Capital Markets Flashcards
(35 cards)
Foundations
Sloan 1996
Hribar and Collins 2002
Kraft et al. 2006
Bertrand and Schoar 2003
Fisman and Miguel 2007
Davidson et al. 2015
Sloan 1996
“Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future
Earnings?”
Data:
30 years (1962 - 1991) 40,679 firm-year observations
IV:
Total accruals = earnings - cashflow,where earnings = income from continuing operations/total assets; accrual = non-cash current assets-current liabilities-depreciation; cash flow = earnings - accruals
DV:
Investor reaction of earnings manipulation: future stock returns
Findings:
Earnings performance attributable to the accruals are less persist than cash flow earnings; Stock prices fail to distinguish the earnings from accruals or cash flow, act as if investors “fixate” on earnings; Firms with high (low) accruals tend to have negative (positive) future stock returns. A simple trading strategy is to buy low-accrual and sell high-accrual firms to yield positive abnormal stock returns.
Contribution:
“The divsovery of accrual anomaly and market inefficiency.
Counter argument: Sloan (1996) is one of the most influential papers in accounting and financial markets research because it identifies a fundamental inefficiency in how investors interpret earnings information. The key insight is that all earnings are not created equal, and investors treat accruals and cash flow from operation equally and systematically misprice discretionary accruals. Contrary, Dechow and Dichev 2002 shows the misprice exist due to the high volatility of accruals and not necessarily the earnings manipulations.”
Hribar and Collins 2002
Errors in Estimating Accruals: Implications for Empirical Research
Data:
14,558 firm-year observations from 1988–1999
IV:
“Accruals estimated using the balance sheet approach
Accruals estimated using cash flow statement approach (net income - operating cash flow)”
DV:
“Measurement error in accrual estimates.
Bias in tests of earnings management, return regressions, and accrual anomaly studies.”
Findings:
“Balance sheet-based accrual estimates are biased and casue measurement errors (detecting earnings management when there is none):
Overstated when firms engage in M&A.
Understated when firms divest business units.
Unpredictably noisy due to foreign currency adjustments.
Abormal accruals studies (e.g., Sloan 1996) that use balance sheet accruals may understate the extent of market mispricing.
The statement of cash flows (SFAS 95) provides a more accurate measure of accruals than the balance sheet approach.”
Contribution:
Estimation error of accurals cause by methodology: statement of cash flows > balance sheet approach
Kraft et al. 2006
An Analysis of the Theories and Explanations Offered for the Mispricing of Accruals and Accrual Components
Data:
20,852 firm-year observations from 1987–1999
IV:
“Accruals:
Total accruals (Sloan, 1996)
Discretionary accruals (BD97; Xie 2001)
Net Operating Assets (NOA) (Hirshleifer et al., 2004)”
DV:
Buy-and-hold abnormal returns (BHAR) for year t+1
Findings:
“1. The traditional linear, negative relation between accruals and abnormal stock returns (as found in Sloan, 1996) disappears when robustness tests are applied. Instead, there is an inverted U-shaped relation between accruals and abnormal returns. This contradicts the functional fixation hypothesis, which suggests a monotonic negative relationship between accruals and future returns.
2. The same pattern is found for: Total accrual anomaly (Sloan, 1996); Discretionary accrual anomaly (Xie, 2001); Net operating asset anomaly (Hirshleifer et al., 2004)
3. Many prior studies fail to account for outliers that drive the documented mispricing.
4. Only 1% of extreme observations drive prior results—removing them leads to dramatically different conclusions.”
Contribution:
“Challenge the robustness of Sloan 1996, the outliers draw the results.
“
Jones 1991
Earnings Management During Import Relief Investigations
Data:
“23 firms across 5 industries (Automobiles, Carbon Steel, Stainless Steel, Copper, Footwear)
general escape clause, countervailing duty, and antidumping investigation”
IV:
under investigation period
DV:
Earnings mgmt: discretionary accruals
Findings:
“Firms under import relief investigations engage in earnings management by making income-decreasing discretionary accruals during the investigation period.
The effect is most pronounced in the year of investigation.
No evidence of earnings reversals in the following year.
The effect is stronger for petitioning firms who request import relief due to greater incentive to manage earnings.”
Contribution:
“Jones model (1991)
Burgstahler and Dichev 1997
Earnings management to avoid earnings decreases and losses
Data:
64,466 firm-year observations (1976-1994)
IV:
pre-earnings accruals
DV:
“Earnings mgmt: discontinuity in the distribution of earnings at 0
* 3 types of accruals: cash flow (real management such as delaying R&D expense), WC accurals (discretionary accruals), others (depreciation method)”
Findings:
“Firms manage earnings to avoid small decreases and losses (more). The cross-sectional distribution of earnings changes and earnings levels shows a discontinuity near zero. Firms with small pre-managed earnings decreases (losses) manipulate earnings to report an increase (profit).
