BUSN8100 Empirical Research in Financial Accounting

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1 Mail ANU College of Business and Economics Building 26C Australian National University Canberra ACT 0200 Student Office Room 2.01 (Level 2) ANUCBE Building 26C Phone: Fax: Within Australia International Within Australia International (local call cost only) Research School of Accounting & Business Information Systems Building 21 Australian National University Canberra ACT 0200 Room 2037 (Level 2) Hanna Neumann Building info.cbe@anu.edu.au enquiries.abis@anu.edu.au BUSN8100 Empirical Research in Financial Accounting Course Description This is an advanced course which examines positive theories of financial reporting. Empirical research relating to the use of accounting in contracts, accounting discretion, and the relationship between accounting information and firm value is critically analysed. The course also examines the key theoretical perspectives essential to the understanding of empirical accounting research. Semester and Year S Course URL Mode of Delivery On Campus Prerequisites BUSN8007 Analysis of Financial Reporting Incompatible Courses N/A Course Convener Associate Professor Mark Wilson Office Location: Hanna Neumann 1030 Phone: mark.wilson@anu.edu.au Consultation hours: Tuesday 12pm-3pm Bio and research interests Mark Wilson is an Associate Professor in the Research School of Accounting and Business Information Systems at the ANU. His research interests include accounting, economic and business history, earnings quality, the response of markets and securities analysts to financial reporting information and transaction cost economics. He has published in leading journals, including Accounting and Business Research, Accounting and Finance, the Journal of Management Information Systems and Abacus. Dr Wilson's PhD thesis was awarded the SJ Butlin Prize for the best Doctoral dissertation completed in Australia or New Zealand 1 THE AUSTRALIAN NATIONAL UNIVERSITY

2 between in the area of Economic history. Mark is an active researcher and supervisor at the Doctoral and Hons. levels, and was a member of the AFAANZ 2013 and 2014 Technical Committees (Financial Accounting). Student Administrators HN 2037 Hanna Neumann Bldg 21 enquiries.abis@anu.edu.au or Office hours : Monday -Friday 9am 5pm COURSE OVERVIEW Course Learning Outcomes This course is designed to provide students with an opportunity to further advance their research skill by taking undertaking directed studies in Commerce. At the end of this course, students should be able to 1) understand and critically analyse contemporary theoretical and empirical research in financial accounting (LO 1) 2) demonstrate the ability to access, process and analyse data used in contemporary empirical accounting research (LO 2) Research-Led Teaching This entirety of this course concerns contemporary research in accounting in fields within the course convenor is an active researcher. Continuous Improvement We use feedback from students, professional bodies and staff to make regular improvements to the course. In response to this feedback, design improvements from the previous version of the course include: Increased integration of applied statistical and data management training in the curriculum Technology, Software, Equipment You will be required to use the statistical application package Stata in this course. This software is available in the Honours Laboratory and most Information Commons computing facilities. Requisites This course is only available to students enrolled in a Doctoral degree within the College of Business and Economics. Enrolment must be approved by Convenor of the PhD program in which you are enrolled. The prerequisite for this course is BUSN8007 Analysis of Financial Reporting or an equivalent subject taught within an Honours or Advanced Masters Degree. Students are assumed to have completed a course in quantitative methods or statistics and a course in corporate finance (or equivalent). 2 THE AUSTRALIAN NATIONAL UNIVERSITY

3 Student Feedback All CBE courses are evaluated using Student Experience of Learning and Teaching (SELT) surveys, administered by Planning and Statistical Services at the ANU. These surveys are offered online, and students will be notified via to their ANU address when surveys are available in each course. Feedback is used for course development so please take the time to respond thoughtfully. Course feedback is anonymous and provides the Colleges, University Education Committee and Academic Board with opportunities to recognise excellent teaching and to improve courses across the university. For more information on student surveys at ANU and reports on feedback provided on ANU courses, visit and COURSE SCHEDULE Week Summary of Activities Assessment 1 Introduction to Empirical Accounting Research and Review of Statistical Methods Used Therein 2 Agency Relationships, Monitoring and the Allocation of Decision Rights Within Organisations 3 Real Earnings Management 4 Analyst Forecast Accuracy and Financial Reporting 5 Analyst Investment Recommendations 6 Accrual Anomaly and Related Topics 7 Accruals Quality and its Relation to Stock Prices 8 No new papers time devoted to assistance with Practical Research Assignment 9 Book-Tax Differences and Earnings Quality Practical Research Assignment Part 1 Due Monday 29 September 10am. 10 Managerial Guidance 11 Accounting and Debt Markets 12 Accounting Quality and the Cost of Equity Capital 13 Review and Presentation of Practical Research Assignments Practical Research Assignment Part 2 Due Thursday 6 November 10am 3 THE AUSTRALIAN NATIONAL UNIVERSITY

