Robert M. Bowen

Does Eva Beat Earnings? Evidence on Associations with Stock Returns and Firm Values

This study tests assertions that Economic Value Added (EVA®) is more highly associated with stock returns and firm values than accrual earnings, and evaluates which components of EVA, if any, contribute to these associations. Relative information content tests reveal earnings to be more highly associated with returns and firm values than EVA, residual income, or cash flow from operations. Incremental tests suggest that EVA components add only marginally to information content beyond earnings. Considered together, these results do not support claims that EVA dominates earnings in relative information content, and suggest rather that earnings generally outperforms EVA.

Accounting Discretion, Corporate Governance, and Firm Performance*

Aromatic compounds in small amounts function as antifoulant additives in pyrolysis furnaces which are subjected to elevated temperatures from about 500 DEG C. to about 1200 DEG C. when thermally convening hydrocarbons to ethylene as well as other useful products. These furnaces produce material that deposits and accumulates upon furnace surfaces including furnace radiant coils and transfer line exchangers. The present antifoulant additives inhibit and suppress the formation and deposition of material on furnace surfaces. The present invention is a method for inhibiting the formation of coke on the surfaces of a radiant heating section of a pyrolysis furnace and the surfaces immediately downstream of such section in contact with a hydrocarbon feedstock which comprises decoking the pyrolysis furnace, and prior to processing the hydrocarbon feedstock, adding an inhibiting compound to the pyrolysis furnace. The inhibiting compound is selected from the group consisting of substituted benzenes, substituted naphthalenes, substituted anthracenes, substituted phenanthrenes, and mixtures thereof wherein the inhibiting compound contains at least one substitutent having at least 2 carbon atoms. A thin catalytically inactive coke layer is formed on the surfaces of the pyrolysis furnace. The hydrocarbon feedstock is then fed into the furnace, whereby the surfaces of the furnace are inhibited against the formation of a catalytically active coke during the processing of the hydrocarbon feedstock.

Emphasis on Pro Forma versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC intervention, and Market Reactions

Earnings press releases provide managers a means to emphasize alternative earnings metrics and perhaps influence the perceptions of firm stakeholders. Recent accounting scandals heightened public scrutiny of accounting disclosures and prompted regulators to issue advice regarding the content and composition of firms’ earnings press releases. We explore the use of managerial emphasis as a disclosure tool and contribute to the current debate over pro forma earnings. Specifically, we examine (1) the determinants of emphasis placed on pro forma and GAAP earnings within quarterly earnings press releases, (2) whether there has been a shift away from (toward) emphasizing pro forma (GAAP) earnings, and (3) whether stock market reactions to earnings news were influenced by emphasis placed on metrics within the press release. We consider two measures of emphasis: the level of emphasis (based on where pro forma and GAAP earnings are mentioned in the press release) and relative emphasis (the difference in placement between pro forma and GAAP earnings). Our results are consistent with managers being strategic in their emphasis on alternative earnings metrics, suggesting that placement of metrics within the earnings release is neither random nor boilerplate. We find that firms focus on metrics that are more value-relevant and portray more favorable firm performance. We also find that the extent to which the firm’s press release is likely to be publicized in the news (i.e., the extent of media coverage) affects managers’ emphasis decision. Further, our results indicate a highly significant shift toward (away from) GAAP (pro forma) emphasis in 2002 relative to 2001. Finally, our stock market tests suggest that greater emphasis on pro forma or GAAP earnings in the quarterly press release results in a larger reaction to the news. Overall, these findings are consistent with managers using emphasis in the earnings press release as a disclosure tool and this emphasis influencing at least one important stakeholder group.

Intra-Industry Effects of the Accident at Three Mile Island

On March 28, 1979, failure occurred in one of the two nuclear reactors at the Three Mile Island (TMI) nuclear power generation facility owned by General Public Utilities (GPU). This nuclear “accident†was the first of its type in the United States, and much anecdotal evidence suggests that the accident intensified public concern and increased regulatory activity. Since this event, several proposed nuclear plants have been cancelled; safety rules have been tightened; certification (by the Nuclear Regulatory Commission) of newly completed nuclear plants has been delayed; and the pressure to curtail or ban the use of nuclear technology continues.

