Joseph Weber

The importance of accounting changes in debt contracts: the cost of flexibility in covenant calculations

In this paper we examine how the exclusion of voluntary and mandatory accounting changes from the calculation of covenant compliance affects the interest rate charged on the loan. After controlling for self-selection bias and other factors known to affect loan spreads, we find that the rate charged is 84 basis points lower when voluntary accounting changes are excluded and 71 basis points lower when mandatory accounting changes are excluded. Our results suggest that borrowers are willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations and to avoid duplicate record keeping costs.

Do Strict Regulators Increase the Transparency of the Banking System

We investigate the role of regulatory incentives on the enforcement of financial reporting transparency in the U.S. banking industry. The previous literature suggests that banking regulators use discretion to facilitate regulatory forbearance. Yet, is not clear whether these actions result from lax oversight or whether they are necessary to prevent further financial instability. Using a novel measure of the quality of regulatory enforcement, we show that strict regulators are more likely to enforce income-reducing reporting choices by forcing banks to restate their overly aggressive call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our analyses are consistent with the notion that regulatory incentives play an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises.

When and Why Do IPO Firms Manage Earnings

Abstract There is significant disagreement about whether, when, and why IPO firms manage earnings. We precisely identify the timing and motives behind earnings management by IPO firms. The period around an IPO is characterized by two events: the IPO itself and the lockup expiration. Both the raising of capital at the IPO and the exit by pre-IPO shareholders at lockup expiration create incentives for firms to manage earnings. To disentangle the effect of these events, we examine quarterly, rather than annual, abnormal accruals. We find no evidence of income-increasing earnings management before the IPO. However, IPO firms exhibit positive abnormal accruals in the quarter before and the quarter of the lockup expiration. Positive abnormal accruals are concentrated in less scrutinized firms and firms with high selling by pre-IPO shareholders. Moreover, we find that these accruals subsequently reverse and that such reversals contribute to long-run IPO underperformance.

The cost of implementing new accounting standards: The case of IFRS adoption in Australia:

This article examines the implementation errors that are made when accounting standards are implemented for the first time. Focusing on the transition to the International Financial Reporting Standards (IFRS), we provide evidence on the causes of these errors as well as the economic consequences of disclosing these errors. We find that the quality of both the chief financial officers (CFOs) and the auditors are associated with less implementation errors. We also find that there is a learning process as later adopters of IFRS report less errors compared to early adopters in the financial reporting cycle. In terms of the consequences of disclosing these errors, we find that firms reporting more implementation errors experience an increase in information asymmetry when these errors become known to market participants. Furthermore, we find a positive association between implementation errors and increases in audit fees when the implementation errors are disclosed. Our results are robust with respect to a number of sensitivity tests.

Pay for Praise: Do Rating Agencies Get Paid More When They Provide Higher Ratings? An Examination of the Consequences of the Recalibration of Municipal Debt

_____________________________________________________________________________ We ask whether credit rating agencies receive higher fees and gain greater market share when they provide more favorable ratings. We investigate this issue using Fitch and Moody’s 2010 recalibration of their rating scales, which increased ratings in the absence of any underlying change in issuer credit quality. Consistent with concerns raised by critics of the issuer pay model, we find that compared to S&P, the governmental entities rated by Moody’s and Fitch received better ratings, were charged higher fees, and issued bonds with lower yields after the recalibration event. This recalibration also led to increases in Fitch and Moody’s market share. Overall the results are consistent with concerns that issuers will pay more for higher ratings. ______________________________________________________________________________

Consequences of State Balanced Budget Restrictions: Fiscal Constraints or Accounting Manipulations?

Although balanced budgets are widely used throughout the world, there is considerable debate on whether they are effective. Poterba (1997) provides two theories on the effectiveness of balanced budget restrictions. The institutional irrelevance view suggests that balanced budget rules are ineffective, as governments can circumvent budget rules through accounting manipulations. Alternatively, the public choice view argues that balanced budgets represent important constraints on political actors. In this paper we provide evidence on these contrasting theories by investigating the extent to which states cut expenditures and/or raise taxes to meet the budget or whether they use accounting gimmicks to comply with budget requirements. Our evidence is consistent with both theories; we find that when facing fiscal problems, states use a combination of expenditure cuts and accounting gimmicks like inter-fund transfers and selling assets to meet the budget. A

L’incidence de l’information privilégiée et du contrôle continu sur le rôle de la qualité de la comptabilité dans les décisions d’investissement

100 per capita deficit induces states with strong anti-deficit rules to transfer

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

20 into the governmental funds, to sell

Determinants of the Informativeness of Analyst Research

6.10 public assets, and to reduce expenditures by

Conservatism and Debt

48.40. We find that the fiscal response to deficits varies based on the size of the deficit; states react to small deficits by increasing taxes and cutting expenditures, and states respond to large deficits using a combination of tax increases, expenditure cuts, and asset sales. Jointly, our results suggest that balanced budget restrictions do provide constraints on political actors, but they also result in the use of accounting gimmicks like fund sweeps and asset sales.