4 COURSE ASSESSMENT Assessment Summary Item Title Value Due Date Linked Learning Outcomes (optional) 1 Seminar Critiques and Presentations 2 Practical Research Assignment 3 Participation in Seminar Discussions 30% Various LO 1 50% Part I 29 September Part 2 6 November LO 1 and LO 2 10% Various LO 1 Assessment Task 1: Seminar Critiques and Presentations Details of task: Each student will be required to lead the class discussion on an academic paper on at least three occasions (the required number of presentations will be finalised in Week 1 once enrolment numbers are confirmed). While you are not expected to present a complete lecture on your topic, you should prepare a small number of Powerpoint slides or hand-outs highlighting key issues / tables / equations / diagrams relevant to your readings. For the papers that you are assigned as the discussion leader, you will also be required to submit a written critique of the paper, of approximately 4 pages (1.5 spaced) in length. The written submission is due by 12 noon on the day prior to the seminar ( submission is preferred). You will be assessed on your demonstrated understanding of the assigned article(s) and their relevance to key issues studied in this course. Assessment Task 2: Practical Research Assignment Details of task: The practical research assignment will require you conduct rudimentary empirical research on a sample of real firms. This assignment will be completed in two stages. In Part 1 candidates will be required to: identify a research topic relating to the relation between properties of analyst forecasts and financial reporting identify and analyse literature relevant to the topic, and prepare a spreadsheet table classifying relevant papers according to numerous criteria develop at least one testable hypothesis obtain, process and analyse archival data used to test the hypothesis (this will require candidates to merge data from different sources and to develop advanced skills in data manipulation) design appropriate empirical tests of the hypotheses, execute these tests and analyse results Write up finding in the form of a preliminary report, emphasising the motivation for the study, the essential logic behind the hypothesis, the properties of the sample and the initial test results 4 THE AUSTRALIAN NATIONAL UNIVERSITY

5 Candidates will be given extensive feedback on the Preliminary Report (i.e Part 1), which they are then required to implement in completing Part 2, which requires the candidate to write up their final results in the form of a scholarly journal article. The assignment overall is worth 50% of the total assessment for the course. Parts 1 and 2 will be weighted 30%/20% or 20%/30%, whichever combination yields the highest total mark for the assignment. For example, if the candidate s percentage grade for Part 2 exceeds that for Part 1, then Part 2 will be weighted as 30% of the total assessment for the course and Part 1 will be weighted at 20% of the total assessment. Assessment Task 3: Participation in Seminar Discussions Details of task: You will be awarded a grade reflecting the frequency and quality of your contributions to seminar discussions. This mark is independent of that awarded under Assessment Task 1. Failure to attend classes will affect your participation grade. Assignment Submission The Practical Research Assignment is to be submitted using the course Wattle site. Submitted assignments must include the cover sheet provided on Wattle. Please keep a copy of the assignment for your records. The ANU is using Turnitin to enhance student citation and referencing techniques, and to assess assignment submissions as a component of the University's approach to managing Academic Integrity. For additional information regarding Turnitin please visit ANU Online. Weekly Seminar Critiques and Powerpoint slides should be ed to the course convenor by 12pm on the day prior to presenting the critique. Extensions and Penalties Late assignments may attract the following penalties: Lateness Penalty 1 day 10% of awarded mark 2 days 15% of awarded mark 3 days 25% of awarded mark 4 days or more No marks will be awarded Returning Assignments Assignments may be returned to students via (seminar critiques) or in hard copy form during class. Scaling Your final mark for the course will be based on the raw marks allocated for each assignment or examination. However, your final mark may not be the same number as produced by that formula, as marks may be scaled. Any scaling applied will preserve the rank order of raw marks (i.e. if your raw mark exceeds that of another student, then your scaled mark will exceed or equal the scaled mark of that student), and may be either up or down. Referencing Requirements Referencing is to be effected using the Harvard (Author-Date) system, details of which are available at: 5 THE AUSTRALIAN NATIONAL UNIVERSITY

