Dan Segal

A Variance Decomposition Primer for Accounting Research

This pedagogical note introduces the accounting-based variance decomposition methodology of Vuolteenaho (2002) in a relatively simple format for the edification of accounting scholars and doctoral students who wish to use variance decomposition in their research. In addition to presenting an example that explicates the variance decomposition approach, we provide well-documented SAS and STATA programs for estimating variance decompositions from cross-sectional time-series data.

Credit Risk and IFRS: The Case of Credit Default Swaps

This study compares the pricing of credit risk information conveyed by accounting numbers under IFRS relative to local GAAP. We measure the price of credit risk by CDS spreads and focus on three fundamental accounting metrics that inform about credit risk: earnings, leverage and book value equity. Using a difference in differences methodology, we find that while earnings, book value and, to a lesser extent, leverage are significant determinants of credit risk pricing both prior to and after IFRS adoption, the adoption of IFRS did not change the credit risk informativeness of these accounting variables as reflected in CDS spreads. This conclusion is robust to controlling for institutional differences among countries as well as a battery of sensitivity analyses.

Are Managers Strategic in Reporting Non-Earnings News? Evidence on Timing and News Bundling

Using a comprehensive sample of non-earnings 8-K filings from 1996 to 2011, we examine whether firms engage in opportunistic reporting of mandatory and voluntary news. We find strong evidence of opportunistic reporting of negative news, especially among public firms. Public firms are more likely to delay disclosure of negative news, report negative news after trading hours, and report on the last day of the week. We also find evidence of opportunistic bundling of news. Our findings support the notion that managers engage in strategic disclosure by delaying or obfuscating negative news in order to mitigate the potential market reaction. Factors such as the risk of litigation, information asymmetry, and corporate governance influence reporting behavior. Further analysis of the market reaction to opportunistic disclosure uncovers no evidence of investor inattention or under-reaction. JEL classifications: G14; G18; K22; M41; M48Using a comprehensive sample of non-earnings 8-K filings from 2005 to 2013, we examine whether firms strategically report mandatory and voluntary news. In particular, we examine whether firms report negative news when investor attention is low and whether they bundle positive and negative news. Our findings support the notion that managers believe in the existence of investor inattention and strategically report negative news after trading hours. These results particularly apply to public firms, where equity market pressures provide stronger incentives to mitigate market reaction to news by exploiting investor inattention. Further analysis of the market reaction to strategic disclosure uncovers no evidence of investor inattention, consistent with market efficiency. We also observe that public firms are more likely to strategically disclose through news bundling and that the likelihood of this increases with the likelihood of strategic disclosure through timing.

The Effect of Pay-For-Performance Compensation and Wealth Derived Income on the Growth-Income Inequality Relation in the US

The paper analyzes the relation between growth and income inequality in the US during the post-war years (1953-2008). We show that the income of the top income groups is more sensitive to growth compared to the income of the lower income groups. This increased sensitivity arises for two reasons: (a) the top income groups receive a large portion of their income from wealth, which is more sensitive to growth than labor income, and (b) the top income groups receive a large portion of their labor income in the form of skilled-based performance pay, which is also sensitive to growth. Consequently, we document that economic growth tends to increase income inequality in the US.The paper analyzes the relation between growth and income inequality in the US during the post-war years (1953–2008). We show that the income of the top income groups is more sensitive to growth, defined broadly as current growth and changes in expectations of future growth, compared to the income of the lower income groups. This increased sensitivity arises for two reasons: the top income groups receive a large portion of their income from wealth, which is more sensitive to growth than labor income, and the top income groups receive a large portion of their labor income in the form of skill-based performance pay, which is also sensitive to growth. Consequently, we conclude that growth and income inequality are positively associated.