UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS

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1 UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS Empirical Financial Accounting Research Autumn 2013 Managers' Corporate Financial Reporting Decisions Instructor Douglas J. Skinner HPC Course Description and Objectives Materials Grades The objective of this class is to provide you with a sound framework for understanding empirical archival research in financial accounting and reporting. In reading research papers, our focus will be on methodology and research design as well as on the underlying economic questions. Each week I will provide you with a set of papers to read. One person will be assigned to prepare a written summary of each paper, and will be responsible for leading the discussion on that paper. I do not intend for this to be a lecture more like a facilitated discussion. You will be graded on both your written summaries and the quality of your discussion, keeping in mind that asking basic questions often stimulates the most useful discussions. Readings will be available using a Dropbox folder. I expect you to read the classic guide to writing nonfiction, On Writing Well, by Z.K. Zinsser, and put its ideas into practice in course assignments. Course assignments that do not communicate effectively can result in failing grades. This includes paying attention to spelling (especially of names), grammar, as well as to style. The list of readings provides a useful guide to the questions that I might ask on the accounting general exam. As should be obvious to you, we will not be able to cover all of these papers during our class sessions. Your grade for the class will be determined according to the following scale: Assignment for first class 10% Weekly paper summaries and class participation 25% Midterm exam (referee report) 25% Final project 40%

2 Final Project/Presentation This assignment involves the preparation and presentation of a research proposal with the objective of jump starting your dissertation research. I plan to have short in-class presentations. Your research proposal should cover the following areas: 1. Research question (causal relation of interest I do want a causal question). 2. Existing literature in this area. 3. Why this project is important: its incremental contribution to the literature (answer the who cares? question). 4. Research approach (field study, analytical, experimental, logical argument, large sample empirical archival) and why it is appropriate. One way of thinking about this is to lay out the ideal experiment that could be used to capture the effect of interest. 5. Experimental design, including sampling and statistical methods. Be sure to be explicit about your identification strategy (natural experiment, instrumental variables, regression discontinuity, etc.). 6. Identify strengths and weaknesses of your proposed research strategy vis-à-vis alternatives. 7. Identify potential limitations of the proposed study. I envisage these documents being no more than ten double-spaced pages of text (12 point font). A clear writing style, spelling, grammar, etc., are all important and will be assessed along with the substantive content of your work. You should be prepared to present and defend your ideas in a forum that is like our workshop. Your presentation and your participation in the discussion of others work will also form part of the assessment. Presentations will probably take minutes each. Please do not use projects prepared for other classes or program requirements for this assignment unless you check with me first (if you are taking Christian s class as well this is perhaps OK but talk to me). Copyright Douglas J. Skinner

3 Class # Date Readings: detailed cites (mostly) shown below 1 9/26 Shadish et al., Ch 1., pp ; Assigned paper; Bamber et al., /3 Shadish et al., Ch. 2, Ch. 3, pp and 83-86; Larcker and Rusticus (2007) 3 10/10 Kothari, Ramanna, Skinner (2010, pp ); Lambert (2010); Watts and Zimmerman (1979) 4 10/17 Watts and Zimmerman (1978); Amershi et al. (1982); Gipper et al. (2013); Ramanna (2008); Skinner (2008); Bischof, Bruggemann, Daske (2013). 5 10/24 Stein (1989), Bernard and Schipper (1994), Rice and Weber (2012). 6 10/31 Skinner (1994); Badertscher et al. (2013, JAR conference); Kim and Skinner (2012) 7 11/7 Miller (2006); Bushee, Core, Guay and Hamm (2010); Bushee, Jung, and Miller (2011); Blankespoor, Miller, White (2013) 8 11/14 Armstrong, Gow, Larcker (2013); Minutti-Meza (2013); Larcker and Rusticus (2010) 9 11/21 Dissertations with fewer tears; Zimmerman (1988) 10 12/5 Presentation of projects Class meets Thursdays, 8:30am-11:30am in Room HC3B. Assignment for first class: Prepare an evaluation of Earnings opacity and closed-end fund country discounts. This should be five pages (at most) and written in good form. Midterm: Referee report due 10/31/13. Paper will be made available to you in the first week or two of class. Copyright Douglas J. Skinner

