Thomas D. Dowdell

The Tylenol Incident, Ensuing Regulation, and Stock Prices

The much publicized Tylenol incident in 1982 led to stringent packaging regulations for over-the-counter pharmaceutical drugs. The sudden incident and the swift progression of associated events offer a unique opportunity to assess the wealth effects of the resultant regulations. The market value of common stock of Johnson & Johnson, makers of Tylenol, declined by approximately 29 percent, amounting to

The Return-Stages Valuation Model and the Expectations within a Firm's P/B and P/E Ratios

2.31 billion. Although other firms in the industry also suffered significantly, their share price decline did not occur around the Tylenol incident but occurred around the subsequent packaging regulation proceedings. On average, 28 other pharmaceutical firms analyzed in this study experienced a decline of

An Examination of the Relationship between Audit Fees and Real Earnings Management Using a Simultaneous Equations Model

310 million per firm, or a total of about

The Impact of Sec Scrutiny on Financial Statement Reporting of In-Process Research and Development Expense

8.68 billion. The results suggest that the regulation had a significant negative effect on the common stock prices of firms in the pharmaceutical industry.

Former Audit Firm Personnel as CFOs: Effect on Earnings Management

The return-stages model can quantify the expectations facing a firm from its price-to-book (P/B) and price-to-earnings (P/E) ratios. We illustrate two implications of the model. First, a firm’s P/B and P/E ratios can predict the future cash flow pattern earned by a firm. Second, the operating performance consistent with a given stock return differs across four groups of firms: Growth Firms, Mature Firms, Turnaround Firms, and Declining Firms. Our results imply that a firm’s stock return depends, in part, on how its operating performance compares to the expectations defined by its P/B and P/E ratios.

CAP Forum on Enron: Former Audit Firm Personnel as CFOs: Effect on Earnings Management*

Real earnings management (REM) is actions taken by management that deviate from normal business practices carried out to meet certain earnings thresholds. Cohen, Dey, and Lys (2008); Cohen and Zarowin (2010); and Chi, Lisic, and Pevzner (2011) find that increased audit scrutiny prompts companies to switch from accrual-based earnings management (ABEM) to REM. In contrast, Sohn (2011) and Greiner, Kohlbeck, and Smith (2013) conclude that REM results in heightened audit scrutiny based on their finding of a positive statistical association between REM and audit fees (a widely-used proxy for scrutiny). However, the positive association researchers observe could be due to companies switching from ABEM to REM in response to audit scrutiny, rather than auditors increasing scrutiny in response to detected REM. To further investigate whether auditors respond to REM with increased scrutiny we examine the relations between REM and audit fees using a simultaneous equations model which allows for effects in both directions. Using this testing approach, we find that the effects indeed occur in both directions. Stated explicitly, we find that higher audit fees cause more REM and that more REM causes higher audit fees. Our results provide additional evidence that auditors respond to REM with increased scrutiny even though these activities do not violate accounting rules.