Richard D. Mergenthaler

CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts

This study examines whether the board of directors penalizes CEOs and CFOs in the form of bonus cuts, fewer equity grants, and forced turnover for the act of barely missing the latest consensus analyst forecast and whether such penalties are consistent with efficient contracting or fixation. We find that CEOs are penalized when they just miss the latest consensus analyst forecast via bonus cuts, fewer equity grants, and forced turnover. CFOs are also penalized for just missing the latest consensus analyst forecast via bonus cuts and forced turnover, but do not appear to be penalized with fewer equity grants. Further, we find evidence suggesting that the penalties levied by the board for just missing the latest analyst forecast are more consistent with fixation than efficient contracting.

Financial Statement Comparability and the Efficiency of Acquisition Decisions

This study examines whether acquirers make better acquisition decisions when target firms’ financial statements exhibit greater comparability with industry peer firms. We predict and find that acquirers’ make more profitable acquisition decisions when targets’ financial statements are more comparable—as evidenced by higher merger announcement returns, higher acquisition synergies, and better future operating performance. We also find that post-acquisition goodwill impairments and post-acquisition divestitures are less likely when target firms’ financial statements are more comparable. Finally, we find the effect of targets’ comparability is more pronounced when acquirers’ ex-ante information asymmetry is higher and when acquisitions are accomplished via tender offers to target shareholders. In total, our evidence suggests targets’ financial statement comparability helps acquirers make better acquisitioninvestment decisions and fosters more efficient capital allocation. We thank Ted Goodman (FARS discussant), Dan Wangerin (AAA discussant), workshop participants at the 2013 AAA Annual Meeting, the 2014 FARS Midyear Meeting, the 2013 BYU Accounting Research Symposium, the University of Iowa, Duke University, University of Minnesota Research Conference and Penn State University for their helpful comments and suggestions. We also thank the University of Texas at Austin Capital Markets Readings Group for their helpful comments and suggestions. Finally, we thank Rodrigo Verdi for providing the SAS program for comparability measures. The authors acknowledge funding from the Tippie College of Business and Naveen Jindal School of Management.

Interpretive Guidance and Financial Reporting Costs: Evidence from Audit Fees

We examine the effect of interpretive accounting guidance on a direct and observable cost of financial reporting: audit fees. Many contend that U.S. GAAP has too much interpretive guidance, making it complex and difficult to assimilate. This effect would lead to higher audit effort and higher fees. However, specific guidance could both lower litigation risk and increase audit efficiency by reducing the need for auditors to continually deliberate complicated accounting issues across engagements. These effects would lead to lower audit fees. Overall, using both levels and changes regressions, we find that interpretive accounting guidance is associated with higher audit fees. However, this effect is smallest for firms facing the highest ex-ante litigation risk. Finally, we examine whether increased audit fees persist and find that the audit fee effect disappears by the third year after the interpretive guidance becomes effective. Overall, we find no evidence that interpretive guidance decreases audit costs.

Explaining Rules-Based Characteristics in U.S. GAAP: Theories and Evidence

Despite debate on the desirability of rules-based standards, no studies provide evidence on why accounting standards take on rules-based characteristics. We identify and test five theories from prior research (litigation risk, constraining opportunism, complexity, transaction frequency, and age) that could explain why some U.S. accounting standards contain rules-based characteristics. Litigation risk and complexity are most consistently related to cross-sectional and time-series variation in rules-based characteristics. We find more limited evidence that frequent transactions, age, and desires by regulators to constrain opportunistic reporting are related to rules-based standards. We note, however, that our findings are necessarily descriptive because standards arise endogenously from market and political forces, limiting causal interpretation. Further, it is difficult to perfectly separate rules-based characteristics of the standard from both the complexity of the standard and the characteristics of the underlying transaction, including the complexity of the transaction.