• Barth, M., L. Hodder, and S. Stubben.  Fair Value Accounting for Liabilitites and Own Credit Risk.  The Accounting Review, May 2008.

  Abstract:  We find that equity returns associated with credit risk changes are attenuated by the debt value effect of the credit risk changes, as Merton (1974) predicts. We find that the relation between credit risk changes and equity returns is significantly less negative for firms with more debt--controlling for asset value changes, credit risk increases (decreases) are associated with equity value increases (decreases). This result obtains across credit risk levels. The relation is associated with changes in both expected cash flows and systematic risk, as reflected in analyst earnings forecasts and equity cost of capital. By inverting the Merton (1974) model, we provide descriptive evidence that if unrecognized debt value changes were recognized in income, but not unrecognized asset value changes, most credit upgrade (downgrade) firms would recognize lower (higher) income. These potentially counterintuitive income effects primarily are attributable to incomplete recognition of contemporaneous asset value changes. However, for a substantial majority of downgrade firms we find that recognized asset write-downs exceed unrecognized gains from debt value decreases. This mitigates concerns that income effects from recognizing changes in debt values would be anomalous for such firms.

• Beaver, W., B. Cornell, W. Landsman, and S. Stubben.  The Impact of Analysts' Forecast Errors and Forecast Revisions on Stock Prices.  Journal of Business Finance & Accounting, June/July 2008.

  Abstract:  We present a comprehensive analysis of the association between stock returns, quarterly earnings forecast errors, and quarter-ahead and year-ahead earnings forecast revisions. We find that forecast errors and the two forecast revisions have significant effects on stock prices, indicating each conveys information content. Findings also show that the fourth quarter differs from other quarters--the relative importance of the forecast error (quarter-ahead forecast revision) is lower (higher). We also find a marked upward shift over time in the forecast error and forecast revision coefficients, consistent with the I/B/E/S database reflecting an improved quality of both earnings forecasts and actual earnings.

• McNichols, M., and S. Stubben.  Does Earnings Management Affect Firms' Investment Decisions.  The Accounting Review, November 2008.

  Abstract:  This paper examines whether firms manipulating their reported financial results make suboptimal investment decisions. We examine fixed asset investments for a large sample of public companies during the 1978-2002 period and document that firms that manipulate their earnings--firms investigated by the SEC for accounting irregularities, firms sued by their shareholders for improper accounting, and firms that restated financial statements--over-invest substantially during the misreporting period. Furthermore, following the misreporting period, these firms no longer over-invest, consistent with corrected information leading to more efficient investment levels. We find similar patterns for firms with high discretionary revenues or accruals. Our findings suggest that earnings management, which is largely viewed as targeting parties external to the firm, can also influence internal decisions.

• Ertimur, Y., F. Ferri, and S. Stubben.  Board of Directors' Responsiveness to Shareholders: Evidence from Majority-Vote Shareholder Proposals.  Journal of Corporate Finance, February 2010.

  Abstract:  In recent years boards have become significantly more likely to implement non-binding, majority-vote (MV) shareholder proposals. Using a sample of 620 MV proposals between 1997 and 2004, we find that shareholder pressure (e.g., the voting outcome and the influence of the proponent) and the type of proposals are the main determinants of the implementation decision, while traditional governance indicators do not seem to affect the decision. We then examine the labor market consequences of the implementation decision for outside directors and find that directors implementing MV shareholder proposals experience a one-fifth reduction in the likelihood of losing their board seat as well as other directorships.

• S. Stubben.  Discretionary Revenues as a Measure of Earnings Management.  The Accounting Review, March 2010.

  Abstract:  This study examines the ability of revenue and accrual models to detect simu-lated and actual earnings management. The results indicate that revenue models are less biased, better specified, and more powerful than commonly used accrual models. Using a simulation procedure, I find that revenue models are more likely than accrual models to detect a combina-tion of revenue and expense manipulation. Using a sample of firms subject to SEC enforcement actions for a mix of revenue- and expense-related misstatements, I find that, although revenue models detect manipulation, accrual models do not. These findings provide support for using measures of discretionary revenues to study earnings management.

• Ertimur, Y., W. Mayew, and S. Stubben.  Analyst Reputation and the Issuance of Disaggregated Earnings Forecasts to I/B/E/S.  Review of Accounting Studies, March 2011.

  Abstract:  Although sell-side analysts privately forecast revenues and expenses when producing earnings forecasts, not all analysts choose to provide I/B/E/S with earnings forecasts disaggregated into revenues and expenses. We investigate the role of reputation in explaining this decision. We find that analysts without established reputations are more likely than reputable analysts to issue disaggregated earnings forecasts to I/B/E/S, consistent with I/B/E/S exposure benefits accruing to analysts seeking to establish a reputation. Among less reputable analysts, those with high ability are more likely to disaggregate, consistent with this group reaping greater benefits from the exposure I/B/E/S provides. Additional tests support our primary hypotheses. Among less reputable analysts, those who disaggregate are more (less) likely to be promoted (demoted or terminated). The stock market responds similarly, with more weight assigned to earnings forecast revisions provided by analysts who disaggregate their earnings forecasts.

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