Lion's Share: The Research Cast

ACCTG 502 | Session 2 | The effect of fair value accounting on the performance evaluation role of earnings - 2020

Ivy Xiying Zhang, Yong Zhang

Introduction:

Using the setting of IFRS adoption, DeFond, Hu, Hung, and Li (2020) examine the impact of fair value accounting on the usefulness of earnings in executive performance evaluation and compensation. In this discussion, we review the research design, discuss the implications of the findings, and offer suggestions for future research. In particular, DeFond et al.'s measure of the impact of fair value accounting may contain significant measurement error, which calls for additional analyses. We believe that DeFond et al. address an important question motivated by recent developments in accounting standard setting. However, the broader question of whether and how IFRS fair value provisions affect the way compensation contracts are written and the usefulness of accounting information, not just earnings, has not been fully understood.

ACCTG 502 | Session 2 | Does Restricting Managers' Discretion through GAAP Impact the Usefulness of Accounting Information in Debt Contracting? - 2022

LIN CHENG, JACOB JAGGI, SPENCER YOUNG

Introduction: We examine whether limiting managers' discretion through GAAP affects the usefulness of accounting information in debt contracts. Our research offers guidance to standard setters and regulators on how restricting managers' discretion via accounting standards impacts debt contracting. We hypothesize and find that under stricter standards, lenders are more likely to make non-GAAP adjustments to GAAP-based performance measures, suggesting that these restrictions reduce the usefulness of accounting information. We conduct two additional analyses to reinforce our findings. First, in an item-level analysis, we observe a positive relationship between excluding specific nonrecurring items from contractual earnings definitions and the number of restrictions within GAAP standards applicable to each item annually. Second, using difference-in-differences tests around standard changes, we find that the likelihood of excluding certain items increases with greater restrictiveness of related standards. Furthermore, we predict and observe that stricter standards are also positively associated with higher loan spreads, although less so when lenders modify GAAP figures in loan agreements. Overall, this study improves our understanding of how the features of accounting standards influence the relevance of accounting information.

ACCTG 502 | Session 2 | The Effect of Fair Value Accounting on the performance evaluation role of earnings - 2020

Mark DeFond, Jinshuai Hu, Mingyi Hung, Siqi Li d

Introduction

We examine the effect of fair value accounting on the relationship between net income and cash payments following the global adoption of IFRS in 2005. We find that, while IFRS's non-fair-value provisions are linked to an increase in this relationship, its fair value provisions are linked to a decrease. Overall, we add to the literature on the usefulness of fair value accounting by providing evidence that it is associated with a reduction in this relationship. Under the assumptions we specify and with the caveats we mention, our findings suggest that fair value accounting may diminish the usefulness of earnings in assessing management performance.

ACCTG 502 | Session 1 | The Relation Between Equity Incentives and Misreporting - 2005

Christopher S. Armstrong, David F. Larcker, Gaizka Ormazabal, Daniel J. Taylor

Introduction:

Previous research indicates that a manager with wealth more sensitive to changes in the firm's stock price has a greater motivation to misreport. However, if the manager is risk-averse and misreporting increases both equity values and equity risk, then the sensitivity of the manager's wealth to stock price changes (portfolio delta) will produce two opposite incentive effects: a positive 'reward effect' and a negative 'risk effect.' Conversely, the sensitivity of the manager's wealth to changes in risk (portfolio vega) will have a clearly positive incentive effect. We demonstrate that considering both the incentive effects of portfolio delta and portfolio vega together significantly alters the conclusions of previous studies. Using both regression and matching approaches, and measuring misreporting through discretionary accruals, restatements, and enforcement actions, we find strong evidence of a positive relationship between vega and misreporting, and that the incentives from vega include those of delta. Overall, our results suggest that equity portfolios encourage managers to misreport when they make managers less risk-averse about equity risk.

ACCTG 502 | Session 1 | CEO Incentives and Earnings Management - 2013

Daniel Bergstressera, Thomas Philippon

Introduction: The paper examines how CEO incentives, particularly equity-based compensation, influence earnings management practices. The study aims to determine whether stronger alignment between CEO wealth and firm value increases the likelihood of discretionary accounting choices that enhance reported performance in the short term. This focus bridges academic debates on executive pay and practical concerns over corporate governance.