Choose to manipulate either cash flow from operations or working capital accruals.”
Contribution:
“Motivates the demand to manage earnings, which is to avoid small losses and decreases (prospective thoery), to meet contractual obligation (debt covenants, compensation) and investor expectations;
Demonstrates the role of cash flow from operations and working capital accruals (less ex-ante manipulation cost) in earnings manipulation.”
Durtschi and Easton 2005
Earnings Management? The Shapes of the Frequency Distributions of Earnings Metrics Are Not Evidence Ipso Facto
Data:
1983–2003
IV:
“Deflator choice (market capitalization, total assets, etc.).
Sample selection effects (exclusion of missing price data).
Firm characteristics (pricing, analyst coverage).
Analyst optimism vs. pessimism in forecast errors.”
DV:
Earnings mgmt: discontinuity in the distribution of earnings at 0
Findings:
“Challenge Burgstahler and Dichev 1997 that the observed discontinuity around zero is not due to earnings mgmt, rather, the shape are affected by:
(1) deflation
(2) sample selection bias
(3) endogenous firm characteristics of observations to the left and the right of 0, such as market pricing and analyst optimism/pessimism”
Contribution:
Challenge the BD97 method (but not saying it’s not manipulation) of using visual pattern to draw causal inference. The pattern could caused by machanical and statistical issues.
Individual Characteristics
Betrand and Schoar 2003
Managing with Style: The Effect of Managers on Firm Policies.
Data:
Forbes 800 file & execucomp 92-99
IV:
Managers that switched firms w/n the sample (required in order to track mgmt fixed effect separately from firm fixed effects)
DV:
Corporate decisions
Findings:
“management style/fixed effects significantly correlate w/ corp decisions
Older CEOs are more conservative”
Contribution:
Corp gov lit: Management impacts firms’ performance. (mgmt fixed effect matter). Prior studies only used firm, industry & market fixed effects. Companies with strong corp gov can manage agency problems relating to management style
Fisman and Miguel 2007
Corruption, norms, and legal enforcement: Evidence from diplomatic parking tickets
Data:
Archival diff n dif: before & after diplomats were fined for parking violations NY parking violation data
IV:
Composite corruption index: Corruption level of diplomats’ home country
DV:
Diplomats tendencies to commit parking violations
Findings:
“Diplomats from countries with more corruption are more likely to illegally park
Once enforcement increased (required to pay fines), the number of parking violations decreased”
Contribution:
Culture norms and enforcement behavior both impact individuals’ behav. In other settings it is hard to distinguish between the 2
Davidson et al. 2015
Executives’ “off-the-job” behavior, corporate culture, and financial reporting risk
Data:
“archival (haphazard model: consider time variation) matched firms w/ CEOs & CFOs w/ legal records w/ firms’ w/o records
AAERs” Hand collected CEO and CFO legal records
IV:
“CEO & CFO legal record
CEO & CFO ownership of luxury goods (frugality)”
DV:
Likelihood of misstatement (F-Score)
Findings:
“CEOs and CFOs w/ legal records more likely to commit fraud
No correlation between frugal CEOs & CFOs and fraud
Unfrugal CEOS have a loose control environment where others have the ability to commit fraud..more corrupt corp culture.”
Contribution:
Extend literature by examining a new exec characteristic, frugality. Show more unfrugality leads to corrupt corp culture
Regulatory Environment
Holzman et al. 2024
When are firms on the hot seat? An analysis of SEC investigation preferences
Data:
1296 investigations; 253,859 firm-quarters observations from 2000-2013; Full investigation data from FOIA 2000-2017 (Blackburne et al 2021), stop at 2013 to leave 4 year of investigation length
IV:
likelihood of regulatory noncompliance; exposure to private sector scrutiny-external watchdog proxies; prublic trigger events
DV:
SEC investigations
Findings:
“Case selection is associated with a firm’s (i) likelihood of regulatory noncompliance, (ii) exposure to private sector scrutiny, and (iii) conspicuous public trigger events.
SEC are selecting cases to increase case merit and enhance deterrence (i), and to mitigate the cost of appearing negligent ( (ii) external watchdog channel), and cases that are easily identified and likely require less resources or effort to resolve (iii) .”
Contribution:
The fact that so few formal investigations lead to an enforcement action emphasizes the importance of understanding how the SEC picks its cases.
Relevant Papers:
Blackburne, Kepler, Quinn, and Taylor 2021
Donelson et al. 2024
The SEC’s September spike: Regulatory inconsistency within the scal year
Data:
13,547 enforcement actions filed by the SEC from fiscal years 2000–2020.
