find that reported goodwill provides greater value relevance relative to other accounting information after SFAS 142 and that the difference between the value relevance of goodwill and other long-lived tangible assets is also significantly greater following SFAS 142.     

Economic consequences of mandatory GAAP changes: The case of SFAS No. 158

This study examines management's reaction to the SFAS No. 158 requirement to recognize previously disclosed post-retirement benefit obligations on the balance sheet. The results indicate that managers attempted to mitigate the impact of the standard by increasing the assumed pension discount rate in subsequent periods. Further, the discount rate choice was related to the magnitude of the SFAS No. 158 balance sheet adjustment. Specifically, firms with larger required liability adjustments and more volatile pension assets and obligations were more likely to increase their discount rates. The findings have important implications for research regarding the economic consequences of accounting regulations and in particular the debate surrounding recognition versus disclosure since they indicate that managers react to the relocation of information from the financial statement footnotes to the balance sheet.