1. “Principles-Based Accounting Standards and Regulatory Enforcement."
Job Market Paper
Presentations: University of Georgia (2019), UCLA (2019), Florida State University (2018), Florida Accounting Symposium (2018)
ABSTRACT: Practitioners claim that rules-based accounting standards provide a safe harbor shield against enforcement risk. In contrast, regulators suggest that principles-based reporting norms better protect preparers and auditors from undue enforcement threat due to its emphasis on substance over form (SEC 2003). I add to this debate by studying a proprietary dataset on national accounting inspections from South Korea in conjunction with their mandated adoption of IFRS in 2011. A temporal analysis of this dataset, which archives annual investigative details and enforcement actions relating to accounting allegations, suggests that a shift to a more principles-based regime is associated with (1) increased detection rates of GAAP violations, (2) larger share price discounts incurred by misreporting firms, and (3) greater declines in their perceived earnings quality. These results are policy relevant in light of the FASB's and IASB's joint proposal advocating a more principles-based approach to standard setting (FASB 2002, 2010).
2. “Eleventh-Hour Earnings Management and Financial Reporting Timeliness."
Co-authors: Spencer Pierce (Florida State University) and Ira Yeung (University of British Columbia)
Presentations: University of Oregon (2018), AAA Annual Meeting (2017), CAAA Annual Meeting (2017), Northwestern University (2011)
ABSTRACT: Prior studies find that firms that delay earnings announcements tend to release unfavorable news, and investors consequently react negatively when firms delay earnings announcements. However, these findings do not explain why investors discount delayed earnings, even after controlling for the earnings news, and why firms sometimes announce good news late. Motivated by theory in Trueman (1990) that attempts to explain these two phenomena, we examine whether firms announcing earnings abnormally late is indicative of last-minute earnings manipulation. Consistent with post fiscal year-end activities driving announcement delays, we find no relation between measures of real earnings management and late announcements. However, we find evidence that late announcers with good news exhibit higher discretionary accruals. Using a last-chance earnings management measure based on tax expense manipulation, we find strong evidence that firms announcing good news with a delay tend to engage in more income-increasing eleventh-hour earnings management. Consistent with Trueman’s (1990) theory that last-minute earnings management helps explain why investors discount delayed earnings announcements, even after holding fixed unexpected earnings news, we find that the negative relation between earnings announcement returns and announcement delays is driven by late announcing firms relying on tax expense manipulation to beat analysts’ expectations.
3. “Post-Litigation Reporting Conservatism."
Co-authors: Frank Heflin (University of Georgia), Robbie Moon (Georgia Institute of Technology), and Spencer Pierce (Florida State University)
ABSTRACT: We investigate changes in financial reporting conservatism arising from disclosure-related shareholder lawsuits filed between 1996 and 2016. We find that sued firms respond to 10b-5 litigation with increased accounting conservatism. Consistent with a spillover effect, we find that non-sued peer firms, identified by EDGAR co-search patterns, also increase their accounting conservatism in response to a peer firm’s litigation event. Despite the FASB eliminating conservatism as an essential qualitative characteristic from the conceptual framework in 2010, we find the post-suit spike in conservatism persists after 2010, suggesting a capital market demand for conservatism even without regulator intervention. Our findings supplement prior studies examining the effect of conservatism on reducing litigation risk by providing the first large sample evidence suggesting that shareholder lawsuits trigger a subsequent increase in reporting conservatism, which is consistent with the widespread but until now untested belief that shareholder litigation induces accounting conservatism.
4. "Mandatory Disclosure and Knightian Uncertainty."
Co-authors: Taejin Kim (Chinese University of Hong Kong Business School) and Kyungha Kari Lee (Rutgers Business School)
Model Design and Proposition Analyses Stage
ABSTRACT: We build a two-dimensional model characterizing firms' disclosure decisions in the mean-variance (μ,σ) space where risk information matters due to uncertainty aversion in financial markets. In equilibrium, joint disclosure thresholds are characterized by cutoff regions depicting more favorable news: higher means and lower variances. Applying this framework, our model predicts that mandatory disclosure of risk and voluntary disclosure of returns on investments are complimentary in the presence of proprietary cost incurred from jointly disclosing the first and second moments as a pair; however, such consequences arising from mandatory risk reporting reverse as substitutory, in lowering voluntary disclosures regarding first moments when we further allow for Knightian uncertainty in the two model parameters. Our analysis suggests that stringent regulation on firm-specific risk disclosure may improve disclosure of second moments only at the cost of reduced first moment disclosure quality when capital markets are ambiguity averse.