IV:
indicator for “September”
DV:
“Monthly case volume
Less case complexity: not contest chargers; without individual defendants”
Findings:
SEC staff respond to performance-reporting pressures and file more enforcement actions in September, the final month of the SEC’s fiscal year, than in any other month. But pursue less complex cases and less sanction actions.
Contribution:
SEC faces similar agency problem as the entities they monitor for.
Bonsall et al. 2024
Wearing out the Watchdog: The Impact of SEC Case Backlog on the Formal Investigation Process
Data:
FOIA from 2000-2017
IV:
case backlog: busyness level on regional office
DV:
likelihood SEC investigation, case selection, investigated firms’ outcomes
Findings:
Busy office decrease the investigation, mostly on largest shareholder losses which is inconsistent with priority. Find no evidence on the decrease in revenue recognition and insider trading, consistent with priority. Busier offices offer lengthier investigation, less AAERs enforcement, lower penalties, and lower incidence of required gov changes.
Contribution:
First to show the SEC office busy level on investigation action, which suggest the busier reduce the punishment for significant cases of misreporting.
Relevant Papers:
Blackburne, Kepler, Quinn, and Taylor 2021
Choy et al. 2024
Public environmental enforcement and private lender monitoring: Evidence from environmental covenants
Data:
“2,073 loan facilities from 1997 to 2016, matched from DealScan and SEC filings;
EPA Enforcement and Compliance History Online database;
pollution data from the TRI database maintained by the EPA.”
IV:
Public environmental enforcement intensity, measured by state-level environmental inspections and enforcement actions.
DV:
“Incidence and effectiveness of lender monitoring, measured through the inclusion of environmental covenants in loan contracts.
Borrowers’ pollution, measured by plant-level toxic chemical releases”
Findings:
“Monitoring Incidence: Lenders use environmental covenants more frequently when public enforcement is stringent, especially when borrowers are from highly polluting industries or when loans are secured by real property collateral.
Monitoring Effectiveness: Environmental covenants significantly reduce borrowers’ toxic chemical releases in the presence of stringent public environmental enforcement.
Mechanisms: 1) The effectiveness of environmental covenants in curbing pollution is stronger for borrowers with higher bankruptcy risks. 2) Borrowers facing stronger enforcement are more likely to invest in pollution abatement initiatives involving product modification.”
Contribution:
“Public vs. Private Enforcement: Highlights complementarity between public environmental enforcement and private lender monitoring, demonstrating that effective environmental risk mitigation requires joint public-private action.
Sustainable Finance: Extends literature on sustainable finance by documenting how lenders directly monitor environmental risks through environmental covenants.
Corporate Pollution Literature: Adds to the literature by showing that lender monitoring, driven by public enforcement, is a significant factor reducing corporate pollution.”
Sutherland et al. 2024
Occupational Licensing and Minority Participation in Professional Labor Markets
Data:
511,647 CPA profiles (1986–2019) from NASBA and state boards of accountancy across the U.S.
IV:
The staggered introduction of the 150-hour rule
DV:
“CPA entry rates (minority vs. nonminority).
CPA quality: 1) Exam performance (first-time pass rates). 2) Frequency of disciplinary actions. 3) Job postings (employer perceptions).”
Findings:
“The introduction of the 150-hour rule significantly reduced CPA entry, disproportionately affecting minorities (Black and Hispanic candidates).
Minority CPA entry declined 26%, compared to a 14% decline for nonminorities.
The differential impact arises primarily from socioeconomic factors: candidates from universities with higher parental income levels increased post-rule.
The negative effect is stronger in states with lower financial aid availability.
No evidence suggests improved CPA quality after the rule enactment, indicated by: 1) Reduced high-quality (first-attempt passers) CPA candidates. 2) No significant changes in disciplinary actions or professional misconduct. 3) No change in job market perceptions or hiring practices regarding CPA quality.”
Contribution:
“Demonstrates clear evidence of licensing as a barrier disproportionately harming minority entry into professional occupations, emphasizing the unintended social costs of regulatory requirements.
Highlights that educational licensing rules may not enhance professional quality despite stated intentions, challenging assumptions about their effectiveness.
Informs ongoing policy debates on occupational licensing, diversity and inclusion strategies, and educational requirements within regulated professions.”
Guo and Tian 2024
Regulatory Transparency and Regulators’ Effort: Evidence from Public Release of the SEC’s Review Work
Data:
“Firm-month observations covering 3,921 unique firms between July 2003 and September 2005 (90,213 observations).
SEC EDGAR logs tracking SEC staff access to filings, matched with firm financial and disclosure characteristics.”
IV:
Regulatory transparency regime, specifically the public release of comment letters on the SEC’s EDGAR system after August 1, 2004.
DV:
“Regulators effort:
1) Number of filings reviewed by SEC staff.
2) Proportion of documents reviewed per filing.
