Steve Rock

Earnings-Based Bonus Plans and Earnings Management by Business Unit Managers

This study tests the Fixed-Target Hypothesis (Healy, 1985), wherein it is hypothesized that managers make discretionary accrual decisions to maximize their short-term bonuses. We conduct our analysis using business unit-level rather than firm-level data. In our setting, business unit manager incentive compensation is based solely on business unit earnings. Therefore, the potentially confounding effects of long-term performance and stock-based incentive compensation present in previous research are absent. Using multiple measures of discretionary accruals, we find evidence consistent with Healy (1985) in that managers with bonus- related incentives to make income-increasing discretionary accruals do so relative to managers with incentives to use accrual discretion to decrease earnings. To the extent that external financial reporting represents an aggregation of business unit financial reports, our results highlight the importance of internal contracting as a determinant of external reporting, as conjectured by Watts and Zimmerman (1990).

Disclosure of Intended Use of Proceeds and Underpricing in Initial Public Offerings

We use the context of a companys initial public offering (IPO) of equity securities as a capital-markets setting to empirically study the economic consequences of endogenous disclosure. In particular, we examine the relation between the extent of dollar detail an IPO issuer provides regarding their intended use of proceeds and first-day underpricing. We document substantial variation in the specificity of this disclosure and find that an increase in such specificity is associated with lower IPO underpricing. Overall, our results suggest that IPOs that provide specific use-of-proceeds disclosures have less ex ante uncertainty, in the sense that these disclosures help investors estimate the dispersion of secondary market values. Our paper contributes to the empirical accounting literature by documenting an association between voluntary disclosure and what is arguably the foremost cost of raising initial equity capital (i.e., IPO underpricing).

Analyst following and count-data econometrics

Abstract This paper reexamines the determinants of the number of analysts following a firm using econometric models based on count distributions. We replicate Bhushans (1989) analyst-following study to demonstrate the effects of using count-data econometrics, in lieu of OLS, in studying phenomena where the dependent variable ranges among nonnegative integers. In contrast with the original paper, our findings indicate the number of institutional investors is inversely related with analyst following. We also provide econometric evidence to support the preferred use of the negative binomial model in estimating cross-sectional, analyst-following regressions.

Value Line and I/B/E/S Earnings Forecasts

This paper compares Value Line and Institutional Brokers Estimate System (I/B/E/S) analysts’ earnings forecasts. Comparing the accuracy of forecasts of a single forecaster (Value Line) to consensus forecasts (I/B/E/S) offers a powerful test of the aggregation principle. Philbrick and Ricks [J. Acc. Res. 29 (1991) 397] conducted a similar study, but found no evidence that aggregation matters. Using more recent data, we reach different conclusions, finding that I/B/E/S earnings forecasts outperform Value Line significantly in terms of accuracy and as proxies for market expectations. I/B/E/S forecasting superiority is largely explained by its timing advantage and the aggregation principle. However, when we build an I/B/E/S consensus using forecasts from the I/B/E/S detail files of individual analyst forecasts, we find that some of its forecasting superiority remains after controlling for these advantages. D 2004 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.

Financial Analysts’ Forecasts and Stock Recommendations: A Review of the Research

This surveys reviews research regarding the role of financial analysts in capital markets. The survey builds on the perspectives provided by Schipper (1991) and Brown (1993). We categorize papers published mainly since 1992 and selectively discuss aspects of these papers that address or suggest key research topics of ongoing interest in seven broad areas: analysts’ decision processes, the determinants of analyst expertise and distributions of individual analysts’ forecasts, the informativeness of analysts’ research outputs, analyst and market efficiency with respect to information, effects of analysts’ economic incentives on their research outputs, effects of the institutional and regulatory environment (including cross-country comparisons), and the limitations of databases and various research paradigms.

Numbers Games? A Natural Experiment Investigating Three (Ir)Regularities in Reported Earnings Per Share

We confirm the existence of three irregularities noted in prior research related to reported earnings per share (EPS). First, the unusual pattern in the second digit of reported EPS noted by Thomas (1989) that the second digit of EPS is more likely to be zero and five and less likely to be nine for profit firms while the pattern does not appear for loss firms. Second, the rounding pattern in (unreported) third decimals of EPS noted by Das and Zhang (2003) that the one tenth of a cent is more likely between five and nine for profit firms. Third, the threshold irregularity in EPS changes attributed to Degeorge et al. (1999) and related to Burgstahler and Dichev (1997), that zero changes and one-cent increases are over-represented and one-cent decreases are underrepresented, relative to expectations. Our study confirms that these patterns exist and enhances confidence in each reported irregularity’s validity by identifying matched pairs of firm-years immediately prior to the adoption of SFAS 128. We further extend prior research on EPS irregularities by conducting analysis to discern whether the second digit pattern appears to dominate the threshold irregularity or vice-versa.