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Prior research finds that mandatory risk factor disclosures are informative in that they increase investors’ assessments of the volatility of a firm’s cash flows. However, the literature is silent as to whether these disclosures provide information about the level of future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows levels and stock returns. We use the setting of taxes because it is relatively easier to identify the specific income and cash flow statement line items to which these risks relate, and offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This suggests that, on average, tax risk factor disclosures relate to tax positions that are rewarded with future tax savings. Second, we find that investors incorporate this relation into stock prices. In additional analysis, we find no evidence of a drift in stock prices, suggesting that investors incorporate the implications of tax risk factor disclosures in a timely manner. Overall, our results suggest that risk factor disclosures provide information about the level of a firm’s future cash flows, that the risks discussed in these disclosures are – on average – value-increasing, and that investors incorporate this information into current stock prices.

This study examines the impact of external financing activities on earnings management decisions and further explores the role of enterprise risk management (ERM) as a potential moderating factor in this association. We find that managers use both real-activities and accrual-based earnings management when engaging in equity financing activities. Moreover, when firms have weaker ERM systems, we find that managers are less likely to use real-activities earnings management in their equity financing efforts. Therefore, our policy-relevant findings suggest that weaker ERM systems can signal poor control mechanisms and attract additional investor scrutiny, thus constraining managers' use of real-activities earnings manipulation to harm long-term firm value.

This study examines whether and how multiple managerial entrenchment devices within a firm, specifically the structure of the board of directors and family firm status, interact to influence tax management. Using a sample of 4,000 U.S. public firm-year observations covering the period 1999–2013, we find that the classified board structure and family firm status are both negatively related with tax avoidance. However, accounting for the interaction between board structure and family firm status, we also find that the negative associations between both entrenchment measures and tax management apply only where the other entrenchment mechanism is absent. In further analysis, we find that higher levels of monitoring by institutional investors neutralize the interaction between the presence of a classified board and family firm status. Our evidence highlights that governance/monitoring mechanisms can interact in complex ways, including an offsetting effect between potentially redundant dual-level entrenchment mechanisms, to influence tax management behavior.

Prior research finds that risk-taking has declined after the Sarbanes-Oxley Act of 2002, consistent with the notion that SOX's corporate governance and internal control mandates diverted resources away from corporate risk-taking. We introduce to the accounting literature a new measure of R&D productivity, Research Quotient, to examine whether SOX affects R&D risk-taking and R&D productivity differently and whether the quality of the firm's governance and internal controls, pre-SOX, moderate these relations. While we find the relation between SOX and R&D risk-taking is sensitive to research design choices, we find a consistent positive relation between SOX and Research Quotient. Our evidence indicates that while firms may allocate fewer resources to R&D post-SOX, they concurrently manage their R&D investments more productively. Further, our results are robust to a difference-in-difference design and are stronger for firms with weaker governance pre-SOX.

Prior research finds that mandatory risk factor disclosures are informative to investors in that they increase their assessments of firm risk (Kravet and Muslu 2013; Campbell et al. 2014; Hope et al. 2016). However, the literature is silent as to whether these disclosures provide information about future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows and stock returns. We use the setting of taxes because it is easy to identify the specific income and cash flow statement line items to which these risks relate. We offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This finding suggests that, on average, managers are taking healthy levels of risk, as risky tax positions are rewarded with future tax savings. Second, we find that investors do not fully incorporate this relation into stock prices at the time of the risk factor disclosure. Instead, investors do not fully impound this information into stock prices until the implications of risk factor disclosures on future cash flows are more saliently disclosed the following year. Overall, our results suggest that risk factor disclosures not only provide information about the risk of the firm, but also provide information about future cash flows of the firm. On average, the outcomes from these risks taken by managers are value increasing, and investors do not fully incorporate this relation into stock prices.

We investigate whether the role of discretionary accruals in predicting future operating cash flows changes after the passage of SOX. We also examine the information content of discretionary accruals in litigious industries. We find that discretionary accruals are positively associated with future operating cash flows and that discretionary accruals become even more important to predict future cash flows during the post-SOX period. Findings also indicate that litigious industry firms impart greater information content relative to those in nonlitigious industries prior to SOX being issued and that the SOX effect on discretionary accruals is weaker for such firms as a result.