4 The University of Chicago Booth School of Business Empirical Financial Accounting Research: Autumn 2013 Managers' Corporate Financial Reporting Decisions List of stuff you should know on this topic Topic 1: Methodology and Quasi-Experiments. Friedman, M., The Methodology of Positive Economics, Essays in Positive Economics. (Chicago: University of Chicago Press, 1953): Shadish, W. R., T. D. Cook, and D. T. Campbell. Experimental and Quasi-experimental designs for generalized causal inference. (Belmont, CA: Wadsworth, Cengage Learning, 2002). Chapter 1, pp ; Chapter 2; Chapter 3, pp and 83-86; Appendix 5.1. Angrist, J. D., and J-S Pischke. Mostly Harmless Econometrics (Princeton: Princeton University Press, 2009). Chapters 1 and 2. Larcker, D. F., and T. O. Rusticus. Endogeneity in Accounting Research. European Accounting Review 16, 1 (2007): Bamber, L. S., T. E. Christensen, and K. M. Gaver. Do we really know what we think we know? A case study of seminal research and its subsequent overgeneralization. Accounting, Organizations and Society 25 (2000): Assigned paper for Week 1: Earnings opacity and closed-end fund country discounts Topic 2: Introduction to Contracting and Positive Accounting Theory; the Politics of Accounting Standard-Setting Jensen, M. C., and W. H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, Journal of Financial Economics 3, 4 (October 1976): Read pages , only. Watts, R. L., and J. L. Zimmerman Towards a positive theory of the determination of accounting standards. The Accounting Review 53: Watts, R. L., and J. L. Zimmerman, The Demand For and Supply of Accounting Theories: The Market for Excuses. Accounting Review 52, 3 (April 1979): Holthausen, R. W. and R. W. Leftwich, The Economic Consequences of Accounting Choice, Journal of Accounting and Economics 5 (1983) Read Sections 1-3 only. Watts, R. L., What has the invisible hand achieved? Accounting and Business Research (2006) Special issue: International Accounting Policy Forum: Copyright Douglas J. Skinner

5 Kothari, S. P., K. Ramanna, and D. J. Skinner. Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics 50 (2010): Lambert, R. A. Discussion of Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics 50 (2010): DeAngelo, L. E., Auditor Independence, Low Balling, and Disclosure Regulation, Journal of Accounting and Economics 3, 2 (August 1981): a. DeAngelo, L. E., Auditor Size and Audit Quality, Journal of Accounting and Economics 3, 3 (December 1981): b. Amershi, A. H., J. S. Demski, and M. A. Wolfson Strategic behavior and regulation research in accounting. Journal of Accounting and Public Policy 1: Gipper, B., B. Lombardi, and D. J. Skinner The politics of accounting standard-setting: A review of empirical research. Working paper, University of Chicago, June. Bischof, J., U. Bruggemann, H. Daske Fair value reclassifications of financial assets during the financial crisis, Working paper, March. Topic 3: Debt Contracting Leftwich, R. Accounting Information in Private Markets: Evidence from Private Lending Agreements. Accounting Review 58, 1 (January 1983): Aghion, P., and P. Bolton. An incomplete contracts approach to financial contracting. The Review of Economic Studies 59 (1992): Hart, O., and J. Moore. Default and renegotiation: A dynamic model of debt. Quarterly Journal of Economics 113 (1998): Garleanu, N., and J. Zwiebel. Design and renegotiation of debt covenants. Review of Financial Studies 22 (2009): Dichev, I., and D. J. Skinner. Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research 40, 4 (September 2002): Asquith, P., A. Beatty, and J. Weber. Performance Pricing in Bank Debt Contracts. Journal of Accounting and Economics 40 (2005): Beatty, A., J. Weber, and J. Yu. Conservatism and Debt. Journal of Accounting and Economics 45 (2008): Copyright Douglas J. Skinner

