Earnings Shortfalls and Strategic Profit Allocations in Segment Reporting

2019 ◽  
Vol 33 (4) ◽  
pp. 37-58 ◽  
Author(s):  
Timothy D. Haight
Keyword(s):  
Firm Value ◽  
Data Availability ◽  
Segment Reporting ◽  
Market Responses ◽  
Earnings Components ◽  
The Future ◽  
Earnings Performance ◽  
Profit Rates

SYNOPSIS I examine whether firms strategically classify earnings components when reporting bad earnings news. Specifically, I examine whether firms reporting small earnings shortfalls allocate profits across their business segments in a manner that understates the future implications and within-firm drivers of disappointing earnings performance. I find that firms reporting small earnings shortfalls transfer profits toward segments in which profit rates are more informative for firm value and away from segments that operate in industries with higher frequencies of bad earnings news. In addition, I find that shortfall shifting initially tempers negative market responses to shortfall news, but pricing effects reverse in the months following shortfall announcements. My findings suggest that firms strategically classify earnings components when reporting small earnings shortfalls and that strategic classifications temporarily affect the pricing of shortfall news. Data Availability: Data are available from public sources identified in this paper.

The Valuation Relevance of Reversing Deferred Tax Liabilities

2004 ◽  
Vol 79 (2) ◽  
pp. 437-451 ◽  
Author(s):  
David A. Guenther ◽  
Richard C. Sansing
Keyword(s):  
Discount Rate ◽  
Firm Value ◽  
Market Value ◽  
Present Value ◽  
Depreciation Rate ◽  
The Future ◽  
Deferred Tax Liabilities ◽  
Deferred Tax ◽  
Tax Depreciation ◽  
Depreciation Methods

This paper compares two attributes of a deferred tax liability (DTL) that arise from differences in book and tax depreciation methods. The first attribute is the effect of the DTL on the market value of the firm. The second is the length of time between when the asset is placed into service and when the DTL associated with that asset begins to reverse. The paper shows that a decrease in the time it takes for the DTL to begin to reverse is neither necessary nor sufficient for the value of the DTL to increase. It also shows that the value of the DTL is not equal to the present value of the future deferred tax expense. The effect of one dollar of DTL on firm value depends only on the tax depreciation rate and the discount rate.

scholarly journals Performance-Based Compensation and Firm Value—Experimental Evidence

2015 ◽  
Vol 29 (4) ◽  
pp. 777-798 ◽  
Author(s):  
Glenn M. Pfeiffer ◽  
Timothy W. Shields
Keyword(s):  
Private Information ◽  
Stock Prices ◽  
Firm Value ◽  
Data Availability ◽  
Equity Prices ◽  
Market Prices ◽  
Compensation Plans ◽  
Price Reactions ◽  
Performance Based Compensation ◽  
The Impact

SYNOPSISWe study equity price reactions to compensation contracting in experimental markets. Motivated by research reporting positive price reactions to adoption of performance-based compensation plans for executive managers, but postulating competing reasons as to why, we design an experiment that allows us to manipulate variables separately to examine the effect of adverse selection and moral hazard on equity prices. We find that managers select contracts based on their private information, sometimes differing from predicted choices, and that private information is conveyed to the market by the choice of compensation contract and is reflected in stock prices. We refer to this as the sorting effect. Additionally, we find that managers do not always exert costly effort in spite of favorable incentives to do so. The design also allows us to assess if the market rationally prices managers' actual choices. We find market prices are consistent with the empirically observed manager choices. Our results imply that to properly assess the impact of compensation plan on market prices, the sorting, as well as the incentive effects of compensation contracts, should be considered, and that the market anticipates errors in managers' choices.JEL Classifications: C92; D82; G12; J33; M52.Data Availability: Available upon request.

