Chul W. Park

Smoothing income in anticipation of future earnings

Abstract Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. We find support for this theory. Our evidence suggests that when current earnings are ‘poor’ and expected future earnings are ‘good’, managers ‘borrow’ earnings from the future for use in the current period. Conversely, when current earnings are ‘good’ and expected future earnings are ‘poor’ managers ‘save’ current earnings for possible use in the future. However, sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings.

Board Leadership Structure and CEO Turnover

We study whether bestowing chief executive officer (CEO) and board chairman duties on one individual affects a boards decision to dismiss an ineffective CEO. The results show that the sensitivity of CEO turnover to firm performance is significantly lower when the CEO and chairman duties are vested in the same individual. These results are consistent with the view that the lack of independent leadership in firms that combine the CEO and Chairman positions makes it difficult for the board to remove poorly performing managers.

The effect of competition on CEO turnover

Abstract Relative performance evaluation (RPE) is likely to improve boards of directors ability to identify unfit CEOs, and competition is likely to enhance the usefulness of RPE. Consistent with our hypotheses, the frequency of CEO turnover is greater in highly competitive industries than in less competitive industries. We also find that RPE-based (firm-specific) accounting measures are more closely associated with CEO turnover in high (low) competition industries than in low (high) competition industries. These findings suggest that the lack of support for RPE in prior studies results from not considering the effects of competition.

Voluntary Disclosure of Balance Sheet Information in Quarterly Earnings Announcements

We investigate a pervasive voluntary disclosure practice ? managers including balance sheets with quarterly earnings announcements. Consistent with expectations, we find that managers voluntarily disclose balance sheets when current earnings are relatively less informative, or when future earnings are relatively more uncertain. Specifically, balance sheet disclosures are more likely among firms: (1) in high technology industries; (2) reporting losses; (3) with larger forecast errors; (4) engaging in mergers or acquisitions; (5) that are younger; and (6) with more volatile stock returns. This is consistent with managers disclosing balance sheets in response to investor demand for value relevant information to supplement earnings.

Analyst forecasting ability and the stock price reaction to forecast revisions

We empirically identifysuperior analysts using their past forecasting track record fora specific firms earnings and demonstrate that subsequent forecastannouncements by these superior analysts have a greater impacton security prices than do the forecasts of other analysts. Wefind that, in our sample, the price effects of this firm-specificforecasting ability do not spill over to other firms followedby the same analyst. We also demonstrate that an analysts forecastingability with respect to the earnings of a certain firm is relativelymore important in the period immediately preceding an earningsannouncement by that firm.

Intraday Stock Price Reactions to Interim-Quarter versus Fourth-Quarter Earnings Announcements

This study investigates intraday patterns of quarterly return-earnings relations. We find that fourth quarter announcements exhibit a lower earnings response coefficient but a more rapid adjustment to new equilibrium levels of prices and a higher R2 than interim quarter announcements. While prior short event window studies document that interim quarter earnings have greater explanatory power than fourth quarter earnings or annual earnings, our analysis indicates that the prior results may be driven by the use of two-day event window that is much wider than what it takes for the market to adjust to fourth quarter announcements.

A Reexamination of the Incremental Information Content of Capital Expenditures

Under generally accepted accounting principles (GAAP), firms must postpone recognition of the earnings effects of capital expenditures until they realize the resulting revenues and expenses. However, if capital expenditures change the profile of future profits, we expect share prices to impound that revision in profitability prior to its recognition under GAAP. This suggests that changes in capital expenditures should have information content beyond current-period unexpected earnings. Prior research considered annual changes in capital expenditures and detected incremental information only in restricted samples. However, we examine more general samples and observe that quarterly as well as annual changes in capital expenditures are informative beyond unexpected earnings. Furthermore, we predict greater incremental information content for fiscal fourth quarter changes in capital expenditures when considering all fiscal quarters simultaneously, because the effect of the earnings recognition delay under GAAP should be magnified for capital expenditures made late in the fiscal year. Our results are consistent with this prediction and inconsistent with the prediction that changes in fiscal fourth quarter capital expenditures reflect lower profitability that results from an inefficient bunching of capital expenditures in the fiscal fourth quarter.