Katherine Gunny

Do Managers Use Meeting Analyst Forecasts to Signal Private Information? Evidence from Patent Citations

This study examines whether firms manage earnings to meet analyst forecasts to signal superior future performance. Prior research finds that firms use earnings management to just meet analyst forecasts and that these firms have a positive association with future performance (Bartov et al., 2002). There are two potential explanations for the positive association – signaling and attaining benefits that allow for better future performance (i.e., the real benefits explanation). Prior studies cannot provide evidence of signaling because they do not control for the real benefits explanation. Our research design enables us to control for the real benefits explanation because we can identify potential signaling firms within the sample of firms that just meet analyst forecasts. We use a unique database from the National Bureau of Economic Research to construct a proxy for the managers belief about future firm value due to patents. We find that firms with more patent citations are more likely to just meet the analyst forecast and manage earnings to achieve this goal. We also find firms that just meet analyst forecasts with more patent citations have significantly better performance than firms with fewer patent citations, which is consistent with signaling and not the real benefits explanation.

Implications of the Integral Approach and Earnings Management for Alternate Annual Reporting Periods

We compare the last 12 months’ earnings ending in quarter four (i.e., fiscal year earnings), three, two and one. Lipe and Bernard (2000) offer two competing explanations for higher volatility in fourth quarter earnings relative to other quarters. First, under the integral approach, any estimation errors in the earlier quarters are corrected through fourth quarter earnings, which could make them more volatile. Second, earnings management concentrated in the fourth quarter renders fourth quarter earnings more volatile. While both explanations have similar implications for the properties of quarterly earnings, their implications differ for the properties of annual earnings ending in each quarter. Our result comparing earnings variability is more consistent with earnings management than the integral approach. We examine the relative earnings attributes and find that fiscal year earnings attributes rank lower. Finally, we re-investigate the accrual anomaly and find that the accrual anomaly is more pronounced for fiscal year earnings.

Profitability and Cost Shifting in Government Procurement Contracts

We examine whether contractors with cost plus contracts earn a higher profit, and whether the higher profit is associated with cost shifting behavior, using a unique set of data of federal procurement contracts between the years 2005 and 2010. Prior research often examines government contractor profitability without differentiating the contract types, which is a key determinant to the contractor’s ability to cost-shift. We identify firms that are awarded with cost plus contracts in some years and without in other years. We find their profitability significantly increases during the years that cost plus contracts are awarded. We also find that these firms exhibit greater discretionary expenditures during the years with cost plus contracts, relative to the years without, which is consistent with cost shifting behavior. However, effective monitoring through the Cost Accounting Standards helps mitigate such behavior.

When Are Outside Directors More Effective Monitors? Evidence From Real Activities Manipulation:

A large body of the corporate governance literature examines the disciplinary role of outside directors in overseeing the CEO. Although it is certainly a critical factor in effective monitoring, independence alone is not sufficient. Fulfilling the monitoring role also requires a skilled and knowledgeable board (Acharya, Myers, & Rajan, 2011; Adams & Ferreira 2007; Raheja, 2005). The skills and knowledge needed for monitoring vary with the type of CEO activity being monitored. For certain managerial actions that require sufficient firm-specific knowledge and expertise to exercise discipline, board informedness could be at least as critical as board independence. Given the trade-off between informedness and independence, outside directors are not necessarily better monitors than inside directors due to information disadvantages. In this study, we examine whether and to what extent an independent board constrains the CEO from taking real actions to manage financial performance. We refer to real earnings management as the CEO’s purposeful intervention in normal business practice in an effort to influence the output of the accounting system (Gunny, 2010; Roychowdhury, 2006). Relative to accrual-based earnings management, real earnings management is inherently more difficult to detect and requires more firm-specific information to understand because it can involve any real decision that deviates from normal business practice (Cohen, Dey, & Lys, 2008; Lo, 2008). Lo (2008) compares the two earnings management methods and concludes that

Strategic Informed Trading by Corporate Executives and Firm Value

Proponents of insider trading argue that informed trading benefits shareholders and could have a positive effect on firm value, however opponents counter that insider trading could be detrimental to firm value. We measure the extent of strategic informed trading by the fraction of insider trades that are V-shaped purchases (defined as insider purchases that are preceded by negative abnormal returns and followed by positive abnormal returns) and Λ-shaped sales (defined as insider sales that are preceded by positive abnormal returns and followed by negative abnormal returns). Our strategic informed trading proxy is negatively associated with future earnings performance and Tobin’s Q, even after controlling for the direction of insider trading intensity. We adopt the view that there could be frictions that prevent the board from setting the level of informed trading at the optimal level at any given time. We find that our measure of strategic informed insider trading is positively related to restatements, another possible manifestation of agency problems resulting from the same frictions. Moreover, strategic informed trading declines significantly after announcements of earnings restatements, which are usually accompanied with significant corporate governance improvement. Overall our evidence indicates that the type of informed trading we identify represents suboptimal informed trading that is detrimental to firm value – consistent with the opponent view of informed trading.