Terry J. Shevlin

Empirical Tax Research in Accounting

This paper traces the development of archival, microeconomic-based, empirical income tax research in accounting over the last 15 years. The paper details three major areas of research: (i) the coordination of tax and non-tax factors, (ii) the effects of taxes on asset prices, and (iii) the taxation of multijurisdictional (international and interstate) commerce. Methodological concerns of particular interest to this field also are discussed. The paper concludes with a discussion of possible directions for future research. r 2001 Elsevier Science B.V. All rights reserved. JEL classification: M41; H25; K34; G32; F23

Do Stock Prices Fully Reflect the Implications of Special Items for Future Earnings

Previous research (Rendleman, Jones, and Latane [1987]; Freeman and Tse [1989]; Bernard and Thomas [1990]; and Ball and Bartov [1996]) indicates that security prices do not fully reflect predictable elements of the relation between current and future quarterly earnings. We investigate whether this finding also holds for the special items component of earnings. Given that special items are prominent in financial analysis and are assumed to have relatively straightforward implications for future earnings (special items are assumed to be largely transitory), one might expect that prices would fully impound the implications of special items for future earnings. Based on the “two-equation” approach used in Ball and Bartov [1996] and other studies (e.g., Abarbanell and Bernard [1992]; Sloan [1996]; Rangan and Sloan [1998]; and Soffer and Lys [1999]), we find that while prices reflect relatively more of the effects of special items compared to other earnings components, we still reject the null hypothesis that prices fully impound the implications of special items for future earnings. The “two-equation” approach assesses the consistency of coefficients in a pair of prediction and pricing equations, and thus depends on an assumed functional form. However, a less structured abnormal returns methodology like that used in Bernard and Thomas [1990] also supports the conclusion that the implications of special items are not fully impounded in prices. Specifically, a trading strategy based only on the sign of special items earns small but statistically significant abnormal returns during a 3-day window four quarters subsequent to the original announcement of special items.

Accounting for Tax Benefits of Employee Stock Options and Implications for Research

A color reproduction controller accesses corrected color values for driving an output color reproduction device by forming, for each color value of each pixel to be reproduced, a data pointer comprising a first word portion of a first color value and second and third word portions of second and third color values, the second and third word portions being smaller than the first word portion. The resultant words are smaller than those of the combined length of the color values from which they are formed and result in significantly smaller memory space.

Does the Pricing of Financial Reporting Quality Change Around Dividend Changes

We examine whether accrual earnings quality is a priced information risk factor in a dividend change setting. We define information risk as the probability that firm-specific financial statement information pertinent to investor pricing decisions is of low precision, and use the factor-mimicking portfolio returns formed on the Dechow-Dichev [2002] accrual quality (AQ) metric to proxy for the information risk (IR) factor returns. We augment the Fama-French three-factor model with this IR factor, and find that dividend initiation and increase firms exhibit a decrease in the factor loadings on the IR factor while dividend decrease firms exhibit an increase in the corresponding factor loadings, but such changes in the factor loadings occur months prior to the dividend change announcements. The results are robust to further controls for operating risk and using an alternative measure of information risk. Further analysis on changes in information characteristics such as AQ, the probability of informed trading score (PIN), forecast dispersion, and return volatility surrounding dividend change events are consistent with the asset pricing results. Overall, we interpret our results as being consistent with investors treating the information risk associated with the precision of financial statement information as a priced risk factor, with both the precision and pricing changing in predictable directions around dividend changes. However, while we attempt to control for operating risk changes in additional tests, we cannot completely rule out changes in operating risk as a competing alternative explanation for our observed results.

Does Voluntary Adoption of a Clawback Provision Improve Financial Reporting Quality

We examine whether financial reporting quality improves after firms voluntarily adopt a compensation clawback provision. Clawback provisions allow companies to recoup excess incentive pay in the event of an accounting restatement, and are intended to ex ante deter managers from publishing misstated accounting information and to ex post penalize managers who do so. For the period 2007-2009, our difference-in-differences analysis reveals significant improvements in both actual and perceived financial reporting quality following clawback adoption, relative to a propensity-matched set of control firms. We also find an increase in compensation for CEOs who are subject to new clawback provisions, as well as an increase in the sensitivity of cash compensation to accounting performance. In cross-sectional tests, our findings indicate that “robust�? clawback provisions, those that apply to restatements caused by either intentional or unintentional errors, have an incrementally larger impact on financial reporting quality and compensation than do clawback provisions that apply only to restatements involving fraud.

Market (In)Attention and the Strategic Scheduling and Timing of Earnings Announcements

We investigate whether managers “hide” bad news by announcing earnings during periods of low attention, or by providing less forewarning of an upcoming earnings announcement. Our findings are consistent with managers reporting bad news after market hours, on busy days, and with less advance notice, and with earnings receiving less attention in these settings. Paradoxically, our findings indicate that managers also report bad news on Fridays, but we do not find lower attention on Fridays. Further, we find negative returns when the market is notified of an upcoming Friday earnings announcement, which is consistent with investors inferring forthcoming bad news.

The value-relevance of nonfinancial information: A discussion

Abstract Amir and Lev (1996) address two interesting issues: the value-relevance of reported financial information for fast-changing, science-based companies and the value-relevance of nonfinancial information incremental to financial information. Using a sample of cellular phone companies, they report that the financial accounting information is only value-relevant after the inclusion of the nonfinancial information and that the nonfinancial information they examine is value-relevant both by itself and incremental to the financial information. I first discuss details specific to the tests conducted by Amir and Lev before discussing some of the implications offered by Amir and Lev.

Optimal exercise and the cost of granting employee stock options with a reload provision

In this paper we formulate a theoretically correct valuation method for estimating the cost to a firm of granting reload options (REOs) to its employees. The model developed in this paper can be used directly by firms who wish to apply Statement of Financial Accounting Standards (henceforth SFAS) No. 123 [1995] to REOs. Also, the model is directly useful to the FASB should they choose to require the entire value of REOs to be estimated at the date of grant, a requirement that was not included in SFAS No. 123 due to the lack of a reasonable valuation model.1 REOs, which have been gaining in popularity since the late 1980s, are similar to traditional ESOs, except that they also carry a reload provision.2 The reload provision specifies that if the option holder exercises

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.

Modelling Option Prices in Australia Using the Black-Scholes Model

This paper provides evidence on the ability of the Black-Scholes model to price options traded on the Australian market. The only variable in the Black-Scholes model which is likely to be subject to significant measurement error is the standard deviation rate. Two different methods of estimation are examined here: historically-based and implied standard deviations. Using historical estimates of the standard deviation rates resulted in significant underpricing by the model relative to the market. This underpricing was consistent across in/out and short/long options with the latter proving particularly troublesome for the model. As would be expected, the use of weighted implied standard deviation (lagged one month), greatly improves the pricing ability of the model. Mean pricing differences were small in absolute terms and very few remained statistically significant.