6 It is of crucial importance that all written work submitted clearly distinguishes the candidate s own work / words from those of other authors. READING LISTS There is no prescribed textbook for this course, however students may wish to access one of the many introductory texts on the use of the Stata statistical package. Copies of all scholarly articles studied in this course will be made available on Wattle. The weekly reading list is attached to the end of this document, and contains background reading, core papers (those discussed directly in class) and further reading. COMMUNICATION If necessary, the lecturers and tutors for this course will contact students on their official ANU student address. Information about your enrolment and fees from the Registrar and Student Services' office will also be sent to this address. Announcements Students are expected to check the Wattle site for announcements about this course, e.g. changes to timetables or notifications of cancellations. Notifications of emergency cancellations of lectures or tutorials will be posted on the door of the relevant room. Course URLs More information about this course may be found on: Programs and Courses ( ) the College of Business and Economics website ( and Wattle ( the University's online learning environment. Log on to Wattle using your student number and your ISIS password. POLICIES The University offers a number of support services for students. Information on these is available online from ANU has educational policies, procedures and guidelines, which are designed to ensure that staff and students are aware of the University s academic standards, and implement them. You can find the University s education policies and an explanatory glossary at: Students are expected to have read the Student Academic Integrity Policy before the commencement of their course. Other key policies include: Student Assessment (Coursework) Student Surveys and Evaluations 6 THE AUSTRALIAN NATIONAL UNIVERSITY

7 READING LIST BY TOPIC Topic 1: (a) (b) Introduction to the Course and Understanding statistical evidence Ball, R. and Brown, P., 1968, An empirical evaluation of accounting income number, Journal of Accounting Research 6, Lennox, C. and J. Pittman, 2011, Voluntary Audits versus Mandatory Audits, The Accounting Review, 86, (Examples of statistical analysis employed in this paper will form the basis of this class). You should also begin reading papers for the following week s seminar. Topic 2: Agency Relationships, Monitoring and the Allocation of Decision Rights Within Organisations Background Reading: Jensen, M. C., and W. H. Meckling, 1976, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics 3: Core Papers: Alchian, A. A., and H. Demsetz, 1972, Production, Information Costs, and Economic Organization. American Economic Review 62, December: Fama, E., and M. C. Jensen, 1983, Separation of Ownership and Control. Journal of Law and Economics XXVI, June: Klein, B., R. G. Crawford, and A. A. Alchian, 1978, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process. Journal of Law and Economics 21, 2: Further Reading (You don t have to read all of these before class!): Akerlof, G., 1970, The Market for 'Lemons': Quality, Uncertainty and the Market Mechanism. Quarterly Journal of Economics 84: Alchian, A. A., and H. Demsetz, 1973, The Property Rights Paradigm. The Journal of Economic History 33, 1: Jensen, M., 1983, Organization Theory and Methodology. The Accounting Review LVIII, 2: Williamson, O. E., 1979, Transaction-Cost Economics: The Governance of Contractual Relations. Journal of Law and Economics 22, 2: Jensen, M. C., 1986, Agency Costs of Free Cash Flow, Corporate Finance and Takeovers. American Economic Review 76, 2: THE AUSTRALIAN NATIONAL UNIVERSITY

8 Topic 3: Real Earnings Management. Background Reading: Bartov, E., 1993, The Timing of Asset Sales and Earnings Manipulation. Accounting Review 68, 4: Core Papers: Roychowdhury, S., 2006, Earnings management through real activities manipulation*. Journal of Accounting & Economics 42, 3: 335. Gunny, K., 2010, The Relation between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks. Contemporary Accounting Research 27, 3: Topic 4: Accounting and Analyst Forecast Accuracy Abarbanell, J., and R. Lehavy, 2003, Biased forecasts or biased earnings? The role of reported earnings in explaining apparent bias and over/underreaction in analysts' earnings forecasts. Journal of Accounting and Economics 36, 1-3: Givoly, D., C. Hayn, and R. Lehavy, 2009, The Quality of Analysts' Cash Flow Forecasts. The Accounting Review 84, 6: Byard, D., Y. Li, and Y. Yu, 2011, The Effect of Mandatory IFRS Adoption on Financial Analysts' Information Environment. Journal of Accounting Research 49, 1: Further reading: Gu, Z. and T. Chen, 2004, Analysts' treatment of nonrecurring items in street earnings, Journal of Accounting and Economics, 38, Topic 5: Analyst Recommendations Lin, H.., and M. F. McNichols, 1998, Underwriting relationships, analysts' earnings forecasts and investment recommendations. Journal of Accounting & Economics 25, 1: Eames, M., S. M. Glover, and J. Kennedy, 2002, The association between trading recommendations and broker-analysts' earnings forecasts. Journal of Accounting Research 40, 1: Howe, J. S., E. Unlu, and X. Yan, 2009, The Predictive Content of Aggregate Analyst Recommendations. Journal of Accounting Research 47, 3: THE AUSTRALIAN NATIONAL UNIVERSITY