Revisiting the (Mis)Pricing of Accruals

2019 ◽  
Vol 4 (1) ◽  
pp. 141-156
Author(s):  
Bradley Lail ◽  
Robert C. Lipe ◽  
Han S. Yi
Keyword(s):  
Stock Returns ◽  
Null Hypothesis ◽  
Statistical Tests ◽  
Cash Flows ◽  
Data Availability ◽  
Investor Behavior ◽  
Reliability Measures ◽  
Accrual Anomaly ◽  
Earnings Components ◽  
Jel Classifications

Our paper examines inconsistent conclusions regarding the accrual anomaly and demonstrates the importance of aligning regression specifications with hypotheses. Richardson, Sloan, Soliman, and Tuna (2005) conclude that accruals are mispriced and the mispricing seems to increase as accrual reliability decreases. Barone and Magilke (2009) and Ball, Gerakos, Linnainmaa, and Nikolaev (2016) conclude that cash flows rather than accruals are mispriced. We show that the divergent conclusions come from misalignment between the null hypothesis and regression specification in Richardson et al. (2005) . In addition, analysis of the contemporaneous relations between stock returns and components of earnings supports an initial underreaction to cash flows by investors. We fail to detect links between the reliability measures in Richardson et al. (2005) and investor behavior once we align the statistical tests with the null hypothesis. Our reexamination of prior findings benefits accounting academics, standard setters, and others interested in how investors use earnings components. JEL Classifications: M41. Data Availability: All data used in this study are publicly available from the sources identified in the text.

The Value of Implicit Political Connections

2020 ◽  
Vol 19 (2) ◽  
pp. 1-18
Author(s):  
David Broadstock ◽  
Xiaoqi Chen ◽  
C. S. Agnes Cheng ◽  
Wenli Huang
Keyword(s):  
Work Experience ◽  
Firm Value ◽  
Top Management Team ◽  
Data Availability ◽  
Political Connections ◽  
The Political ◽  
Government Officials ◽  
The Public ◽  
Political Relations ◽  
The Government

ABSTRACT We investigate whether the aggregated political relations of a firm's top management team (TMT) add value to the firm's performance. We distinguish between the political relations that arise from TMT's own work experience, which are termed direct political connections (DPC), and the relations that TMT develops from working for the same institution with the government officials, which are termed implicit political connections (IPC). We find that IPC are positively associated with firm performance and that they often have a stronger effect than DPC do. We also find that the effect of IPC on firm value is stronger in SOEs and in firms located in under-developed provinces. Moreover, we find that after the anti-corruption campaign, the effect of DPC decreases but the effect of IPC does not significantly change. Overall, our results suggest the importance of investigating a firm's aggregated political connections, especially its IPC. JEL Classifications: G32; D72; J33; L33. Data Availability: Data are available from the public sources cited in the text.

scholarly journals The Effect of SFAS No. 131 on the Diversification Discount

2015 ◽  
Vol 7 (2) ◽  
pp. 58
Author(s):  
Seoungpil Ahn
Keyword(s):  
Firm Value ◽  
Investment Efficiency ◽  
Diversification Discount ◽  
Segment Reporting ◽  
Precise Estimation ◽  
Rule Change ◽  
Before And After ◽  
Excess Value ◽  
Diversified Firms ◽  
The Impact

<p>For a sample of diversified firms, I investigate the impact of the segment reporting rule change from SFAS No. 14 to SFAS No. 131 in 1997. This change in segment-reporting rules to SFAS No. 131 potentially allows more precise estimation of diversification discount. I probe the changes in the diversification discount before and after the reporting rule change in 1997. I find that there is a substantial increase in the diversification discount under SFAS No. 131. Further analysis indicates that the changes in the diversification discount are unrelated to the changes in firm value or investment efficiency. Instead, the measures of diversity appear to be more associated with the changes in excess value. This indicates that excess value is not a clean measure of diversification discount.</p>

The Relationship between Aggressive Real Earnings Management and Current and Future Audit Fees

2016 ◽  
Vol 36 (1) ◽  
pp. 85-107 ◽  
Author(s):  
Adam Greiner ◽  
Mark J. Kohlbeck ◽  
Thomas J. Smith
Keyword(s):  
Earnings Management ◽  
Firm Value ◽  
Audit Fees ◽  
Cash Flows ◽  
Data Availability ◽  
Real Earnings Management ◽  
Increased Risk ◽  
Pricing Behavior ◽  
Reported Earnings ◽  
The Relationship

SUMMARY We examine the relationship between aggressive income-increasing real earnings management (REM) and current and future audit fees. Managers pursue REM activities to influence reported earnings and, as a consequence, alter cash flows and sacrifice firm value. We posit that the implications of REM are considered in auditors' assessments of engagement risk related to the client's economic condition and result in higher audit fees. We find that, with the exception of abnormal reductions in SG&A, aggressive income-increasing REM is positively associated with both current and future audit fees. Additional analyses provide evidence consistent with increased effort combined with increased risk contributing to the current pricing effect, with increased business risk primarily driving the future pricing effect. We, therefore, provide evidence that aggressive income-increasing REM activities have a significant influence on auditor pricing behavior, consistent with the audit framework associating engagement risk with audit fees. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

Modelling future glacier evolution: Which feedbacks are relevant?