3) Timeliness of reviews.
Regulatory outcomes:
1) Likelihood of firms receiving a comment letter.
2) Likelihood of financial restatement.
3) Probability of subsequent SEC investigation for potential fraud.”
Findings:
“Public disclosure of SEC comment letters increases regulators’ review effort: 1) Regulators review more filings and a higher proportion of documents per filing after the transparency regime. 2) The effect is stronger for filings likely to attract greater investor or public monitoring (e.g., those with higher media attention, analyst coverage, or proximity to SEC offices).
Increased transparency leads to more timely SEC reviews.
Reviewed filings are more likely to receive comment letters but less likely to be restated after the transparency change.
Firms receiving comment letters indicating potential fraud have a higher probability of subsequent SEC investigation under the transparency regime.”
Contribution:
“First paper explicitly linking regulatory transparency to regulators’ internal behavior (effort), directly addressing the question of how transparency affects regulators themselves, rather than regulated entities alone.
Enhances understanding of regulatory accountability mechanisms by empirically demonstrating how public transparency disciplines regulators.
Extends research on the intersection between transparency, regulatory efficiency, and enforcement outcomes.”
Corporate Misconduct
Corporate Misconduct
Erickson et al. 2004
How Much Will Firms Pay for Earnings That Do Not Exist? Evidence of Taxes Paid on Allegedly Fraudulent Earnings
Data:
27 firms of fraudulently overstating earnings from 1996-2002
IV:
Overstated earnings from SEC Accounting and Auditing Enforcement Releases (AAERs)
DV:
Corrected income tax expense after removing the tax expense on overstated earnings.
Findings:
Firms paid $320 million in income taxes on pretax earnings overstatements of more than $3.36 billions
Contribution:
Tax consequences of F/S violations
Davidson 2022
Who did it matters: Executive equity compensation and financial reporting fraud
Data:
“404 firms, 1805 executives
DEF 14A filings”
IV:
“Delta = change in the value of an executive’s equity portfolio for a one percent change in stock price;
Vega = change in value of an executive’s equity portfolio for a one percent
change in stock price volatility.”
DV:
Excecutives’s fraud: AAERs: good proxy because it captures the intentionally fraud manipulation and know which executives did this.
Findings:
CEOs, CFOs, and other top executives compensation incentives is postively associated with fraud commitment
Contribution:
Beyong earnings manipulation and reporting fraud
Carnes et al. 2023
Externalities of Financial Statement Fraud on the Incoming Accounting Labor Force
Data:
“2.03 millions survey data from the Higher Education Research Institute (HERI)
1985 to 2009
“
IV:
Financial reporting fraud
DV:
student choose to major in acct
Findings:
“incoming students are more likely to major in accounting and be a CPA when local frauds occur during their formative years, driven by the nonpecuniary traits of acct students different from other business majors.
Increase in public service orientation and decrease in commercial orientation”
Contribution:
fraud is unmistakably bad, it appears to have the posi-
tive unintended consequence of attracting labor into business disciplines and, in accounting, increasing the prevalence of desirable traits among entrants.
Raghunandan 2024
Government Subsidies and Corporate Misconduct
Data:
“violation tracker and Subsidy Tracker;
257,889 firm-state-years, reflecting 1,568 distinct firms in the final sample, spanning the years 2004–16”
IV:
Indicator = 1 if firm has received a state subsidy
DV:
Non-financial misconduct (NonFM): (1) indicator =1 if a firm is sanctioned for misconduct in a given state‐year. (2)The severity captured by the (log) dollar value of penalties imposed.
Findings:
“Firms that receive state subsidies are more likely to commit misconduct, with higher rates and severity of federal enforcement actions, in the states that granted the subsidies.
This relationship is not observed in states where the firm did not receive subsidies, and additional analyses (including tests with inherited subsidies in mergers) support that the effect stems from lower state enforcement intensity.”
Contribution:
“To the literature on political connections by showing that ex post political ties can have adverse behavioral consequences, increasing nonfinancial corporate misconduct.
The benefits of subsidies may come with hidden costs in terms of weakened regulatory compliance and potential harm to local stakeholders.”
Parsons et al. 2018
The geography of financial misconduct
Data:
Archival: US economic areas “compustat
Karpoff et al. 2017 dataset of misconduct that led to SEC enforcement “
IV:
firms headquartered 20 largest US economic areas (bigger than metropolitan areas)
DV:
Rate of financial misconduct
Findings:
“Large cross sectional differences in the avg rate of detected financial misconduct
Clustering of misconduct: areas with the highest rate of misconduct tend to be 3 times higher than lower cities
Correlation b/t: misconduct rates & areas cultural/social norms & regional differences in enforcement”
Contribution:
Extend lit.by showing that social factors within a geographic area (norms and enforcement) impact firm performance