6 Guay, W.R. Conservative Financial Reporting, Debt Covenants, and the Agency Costs of Debt. Journal of Accounting and Economics 45 (2008): Ball, R., R. Bushman, and F.P. Vasvari. The debt-contracting value of accounting information and loan syndicate structure. Journal of Accounting Research 46, 2 (2008): Frankel, R., C. Seethamraju, T. Zach. GAAP goodwill and debt contracting efficiency: Evidence from net worth covenants. Review of Accounting Studies 13 (2008): Wittenberg-Moerman, R. The role of information asymmetry and financial reporting quality in debt trading: Evidence from the secondary loan market. Journal of Accounting and Economics 46 (2008): Christensen, H.B., and V. V. Nikolaev. Capital versus performance covenants in debt contracts, working paper (Sept. 2011). Topic 4: Some papers on Value Relevance and Conservatism Aboody, D Market valuation of employee stock options. Journal of Accounting and Economics 22: Skinner, D.J Are disclosures about bank derivatives and employee stock options value relevant? Journal of Accounting and Economics 22: Holthausen, R.W., and R.L. Watts The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting and Economics 31: Watts, R.L. 2003a. Conservatism in accounting part I: Explanations and Implications. Accounting Horizons 17: Watts, R.L. 2003b. Conservatism in accounting part II: Evidence and research opportunities. Accounting Horizons 17: Skinner, D. J Accounting for Intangibles A Critical Review of Policy Recommendations. Accounting and Business Research 38, 3: Topic 5: Earnings Management: Economics Stein, J.C. Efficient capital markets, inefficient firms: A model of myopic corporate behavior, Quarterly Journal of Economics 104, 4 (November 1989): DeAngelo, L. E. Accounting Numbers as Market Valuation Substitutes: A Study of Management Buyouts of Public Stockholders, Accounting Review 61, 3 (July 1986): Copyright Douglas J. Skinner

7 Dechow, P. M., and D. J. Skinner. Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators, Accounting Horizons, 14, 2, (June 2000): Myers, J., L. Myers, and D. J. Skinner. Earnings momentum and earnings management, Journal of Accounting, Auditing, and Finance 22, 2 (Spring 2007): Skinner, D. J. The rise of deferred tax assets in Japan: The role of deferred tax accounting in the Japanese banking crisis. Journal of Accounting and Economics 46 (2008): Healy, P. M., and J. M. Wahlen. A review of the earnings management literature and its implications for standard setting, Accounting Horizons, 13, 4 (December 1999): Topic 6: Earnings Management: Methods Dechow, P. M., R. G. Sloan, and A. P. Sweeney, Detecting Earnings Management, The Accounting Review 70, 2 (April 1995): Kothari, S. P., A. Leone, and C. Wasley. Performance-matched discretionary accruals measures. Journal of Accounting and Economics 39 (2005): Bergstresser, D., and T. Philippon. CEO Incentives and Earnings Management. Journal of Financial Economics 80 (2006): Supplementary: Ball, R and L. Shivakumar. Earnings quality at initial public offerings. Journal of Accounting and Economics 45 (2008): Collins, D.W., and P. Hribar. Errors in estimating accruals: Implications for empirical research, Journal of Accounting Research 40, 1 (March 2002). Hribar, P and D. C. Nichols. The use of unsigned earnings quality measures in tests of earnings management. Journal of Accounting Research 45, 5 (2007): Frankel, R. M., M. F. Johnson, and K. K. Nelson. The Relation between Auditors Fees for Non- Audit Services and Earnings Management. Accounting Review 77 (Supplement 2002): Larcker, D.F., and S.A. Richardson. Fees paid to audit firms, accrual choices, and corporate governance. Journal of Accounting Research 42, 3 (June 2004): Topic 7: Earnings Management: Other Approaches Degeorge, F., J. Patel, and R. Zeckhauser. Earnings management to exceed thresholds. Journal of Business 72, 1 (January 1999): Copyright Douglas J. Skinner

