Accounting

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                 Short Reviews of Academic Articles
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>Appeared in September 25th, 2004 newsletter

OUCH, This one is going to be controversial!   Just don’t blame the
messenger! ;)
In a hard hitting article Kane looks at the accounting profession and
does not like what he finds. After laying out “an unremitting flood of
accounting scams” he “traces a major part of the problem to the flawed
ethics of the accounting profession” Which he claims “by designing and
certifying reporting options that help troubled firms and rouge managers
to conceal adverse information from outside stakeholders, the highly
concentrated accounting industry manages to insulate fro serious
sanctions the economic rents it can earn from cleverly abetting
deceitful behavior.” Wow. This one is definitely worth reading and
discussing.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=396694#

>Appeared in August 27th, 2003 newsletter

Conservatism is under attack from certain circles. For example, some
(including even the FASB) are now suggesting it may be better to abandon
conservatism in order to show more unbiased financial statements. In a
surprisingly interesting article (NOTHING personal, but come on, it is
about accounting conservatism!) Ross Watts looks at this issue and
examines conservatism both from a both an historical/theoretical
perspective as well as by reviewing the empirical literature on the
subject.
http://papers.ssrn.com/abstract_id=414522

 >Appeared in June 5th, 2003 Newsletter

What happened in the financial markets when Andersen got in trouble?
Chaney and Philipich reported in the Journal of Accounting
Research(2002) that stock prices of Andersen audited clients fell
further than those of Non Andersen audited clients. Now Callen and
Morel give lukewarm confirmation of this stock price drop by finding
that over the entire 4 month period there was a price significant price
decline, but they find mixed results in looking at other windows.
Overall, it does look like stock prices fell for Andersen audited firms.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=341440

In a related paper, two guys named Godbey and Mahar (yeah you may have
heard of them) look at implied volatilities and found that the implied
volatilities of equity options on Andersen audited firms’ stock went up.
This fits the hypothesis that auditor quality can be used to reduce
information asymmetry and when Andersen’s reputation suffered, the risk
(as measure by implied volatility), also went up.
http://www.financeprofessor.com/Jimspapers/implied%20volatility%20and%20auditors/Mar14-submitted%203.14.doc

>Appeared in March 3rd, 2003 newsletter

Given the many stories of aggressive practices and even fraud, here is
somewhat surprising paper by Ross Watts of the University of Rochester.
He finds that conservatism is still alive and well in accounting.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=371820

>Appeared in January 22nd, 2003 newsletter

Is earnings management always bad? No, if you believe the new paper by
Arya, Glover, and Sunder. They point out that Earnings management can
in reduce the noise inherent in earnings and thereby reduce investor
uncertainty. To quote the paper “ a smooth car ride is not only
comfortable, it also assures the driver of the driver’s expertise.”
Moreover, too much transparency may reduce incentives of managers. (I
must say that there are some good points, but overall I would still
argue on the side of more, not less transparency and therefore less
earnings management.)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=322260

>Appeared in December 3rd, 2002 newsletter

Gee, from the first two you can probably figure what my next paper (with
Jonathan Godbey) is going to be on.

It is always cool when things work as financial theory (which I dare say
is just economic theory) suggest. Imagine you are an auditor and your
reputation is on the line when you perform an audit. Risky firms have a
greater chance of hurting your reputation, so you are reluctant to
perform the audit. What do you do? Charge more. (more risk, more
return). That is the finding of John Lyon and Mike Maher (no relation,
and he spells his name wrong ;-) ) who looked at foreign firms and
found where the risk was higher, so too were the audit fees. Now the
study is not conclusive (they look at risk of bribery in developing
nations), but it is consistent with previously published work by Bell,
Landsman and Shackelford.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=316485

Ok, so do auditors matter? Yes. That is the conclusion of two recent
papers that have looked at the stock price reactions following the Enron
debacle. In each (Chaney and Philipich in the Journal of Accounting
Research) and Asthana, Balsam, and Krishnan found that Andersen audited
experienced a more pronounced negative stock price decline than firms
audited by other accounting firms.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=320327

>Appeared in September 3rd, 2002 newsletter

Butler, Kraft, and Weiss look at the frequency at which firms report
earnings and the corresponding speed at which the information is
incorporated into the stock price. Not surprisingly, those firms that
reported quarterly have a faster price adjustment than those that report
annually. Additionally, the paper looks at those firms that report more
often voluntarily as opposed to those mandated to report more often.
The results suggest that the mandatory reporters derive less benefit
from the increased frequency, which suggests that the firms with high
information asymmetry self-select to report more regularly. This finding
may call into question the effectiveness of imposed mandates on
increasing report frequency. (That said, I would still vote for more
often reporting in order to shine the light on those few firms that
deliberately relish in their information asymmetries.)
http://papers.ssrn.com/paper.taf?abstract_id=312953