2020 ◽  
Author(s):  
Matthias Huss ◽  
Enrico Mattea ◽  
Andreas Linsbauer ◽  
Martin Hoelzle
Keyword(s):  
Energy Balance ◽  
Data Availability ◽  
Swiss Alps ◽  
Balance Model ◽  
Ice Dynamics ◽  
Feedback Effects ◽  
Proglacial Lakes ◽  
Regional Climate Model Output ◽  
The Future ◽  
Energy Balance Approach

&lt;div&gt; &lt;div&gt;Numerous models to project the future evolution of mountain glaciers in response to ongoing climate change are available, both at the local and the global scale. However, a suite of partly major simplifications is necessary in these models given the restrictions in data availability. Whereas most models account for the primary feedbacks, such as the snow-ice albedo feedback and the dynamic glacier response in some way, a considerable number of yet poorly understood or less investigated feedbacks is present that might significantly hamper the reliability of current glaciological projections.&lt;/div&gt; &lt;div&gt;&amp;#160;&lt;/div&gt; &lt;div&gt;Here, we present results of a detailed modelling study for the example of Vadret da Morteratsch, Swiss Alps. A surface mass balance model accounting for ice dynamics is forced with downscaled regional climate model output (68 scenarios, CH2018) for the period 2015 to 2100. Various processes are either parameterized or explicitly accounted for. We focus on the use of a fully distributed surface energy-balance approach in comparison to simplified degree-day methods. The relevance of projected changes in different components of the energy balance is assessed using model experiments. In particular, the importance of feedback effects due to (1) the spatio-temporal evolution of supraglacial debris, (2) the formation of new proglacial lakes, and (3) changes in bare-ice albedo and local direct solar irradiance is investigated.&lt;/div&gt; &lt;div&gt;&amp;#160;&lt;/div&gt; &lt;div&gt;We find that the above feedback effects all have a rather small potential to substantially impact on the rates of expected glacier retreat. In some cases, this is unexpected (e.g. for debris coverage and proglacial lakes) but can be explained by compensating processes. We also discuss and visualize the future wastage of Vadret da Morteratsch under the newest generation of climate scenarios, and put these results into context with previous studies, as well as with plans to artificially reduce the rate of glacier mass loss.&lt;/div&gt; &lt;/div&gt;

scholarly journals The Relationship Between Segment-Level Manipulations And Audit Fees

2013 ◽  
Vol 29 (4) ◽  
pp. 1243 ◽  
Author(s):  
David Hurtt ◽  
Bradley E. Lail ◽  
Jason MacGregor
Keyword(s):  
Financial Reporting ◽  
Firm Value ◽  
Accounting Standards ◽  
Positive Association ◽  
Audit Fees ◽  
Risk Assessments ◽  
Net Income ◽  
Bottom Line ◽  
Segment Reporting ◽  
The Relationship

We examine the auditorssensitivity to manipulative financial reporting by investigating the relationbetween audit fees and segment-level manipulations. Segment reporting provides an interestingsetting to examine auditor risk assessments because of the discretion affordedto management under existing regulations. Segment manipulations, a form of classificationsmoothing, are not in violation of accounting standards; nevertheless, thesemanipulations violate the spirit of faithful representation by distorting theperformance of a subset of the reporting unit at the expense of (or to thebenefit) of another subset. Because disaggregatedinformation is used by analysts and investors in bottom-upforecasting, these distortions can influence firm value even though they do notaffect bottom-line net income. Ourmeasure of classification smoothing measurescost shifting between core operating segments and non-core segments to proxyfor segment manipulation. We find thataudit fees, a proxy for the auditors risk assessment, have a positiveassociation with segment-level manipulations. Subsequent analyses suggest that higher auditfees are also due to the additional effort exerted in the presence of segment-levelmanipulations. Further, auditors appearjustified in charging higher fees to clients that engage in segmentmanipulations as we document evidence of a positive association betweenrestatements and segment-level manipulations. Collectively, these results suggest thatauditors are aware of the risk associated with companies that engage in segment-levelmanipulations and auditors respond appropriately by charging higher fees anddoing additional work.