We examine the relationship between corporate governance (as measured by traditional corporate governance variables and a new measure of corporate governance, called CEO dominance) and executive compensation, pre- and post-SOX. We conceptualize CEO dominance as a measure of a CEO's power and define it as the difference between CEO pay and the next highest executive's pay divided by the CEO's pay. We argue that for traditional corporate governance variables, the inverse governance–compensation relation that exists pre-SOX will improve post-SOX. On the other hand, we expect a strong and positive CEO dominance–compensation relation to exist both pre- and post-SOX. Consistent with expectations, our results indicate that SOX has changed the relationship between CEO duality and compensation relation, but it has not changed the CEO dominance–compensation relation. This suggests that SOX regulatory reforms do not limit the ability of CEO power to obstruct traditional corporate governance mechanisms in extracting compensation-related rents.

Purpose – The purpose of this paper is to examine, in the context of movement towards a fair‐value based pension accounting standard, the value relevance of both recognized and disclosed pension accounting information.Design/methodology/approach – Using hand‐collected data from Fortune 200 firms, this study includes both recognized and disclosed pension accounting measures (aggregated and disaggregated) in multivariate regression models. The investigation employs tests of relative and incremental value relevance in both equity and credit rating evaluation contexts.Findings – Findings indicate that pension information recognized under a fair‐value‐based accounting model is no more or less value relevant than pension information recognized under the SFAS 87 model. Also, the disclosed off‐balance sheet pension amount is incrementally value relevant for determining share prices. However, it is not value relevant for the credit rating decision.Research limitations/implications – This study tests the relevance ...

This paper investigates whether the newly required recognition of the funded status of defined benefit (DB) plans under SFAS 158 is incrementally value relevant in its adoption year (2006) relative to the corresponding amounts which were previously disclosed from both equity investor and credit rating perspectives. In equity valuation models, we use a sample of 878 firms (1756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incrementally significant association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit rating tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the SFAS 158-imposed pension differential while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants in aggregate use pension-related financial statement information.

PurposeThe purpose of this paper is to examine whether the significant clustering of defined benefit (DB) pension plan freeze announcements during 2001‐2006 is motivated at least in part by accounting concerns due to the Financial Accounting Standards Board's pending adoption of Statement of Financial Accounting Standards No. 158 (SFAS 158).Design/methodology/approachUsing logistic regression models, the paper compares 147 “freeze firms” with a matched sample of firms that did not announce a DB plan freeze. Empirical models control for other DB plan motives including as a response to stricter contribution requirements under the Pension Protection Act of 2006 and improving the firm's competitive position.FindingsThe potential SFAS 158 impact is significantly associated with firms' decisions to freeze their DB plans. Firm profitability is also significantly associated with the freeze decision. However, there is no significant association between cash flow positions or pension plan contributions and the freeze decision.Research limitations/implicationsIt is possible that economic conditions adversely affecting the funded status of DB plans also motivate the freeze decision. While this study controls for the economic environment, economic factors could exacerbate the potential effect of SFAS 158.Originality/valueThis paper considers potential effects of accounting policy by examining its influence on real management actions and has consequences for a variety of stakeholders including investors, creditors, and, importantly, pension beneficiaries and workers, as DB plans represent implicit contracts between firms and their employees.

Purpose This paper provides a useful template for integrating the teaching of International Financial Reporting Standards (IFRS) into the accounting curriculum. Methodology/approach We document the evolution of the dedicated IFRS course taught at Drexel University, sharing our department’s experiences teaching it at both the undergraduate and graduate levels. Findings We identify instructional delivery options for teaching IFRS either as an independent course or as a supplement to an existing financial reporting, advanced accounting, or special topics course. We discuss the different approaches we have used to deliver such material and present our recommendations for best practices. Practical implications Recent surveys note that academia’s slow integration of IFRS into the classroom does not match the expectations of many accounting practitioners, particularly those with an international presence. With more than 100 countries around the world, including most of the emerging and major economies such as China, Brazil, and Germany, having already adopted IFRS, accounting firms expect job candidates to be conversant with international accounting standards and to be appropriately prepared in anticipation of an SEC decision to adopt IFRS. Originality/value This paper provides academics who intend to begin teaching IFRS with the essential information they need to keep their students current with global accounting trends.

