Douglas J. Skinner

Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators

A technique for encoding and decoding an image includes the following steps: subsampling the image to obtain a number of subsampled frames of spatially offset image-representative signals; transforming each of the subsampled frames to obtain a corresponding number of frames of transform coefficient-representative signals; forming vector-representative signals from corresponding coefficient-representative signals of the respective frames of coefficient-representative signals; performing a thresholding operation on the vector-representative signals to obtain thresholded vector-representative signals; vector quantizing the thresholded vector-representative signals to obtain encoded signals; storing the encoded signals; and decoding the encoded signals to obtain a recovered version of the image.

Are Dividends Disappearing? Dividend Concentration and the Consolidation of Earnings

Although the number of dividend paying industrials declines by more than 50% over the last two decades (Fama and French (2001a)), aggregate real dividends paid by industrials increase over the same period. Dividends increase despite a precipitous decline in the number of payers because (i) the reduction in payers occurs almost entirely among firms that pay very small dividends, and (ii) increased real dividends from the top payers swamp the modest dividend reduction associated with the loss of many small payers. These secular changes reflect high and increasing concentration in the supply of dividends which, in turn, reflect high and increasing earnings concentration. For example, 26 firms with real earnings of

Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance

1 billion-plus account for 63.4% and 46.8% of aggregate industrial earnings and dividends in 2000. Our findings on dividend concentration cast doubt on the empirical validity of the dividend clientele and signaling hypotheses.

Special dividends and the evolution of dividend signaling

We investigate whether earnings guidance affects aggregate stock returns through its effects on expectations about overall earnings performance and/or aggregate expected returns. We find that aggregate guidance, especially relative levels of quarterly downward guidance, is associated with analyst- and time-series-based measures of aggregate earnings news. We find more modest evidence that guidance, again, largely downward guidance, is associated with market returns - market returns appear to respond to guidance toward the end of each calendar quarter, when most earnings preannouncements are released, and there is some evidence that firm-level guidance affects market returns in short windows around its release.

Audit Quality and Auditor Reputation: Evidence from Japan*

This paper documents that (1) special dividends were once commonly paid by NYSE firms, but are now a rare phenomenon; (2) firms typically paid specials almost as predictably as they paid regulars; and (3) despite the dramatic decline in specials as a whole, the incidence of very large specials increased in recent years. Most plausibly, small specials disappeared because their predictability made them close substitutes for regular dividend signals, while large specials survived because their sheer size automatically differentiates them from regulars. Firms that stop paying specials substitute into more frequent regular increases but do not alter the pattern of total dividends (per the Lintner (1956) model). Firms that reduce specials tend to increase regulars, effectively making the two types of dividends closer substitutes (and this tendency is more pronounced in recent years). The stock market typically reacts favorably to the declaration of a special, but does not systematically differentiate between special increases and decreases to a still-positive level. The latter regularities give managers incentives to pay specials more frequently than they otherwise would which, in turn, makes specials more closely resemble regulars. Firms that continue to pay specials have lower institutional ownership, suggesting that the long-term trend to a more sophisticated stockholder clientele contributed to the demise of poorly differentiated dividend signals. Finally, special dividends were not displaced by stock repurchases, indicating that most specials failed to survive on their own accord and not because managers discovered the tax advantages of repurchases.

Are disclosures about bank derivatives and employee stock options 'value-relevant'?

We study events surrounding ChuoAoyama’s failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC’s Japanese affiliate and one of Japan’s “Big Four” audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months as punishment for its role in the accounting fraud at Kanebo. This action was unprecedented, and followed a sequence of events that seriously damaged ChuoAoyama’s reputation for audit quality. We use these events to provide evidence on the importance of auditors’ reputation for audit quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama’s audit clients switched away from the firm as questions about its audit quality became more pronounced, consistent with the importance of auditors’ reputation for delivering quality. Larger firms and those with greater growth options were more likely to leave ChuoAoyama suggesting a greater value for audit quality in these firms.

How well does net income measure firm performance? A discussion of two studies1

Abstract The papers by Venkatachalam (1996) and Aboody (1996) provide some interesting evidence on issues that are important to accounting regulators as well as accounting academics. However, for econometric as well as economic reasons, there are limits to what we can learn from this type of research (cross-sectional ‘levels’ studies). Careful attention to methodological issues in this type of research design can reduce, but likely will not eliminate, these interpretational difficulties.

The Evolving Disclosure Landscape: How Changes in Technology, the Media, and Capital Markets Are Affecting Disclosure

Abstract The papers by Dhaliwal, Subramanyam and Trezevant (1998) and Vincent (1998) both examine whether stock returns are more highly associated with net income or an alternative measure of firm performance in contexts that are of some current interest to accounting regulators. However, since neither paper does a very good job of motivating their basic economic questions, we are left with results that are not all that interesting or surprising. Both papers would have benefited greatly from a clearer delineation of the economic rationale for their tests and predictions.

The Role of the Media in Disseminating Insider-Trading News

Recent changes in technology and the media are causing significant changes in how capital markets assimilate and respond to information. We identify important themes in the disclosure literature and use this as a framework to discuss the conference papers that appear in this volume. These papers examine how managers’ disclosure practices are being affected by changes in technology, the media, and capital markets. While this work makes important progress, we discuss how continuing technological change and the emergence of new forms of media offer further opportunities for research on the role of disclosure in capital markets.

A reply to Lev's rejoinder to ‘Accounting for intangibles – a critical review of policy recommendations’

We use the process through which insider trading (SEC Form 4) filings are made public to investigate whether media coverage affects the way securities markets assimilate news. To do this, we use recent changes in disclosure rules governing insider trades as well as the initiation of coverage by Dow Jones to cleanly identify media effects. Using high-resolution intraday data, we find clear effects of media dissemination on the way prices and volume respond to insider trading news in the minutes after its release. These results help to resolve open questions regarding the role of the media in capital markets, including why apparently second hand news affects securities prices.