scholarly journals Review of Snow Data Assimilation Methods for Hydrological, Land Surface, Meteorological and Climate Models: Results from a COST HarmoSnow Survey

Geosciences ◽  
2018 ◽  
Vol 8 (12) ◽  
pp. 489 ◽  
Author(s):  
Jürgen Helmert ◽  
Aynur Şensoy Şorman ◽  
Rodolfo Alvarado Montero ◽  
Carlo De Michele ◽  
Patricia de Rosnay ◽  
...  
Keyword(s):  
Data Assimilation ◽  
Numerical Weather Prediction ◽  
Land Surface ◽  
Climate Models ◽  
Weather Prediction ◽  
Data Availability ◽  
Observation Data ◽  
Climate Change Scenarios ◽  
Numerical Weather ◽  
The Future

The European Cooperation in Science and Technology (COST) Action ES1404 “HarmoSnow”, entitled, “A European network for a harmonized monitoring of snow for the benefit of climate change scenarios, hydrology and numerical weather prediction” (2014-2018) aims to coordinate efforts in Europe to harmonize approaches to validation, and methodologies of snow measurement practices, instrumentation, algorithms and data assimilation (DA) techniques. One of the key objectives of the action was “Advance the application of snow DA in numerical weather prediction (NWP) and hydrological models and show its benefit for weather and hydrological forecasting as well as other applications.” This paper reviews approaches used for assimilation of snow measurements such as remotely sensed and in situ observations into hydrological, land surface, meteorological and climate models based on a COST HarmoSnow survey exploring the common practices on the use of snow observation data in different modeling environments. The aim is to assess the current situation and understand the diversity of usage of snow observations in DA, forcing, monitoring, validation, or verification within NWP, hydrology, snow and climate models. Based on the responses from the community to the questionnaire and on literature review the status and requirements for the future evolution of conventional snow observations from national networks and satellite products, for data assimilation and model validation are derived and suggestions are formulated towards standardized and improved usage of snow observation data in snow DA. Results of the conducted survey showed that there is a fit between the snow macro-physical variables required for snow DA and those provided by the measurement networks, instruments, and techniques. Data availability and resources to integrate the data in the model environment are identified as the current barriers and limitations for the use of new or upcoming snow data sources. Broadening resources to integrate enhanced snow data would promote the future plans to make use of them in all model environments.

Analysts, Taxes, and the Information Environment

2019 ◽  
Vol 42 (1) ◽  
pp. 103-131 ◽  
Author(s):  
Sangwan Kim ◽  
Andrew P. Schmidt ◽  
Kelly Wentland
Keyword(s):  
Accounting Information ◽  
Earnings Forecasts ◽  
Information Environment ◽  
Data Availability ◽  
Forecast Errors ◽  
Complete Understanding ◽  
The Public ◽  
Earnings Information ◽  
Earnings Components ◽  
Jel Classifications

ABSTRACT This paper investigates the extent to which analysts incorporate tax-based earnings information into their earnings forecasts relative to other earnings information. We find that analysts' misreaction to tax-based earnings information is distinct from their misreaction to other (nontax) accounting information, on average. We then show that analysts differ in their misestimation of tax and other (nontax) earnings components only when firms have weak information environments; when firms have strong information environments, analysts' forecasts fully incorporate tax-based earnings information and exhibit no difference incorporating tax-based earnings information relative to other accounting information. Our evidence suggests that, on average, forecasting tax-based earnings information is more difficult for analysts relative to forecasting other accounting information. However, access to appropriate information and resources enables analysts to better process tax information. Overall, we contribute to the literature by providing a more complete understanding of the source of analysts' tax-related forecast errors. JEL Classifications: H25; M41; D82; G14. Data Availability: Data are available from the public sources identified in the text.

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