This study examines how financial statement management via pension plan assumption choices, a simple mechanism through which management can manipulate financial reports, is related to corporate governance effectiveness. Based on our sample of Taiwanese listed companies, which are characterized by a high degree of ownership concentration and an emerging economy, we find that the deviation between control rights and cash flow rights, the number of board seats held by the ultimate controller, and board independence are significantly related to more aggressive expected rate of return on pension assets assumption choices. We also find that when the ultimate controller also serves as the CEO, this conflict of interest is associated with aggressive pension assumptions related to the PBO. In addition, institutional shareholders appear to play an important monitoring role, which can mitigate opportunistic pension rate assumption choices. Our findings indicate that the opacity inherent in pension accounting guidance is likely exacerbated by poor corporate governance. It informs the current debate over measurement and reporting discretion for DB pension plans specifically as well as the more general debate over managing financial statements in the presence of accounting discretion.

In this paper, we investigate whether the role of discretionary accruals in predicting future operating cash flows changes after the passage of the Sarbanes-Oxley Act (hereafter SOX). We also examine the information content of discretionary accruals in industries where litigation is more common. We find that discretionary accruals are positively associated with future operating cash flows. More importantly, we find that discretionary accruals become even more important to predict future cash flows during the post-SOX period. In addition, our findings indicate that litigious firms impart greater information content relative to non-litigious firms prior to the issuance of SOX and that the SOX effect on discretionary accruals is weaker for such firms as a result. Our results suggest that managers improve earnings quality after SOX by reducing discretionary accruals and reporting more conservatively. Our study contributes to the understanding of the impact of SOX on the use of discretionary accruals to convey firm value.

This paper investigates whether the newly required recognition of pension asset and liability amounts under SFAS 158 is incrementally value relevant in its first adoption year (2006) relative to the same amounts which were previously only disclosed to both equity investor and credit rating agency decision makers. In equity valuation models, we use a sample of 878 firms (1,756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incremental association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit ratings tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the formerly disclosed pension liability while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants use pension-related financial statement information.

This study investigates the association between pension accounting information and both firm value and credit ratings. My findings indicate that fair-value-based pension accounting information is not more evaluation relevant (often termed value relevant in prior literature relating specifically to the equity valuation decision) than pension information recognized in the financial statements under SFAS 87. In fact, I find SFAS 87 information to be more evaluation relevant in models with composite pension variables. However, once I disaggregate the variables, the performance of fair-value data improves, which suggests that the loss in evaluation relevance is due mainly to the aggregation of transitory components (i.e. actuarial and investment gains and losses) with more persistent pension cost components. Similar to previous research, incremental evaluation relevance tests of pension cost component variables suggest that the market may overvalue pension components relative to regular earnings components. Moreover, my results suggest that financial statement users, particularly credit rating analysts, focus on pension income statement information, also indicative of overvaluation and weaker risk assessments. Should the U.S. continue to shift toward a fair-value based pension accounting standard, recognizing transitory elements of pension cost separately from net income (perhaps as part of comprehensive income) can mitigate any loss in evaluation relevance.

This paper documents that the earned income of taxpayers claiming the earned income tax credit (EITC) tends to cluster within $800 intervals surrounding the kink points of the EITC benefit distribution. This clustering is especially strong for head of household taxpayers around the kink point of the phase-in range and, to a lesser extent, for married filing joint taxpayers around the kink point of the phase-out range. The results from logit regression models estimated by filing status and kink point location indicate that “secondary evasion” with respect to the EITC is more associated with the characteristics of head of household taxpayers than those of married filing joint taxpayers.