Determinants of the Timing of Quarterly Earnings Announcements

Previous empirical research provides descriptive evidence on the timing pattern of earnings announcements but does not attempt to investigate potential explanations. Because some stakeholders are not likely to find it cost-effective to monitor the firm actively, managers have the opportunity to influence the perceptions of relatively uninformed stakeholders through accounting decisions such as the timing of earnings announcements. We provide evidence on this stakeholder explanation of timing decisions by identifying a setting that has the potential to discriminate between this and a confounding explanation for the normal timing pattern suggested in prior studies. Specifically, if managers rushed to report bad news following the October 1987 stock market crash in the belief that the ongoing market chaos reduced the reactions of stakeholders to the news, “normal” timing patterns would be (at least partially) reversed. Our results are generally consistent with prior research in that we document a (somewhat weak) association between earnings news and timing. However, consistent with the stakeholder explanation, we find that the earliest reporting group exhibited, on average, bad news. Thus, we infer that timing decisions for some firms are motivated by a desire to minimize the adverse reaction of stakeholders to bad news. In addition, we report evidence that suggests managers reduced the magnitude of reported earnings following the crash. This evidence corroborates our conclusion that managers are attempting to influence stakeholder perceptions of the firms earnings performance.

Economic Value Added: Some Empirical Evidence

Traces the growth in the use of economic value added (EVA, previously known as residual income) and uses two previous research studies to assess some claims for its merits. Compares EVA’s ability to explain stock returns with that of earnings before extraordinary items (EBEI) and cash flow using 1984‐1993 US data; and finds EBEI is most closely related. Examines EVA’s incentive effects on management investing, financing and operating decisions and shows that, although EVA users decreased new investment, increased dispositions of assets, increased share repurchases, used assets more intensively and increased residual income, market reactions to this were weak. Suggests possible reasons for this and concludes that EVA may align management incentives with shareholders’ interests but this does not necessarily increase shareholder value.

Determinants of the use of regulatory accounting principles by Savings and Loans

Abstract The voluntary use of regulatory accounting principles (RAP) by Savings and Loans (S&Ls) is predicted to be related to ownership structure, proximity to violation of net worth requirements, political factors, and prior use of RAP. We examine the decisions to both adopt and retain the use of several RAP: two ‘cosmetic’ RAP that are relatively independent of other economic decisions and two ‘noncosmetic’ RAP that directly interact with investment or financing decisions. S&Ls using RAP tend to: (a) be mutuals, (b) have low regulatory net worth, (c) be larger (for S&Ls adopting RAP), and (d) have used other RAP in the prior period.

Informational efficiency and the information content of earnings during the market crash of October 1987

Abstract This paper examines the joint hypothesis that stock markets were efficient with respect to announcements of quarterly earnings and that these earnings numbers were important in the determination of equilibrium security prices in four subperiods before, during, and after the crash of October 1987. Results for the complete sample and the NYSE subsample strongly support the joint hypothesis in each subperiod, except for the worst of the crash, October 19–20, 1987. In contrast, NASDAQ firms reacted in the predicted direction during most subperiods (including the crash), but not all associations were significant.

Is Warren Buffett's Commentary on Accounting, Governance and Investing Practices Reflected in the Investment Decisions and Subsequent Influence of Berkshire Hathaway?

We examine (i) whether the business practices of Berkshire Hathaway investees are consistent with Warren Buffett’s public statements on what constitutes good accounting, governance and investing practices and (ii) whether these practices are associated with Berkshire’s initial “selection�? or Buffett’s subsequent “influence.�? Compared to control firms, we find that Berkshire investees are highly likely to follow Buffett’s investment philosophy, somewhat likely to follow his preferred accounting, disclosure and compensation policies, but unlikely to follow the board-related governance practices that we can measure. Second, we find some evidence that the business practices of future Berkshire investees are more aligned with Buffett’s beliefs in the pre-investment period compared to control firms. Third, we find relatively modest evidence that investees improve a few of their business practices subsequent to Berkshire’s initial investment. However, overall, Buffett does not appear to be especially influential in the subsequent accounting, governance and investing decisions of Berkshire investees, likely because he has already taken into account the attributes he cares most about in the initial investment decision.

Intra-Industry Market Reactions to Failures of Publicly Held Savings and Loans

This study examines the consequences of failures involving publicly held S&Ls on the market value of surviving firms in the industry. Market reactions of surviving firms are predicted to be associated with the circumstances surrounding the failure as well as the characteristics of the surviving S&Ls. Four competing (but not mutually exclusive) hypotheses are examined. An overall positive intra-industry market reaction was observed for the failures of eight publicly traded S&Ls during 1985 and 1986; however, this reaction was not significant at conventional levels. Cross-sectional analyses of the relation between market reactions and characteristics of failed and surviving S&Ls provides some support for the hypothesis that positive reactions were associated with a perceived reduction in competition, especially for stronger surviving S&Ls. The three remaining hypotheses (related to regulatory enforcement, regulatory resources, and the contagious effects of individual failures) receive only weak support.