8 Burgstahler, D., and I. Dichev. Earnings Management to Avoid Earnings Decreases and Losses. Journal of Accounting and Economics 24, 1 (December 1997): Durtschi, C., and P. Easton. Earnings Management? The Shapes of the Frequency Distributions of earnings metrics are not evidence ipso facto. Journal of Accounting Research 43 (September 2005): Dechow, P., W. Ge., C. R. Larson, R. G. Sloan. Predicting Material Accounting Misstatements. Contemporary Accounting Research 28, 1 (Spring 2011): Bergstresser, D., M. Desai, and J. Rauh. Earnings manipulation, pension assumptions and managerial investment decisions. Quarterly Journal of Economics 121, 1 (Feb. 2006): Supplementary: Jacob, J., and B.N. Jorgensen. Earnings management and accounting income aggregation. Journal of Accounting and Economics 43 (2007): Durtschi, C., and P. Easton Earnings management? Averaging, Sample Selection Bias, and Scaling Lead to Erroneous Inferences. Working paper, Notre Dame and DePaul. Bushee, B. J The influence of institutional investors on myopic R&D investment behavior. The Accounting Review 73, 3 (July 1998): Graham, J. R., C. R. Harvey, and S. Rajgopal. The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics 40 (2005): Miller, G. S., The Press as a Watchdog for Accounting Fraud. Journal of Accounting Research 44 (5): Topic 8: Disclosure: Selected Topics Lang, M., and R. Lundholm. Corporate Disclosure and Analyst Behavior. The Accounting Review 71 (October 1996): Botosan, C.A., and M.A. Plumlee. A re-examination of disclosure level and the expected cost of equity capital. Journal of Accounting Research 40, 1 (March 2002): Verrecchia, R.E. Discretionary Disclosure. Journal of Accounting and Economics 5 (1983): Jung, W.O., and Y.K. Kwon. Disclosure when market is unsure of information endowment of managers. Journal of Accounting Research 26, 1 (1988): Skinner, D. J. Why Firms Voluntarily Disclose Bad News. Journal of Accounting Research 32 (1994): Copyright Douglas J. Skinner

9 Soffer, L. C., S. R. Thiagarajan, and B. R. Walther, Earnings Preannouncement Strategies. Review of Accounting Studies 5, 1 (March 2000): Kothari, S.P., S. Shu, and P. Wysocki. Do Managers Withhold Bad News? Journal of Accounting Research 47, 1 (March 2009): Hutton, A. P., G. S. Miller, and D. J. Skinner, The role of supplementary statements with management earnings forecasts. Journal of Accounting Research 41, 5 (December 2003): Rogers, J.L., D. J. Skinner, and A. Van Buskirk. Earnings guidance and market uncertainty. Journal of Accounting and Economics 48 (2009): Kim, I. Y., and D. J. Skinner. Measuring securities litigation risk. Journal of Accounting and Economics, forthcoming (September 2011). Topic 9: Additional papers on financial reporting, auditing, and other stuff Bernard, V. and K. Schipper, Recognition and Disclosure in Financial Reporting, Unpublished paper, University of Michigan and University of Chicago, November Rice, S. C., and D. P. Weber, How effective is internal control reporting under SOX 404? Determinants of the (non-) disclosure of existing material control weaknesses. Journal of Accounting Research 50, 3 (June 2012): Minutti-Meza, M., Does auditor industry specialization improve audit quality? Journal of Accounting Research 51, 4 (September 2013): Badertscher, B., B. Jorgensen, S. Katz, and W. Kinney. Public equity and audit pricing in the U.S. Working paper (2013). Topic 10: Econometrics/Method papers Petersen, M.A., Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches. Review of Financial Studies 22, 1 (2009): Larcker, D. F., and T. O. Rusticus. On the use of instrumental variables in accounting research. Journal of Accounting and Economics 49 (2010): Armstrong, C., A. D. Jagolinzer, and D. F. Larcker. Chief Executive Officer Equity Incentives and Accounting Irregularities. Journal of Accounting Research 48, 2 (May 2010): Armstrong, C. A., I. D. Gow, and D. F. Larcker. The efficacy of shareholder voting: Evidence from equity compensation plans. Journal of Accounting Research, forthcoming Copyright Douglas J. Skinner