Krishna R. Kumar

Accounting Earnings and Executive Compensation: The Role of Earnings Persistence

This study investigates whether relations between accounting earnings and executive compensation depend on earnings persistence. The analysis is informed by prior studies that link executive compensation with accounting earnings and those that link security returns with earnings persistence. We expect that the sensitivity of executive compensation to accounting earnings varies directly with earnings persistence. We also expect that the weights assigned to earnings levels and earnings changes vary with earnings persistence in predictable ways. Results for a cross- sectional analysis of cash compensation paid to CEO s of 712 U.S. firms are consistent with these expectations.

Client Security Price Reactions to the Laventhol and Horwath Bankruptcy

On November 21, 1990, Laventhol and Horwath (henceforth LH), then the nations seventh-largest public accounting firm, filed for protection under Chapter 11 of the U.S. Federal Bankruptcy Code. A portfolio of 75 LH client common stocks earned statistically significant risk-adjusted returns of -1.91% during the two-day trading period around the LH bankruptcy disclosure. We propose and investigate two explanations for these security price reactions. The insurance explanation presumes investor reliance on auditors to recover future investment losses (Kellogg [1984] and Stice [1991]). Recovery is conditioned on the auditors ability to pay; therefore, the LH

The magnitudes of financial statement effects and accounting choice: The case of the adoption of SFAS 87☆

Abstract We examine the accounting choice decision in the context of the timing of adoption of SFAS 87. Unlike most prior studies, we consider interactions between firm characteristics and the magnitudes of the financial statement effects of an accounting decision. We expect that including interactions will both enhance the ability to explain accounting choice, and facilitate distinction between omitted variables (Ball and Foster, 1982) and hypothesized relations. Results are consistent with these expectations.

Was Andersen’s audit quality lower than its peers?: A comparative analysis of audit quality

Purpose - – This paper aims to examine whether Andersen’s audit quality in the five years preceding its collapse lagged that of other Big-Five auditors. Design/methodology/approach - – This paper compares Andersen’s audit quality and the other Big-Five auditors using five methodologies, namely, earnings response coefficients, magnitudes of abnormal accruals, propensities to issue going-concern opinions, usefulness of going-concern opinions in predicting bankruptcy and the frequency of Accounting and Auditing Enforcement Releases. The comparisons are based on both pooled samples of all observations and propensity-score-based matched-pairs. Findings - – The preponderance of evidence shows that Andersen’s audit quality did not differ materially in audit quality from other Big-Five auditors prior to its failure. However, it was found that Andersen’s independence was compromised in the year leading to its collapse (2000), as indicated by the lower likelihood to issue going-concern opinions. Originality/value - – This paper complements and improves on Cahan