9 Topic 6: Accruals Anomaly Background Reading: Sloan, R. G., 1996, Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? Accounting Review 71, 3: Core Readings: Dechow, P., Richardson, S. and R. Sloan, 2008, The Persistence and Pricing of the Cash Component of Earnings, Journal of Accounting Research, 46, Allen, E. J., C. R. Larson, and R. G. Sloan, 2013, Accrual Reversals, Earnings and Stock Returns. SJournal of Accounting and Economics, 56: Further Reading: Xie, H., 2001, The Mispricing of Abnormal Accruals. Accounting Review 76, 3: Topic 7: Accruals Quality and its Relation to Stock Prices Dechow, P. and I. Dichev, 2002, The quality of accruals and earnings: the role of accrual estimation errors, The Accounting Review 77 (Supp), Francis, J, LaFond, R., Olsson, P. and K. Schipper, 2005, The Market Pricing of Accruals Quality, Journal of Accounting and Economics, 39: Further Reading: Core, J., Guay, W. and R. Verdi, 2008, Is Accruals Quality a Priced Risk Factor, Journal of Accounting and Economics, 46: Kim, D. and Y. Qi, 2010, Accruals Quality, Stock Returns and Macroeconomic Conditions, Accounting Review, 85(3): Mashruwala, C. and S. Mashruwala, 2011, The Pricing of Accruals Quality: January versus the Rest of the Year, Accounting Review, 86(4): Topic 8: NO READINGS Topic 9: Book-Tax Differences and Earnings Quality Lev, B., & Nissim, D. (2004). Taxable income, future earnings, and equity values. The Accounting Review, 79(4), Hanlon, M, 2005, The Persistence and Pricing of Earnings, Accruals and Cash Flows When Firms have Large Book-Tax Differences, The Accounting Review, 80(1): Blaylock, B., Shevlin, T. and R. Wilson, 2012, Tax Avoidance, Large Positive Temporary Book-Tax Differences and Earnings Persistence, The Accounting Review, 87(1): THE AUSTRALIAN NATIONAL UNIVERSITY

10 Further Reading: Phillips, J., Pincus, M., & Rego, S. O. (2003). Earnings management: New evidence based on deferred tax expense. The Accounting Review, 78(2), Topic 10: Managerial Guidance Christensen, T., Merkeley, K., Tucker, J. and S. Venkataraman, 2011, Do Managers Use Earnings Guidance to Influence Street Earnings, Review of Accounting Studies, 16: Cotter, J. Tuna I. and P. Wysocki, 2005, Expectations Management and Beatable Targets: How Do Analysts React to Explicit Guidance, Contemporary Accounting Research, 23, Topic 11: Accounting and Debt Markets Costello, A. M., and R. W. Moerman, 2011, The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports. Journal of Accounting Research 49, 1: Beatty, A., K. Ramesh, and J. Weber, 2002, The importance of accounting changes in debt contracts: The cost of flexibility in covenant calculations. Journal of Accounting & Economics 33, 2: Bharath, S. T., J. Sunder, and S. V. Sunder, 2008, Accounting Quality and Debt Contracting. The Accounting Review 83, 1: Christenson, H. and V. Nikolaev, 2012, Capital Versus Performance Covenants in Debt Contracts, Journal of Accounting Research, 50: Topic 12: Accounting Quality and the Cost of Equity Capital Botosan, C. A., and M. A. Plumlee, 2002, A Re-Examination of Disclosure Level and the Expected Cost of Capital. Journal of Accounting Research 40, 1: Dhaliwal, D. S., O. Z. Li, A. Tsang, and Y. G. Yang, 2011, Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review 86, 1: Armstrong, C., J. Core, D. Taylor, and R. Verrechia, 2011, When Does Information Asymmetry Affect the Cost of Capital. Journal of Accounting Research 49, 1: Barth, M., Konchitchki, Y. and W. Landsman, 2013, Cost of Capital and Earnings Transparency, Journal of Accounting and Economics, 55: THE AUSTRALIAN NATIONAL UNIVERSITY