Anne Beyer

Capital Market Prices, Management Forecasts, and Earnings Management

The paper studies a managers optimal earnings forecasting strategy and optimal earnings management policy in a setting where both the mean and the variance of the distribution generating the firms cash flows are unknown. The paper shows that the equilibrium price of the firm is a function of the managers forecast, the firms reported earnings, and the squared error in the managers earnings forecast. The model in the paper contains several predictions, including: (i) the manager manipulates earnings to reduce his forecast error at the earnings announcement date; (ii) the firms stock price is more sensitive to the firms actual earnings announcement than to the managers forecast; and (iii) controlling for the level of reported earnings and the magnitude of the earnings surprise, the firms price is higher when it has a positive surprise at the earnings announcement date than when it has a negative surprise.

Conservatism and Aggregation: The Effect on Cost of Equity Capital and the Efficiency of Debt Contracts

This paper studies the joint effect of conservatism and aggregation on the cost of equity capital and the efficiency of debt contracts. In the model, a firms two assets are valued at either the lower-of-cost-or-market or fair value and the accounting report aggregates the value of the two assets. While the process of aggregation leads inevitably to a loss of information, what information is lost depends on the accounting regime. In the conservative regime, gains are ignored while in the fair value regime gains are off-set against losses.The paper studies the joint effect of conservatism and aggregation in two settings. First, it considers an all-equity firm and compares the valuation of equity when investors observe an accounting report under either the conservative or a fair-value regime. The model predicts that cost of equity capital is lower in the conservative regime than in the fair value regime if the firms production function exhibits sufficiently decreasing marginal returns. Second, the paper takes a contractual perspective and considers the efficiency of debt contracts when debt covenants must be written in terms of the accounting report. The paper shows the maximum capital that can be raised by a debt contract which implements efficient post-contractual decisions is higher in the conservative than in the fair value regime.

Optimal Contracts with Performance Manipulation

We study optimal compensation contracts that (1) are designed to address a joint moral hazard and adverse selection problem and that (2) are based on performance measures, which may be manipulated by the agent at a cost. In the model, a manager is privately informed about his productivity prior to being hired by a firm. In order to incentivize the manager to exert productive effort, the firm designs a compensation contract that is based on reported earnings, which can be manipulated by the manager. Our model predicts that (1) the optimal compensation contract is convex in reported earnings; (2) the optimal contract is less sensitive to reported earnings than it would be absent the managers ability to manipulate earnings; and (3) higher costs of manipulating reported earnings (e.g., due to higher governance quality) are associated with higher firm value, lower expected level of earnings management, and higher output.

From Casual to Causal Inference in Accounting Research: The Need for Theoretical Foundations

On December 5th and 6th 2014, the Stanford Graduate School of Business hosted the Causality in the Social Sciences Conference. The conference brought together several distinguished speakers from philosophy, economics, finance, accounting and marketing with the bold mission of debating scientific methods that support causal statements. We highlight key themes from the conference as relevant for accounting researchers. First, we emphasize the role of formal economic theory in informing empirical research that seeks to draw causal inferences, and offer a skeptical perspective on attempts to draw causal inferences in the absence of well-defined constructs and assumptions. Next, we highlight some of the conceptual limitations of quasi-natural experimental methods that were discussed at the conference, and discuss the role of structural estimation. Finally, we illustrate many of the points from the conference by estimating a novel, theoretically-grounded measure of disclosure costs. ___________________________________________ We thank an anonymous referee, Chris Armstrong, Qi Chen, Paul Fischer, Joseph Gerakos, Ian Gow, Wayne Guay, David Larcker, Christian Leuz, Ivan Marinovic, Jeremy Michels, Valeri Nikolaev, Ro Verrecchia, and Ivo Welch for helpful conversations and comments. We are grateful to the conference organizers for giving us the opportunity to write this piece.