PUBLICATIONS
Tradeoffs in Income Statement and Balance Sheet Preferences: Evidence from Acquirers’ Goodwill Valuations (Forthcoming)
Contemporary Accounting Research
Co-authored with Lisa Koonce and Brian White
Academic and anecdotal evidence suggests that acquirers prefer to record higher goodwill values in business combinations so they can benefit from higher post-acquisition earnings when goodwill is only tested for impairment. We conduct multiple experiments to test the hypothesis that this perspective ignores two costs that acquirers may also consider. Specifically, goodwill generally carries negative market perceptions and is associated with a risk of costly future impairment losses. Our results indicate that consideration of these two costs offsets acquirers’ preferences for the earnings benefit of upwardly biasing goodwill. We also document that when there is no earnings benefit from higher goodwill valuations—namely, in a setting where goodwill is amortized to expense—we observe acquirers downwardly biasing goodwill values. Overall, our findings add nuance to our understanding of managerial discretion in the context of business combinations.
The SEC’s September Spike: Regulatory Inconsistency within the Fiscal Year (2024)
Journal of Accounting and Economics
Co-authored with Dain Donelson and Matt Kubic
We examine whether performance reporting leads to inconsistent enforcement at the Securities and Exchange Commission (SEC). In a sample of over 13,000 SEC enforcement actions, we show that SEC staff respond to performance-reporting pressures and file more enforcement actions in September, the final month of the SEC’s fiscal year, than in any other month. The increase in case volume in September is not fully explained by staff filing more procedural cases or accelerating case filings. Instead, SEC staff pursue less complex cases and agree to more lenient financial and non-financial sanctions to increase case volume in September. We attempt to rule out alternative explanations for our results, including natural SEC workflow and resource constraints. Overall, our findings suggest that performance reporting creates agency conflicts that lead to regulatory inconsistency within the fiscal year.
Experience with Non-GAAP Earnings and Investors’ Pricing of Exclusions (2024)
The Accounting Review
Co-authored with Sarah McVay and Edgar Rodriguez-Vazquez
Although the increase in non-GAAP earnings metrics has drawn unfavorable attention from regulators and standard setters, it can provide valuable experience for investors. We investigate whether experience with non-GAAP earnings metrics influences investors’ pricing of non-GAAP exclusions. We measure experience as the frequency with which managers or analysts provide non-GAAP earnings over the prior eight quarters and find that experience aids in the pricing of non-GAAP exclusions. Absent prior experience with non-GAAP earnings metrics, investors appear to overestimate the persistence of exclusions at the earnings announcement, which corrects in the following months. Cross-sectional tests suggest that experience facilitates investors’ pricing of non-GAAP exclusions by reducing their information processing costs.
Regulator Continuity and Decision-Making Quality: Evidence from SEC Comment Letters (2023)
The Accounting Review
Co-authored with Matt Kubic
Staff at the U.S. Securities and Exchange Commission (SEC) conduct recurring reviews of firms’ filings to deter misconduct and facilitate investor access to high-quality information. We identify the names of SEC staff who work on a comment letter and examine whether their prior involvement (i.e., continuity) is associated with comment letter quality. Our results are consistent with continuity leading to lower quality comment letters. Continuity is associated with fewer substantive comments, agreed-upon disclosure changes, and greater similarity between consecutive comment letter reviews. These results are consistent with continuity increasing staffs’ tendency to focus on familiar issues and overlook other areas of potential deficiencies. Time, changes in firms’ operations, and increasing staffs’ feelings of accountability can mitigate the negative effect of continuity on comment letter quality. Our study suggests benefits to a fresh perspective in regulatory monitoring.
The Need to Validate Exogenous Shocks: Shareholder Derivative Litigation, Universal Demand Laws and Financial Reporting Decisions (2022)
Journal of Accounting and Economics
Co-authored with Dain Donelson, Laura Kettell, and John McInnis
Several recent studies argue that the adoption of universal demand (UD) laws represent an exogenous decline in litigation risk by increasing the procedural hurdles associated with shareholder derivative litigation. This study examines how UD laws affect the incidence of derivative litigation risk and related decisions. We show that the adoption of UD laws had no meaningful impact on derivative litigation from 1996-2015. We also find no evidence that UD laws affect aggressive accounting, voluntary disclosure, executive compensation, or corporate governance decisions. Collectively, our findings cast doubt on the validity of using UD laws as an exogenous shock to litigation risk.
Firm-Manager Matching and the Tradeoffs of CFO Accounting Expertise (2021)
Management Science
Co-authored with Darren Bernard, Weili Ge, and Dawn Matsumoto
We present evidence that, while individuals with accounting expertise bring key skills to financial reporting responsibilities of the CFO position, they tend to lack educational and career experiences relevant to non-accounting responsibilities (e.g., operations and strategy). Assuming boards’ perceptions of CFO accounting expertise are correct on average, we provide evidence of tradeoffs of CFO accounting expertise by examining how differences in CFO backgrounds shape executive employment decisions. Firms with greater demand for non-accounting expertise are less likely to hire an accounting expert CFO, consistent with ex ante firm-manager matching. Ex post, significant declines in firm-manager fit after appointment predict CFO turnover and other compensating changes in the composition of the senior management team. Accounting expert CFOs are also less likely to become CEOs, suggesting that CFO experience does not fully mitigate these tradeoffs. Collectively, the results suggest important tradeoffs inherent to CFO accounting expertise that shape the structure of the senior management team.
The Changing Implications of Research and Development Expenditures for Future Profitability (2020)
Review of Accounting Studies
Co-authored with Asher Curtis and Sarah McVay
We document strong evidence of a declining relation between R&D and future
profitability, which coincides with a number of important economic changes including a
significant increase in R&D spending. We identify several contributors to this decline, including
changes in the nature and riskiness of R&D projects and a shift in the types of firms undertaking
R&D in our sample (e.g., successive cohorts, STEM versus non-STEM firms). We also
demonstrate variation in the implications of R&D for future profitability consistent with
diminishing marginal returns to R&D investments. Overall, our evidence suggests that in earlier
time periods, investments in R&D offered high returns in U.S. public firms, but that in more
recent times these returns have stabilized at lower levels. Our study offers important insights for
financial statement users, managers, and researchers.
Historical Cost Measurement and the Use of DuPont Analysis by Market Participants (2015)
Review of Accounting Studies
Co-authored with Asher Curtis and Melissa Lewis-Western
We investigate whether historical cost measurement of assets lowers the usefulness of DuPont analysis for investors. Because firms report assets at modified historical cost under US GAAP, accounting ratios can be biased upward when assets have appreciated. Thus, variation in asset turnover, which is the DuPont ratio most affected by asset measurement, can be due to both economic forces and measurement effects. We assess the extent of measurement effects using the average age of a firm’s assets and find that asset turnover ratios are higher and more persistent for firms with older assets. Forecast errors of asset turnover are associated with the change in asset age, and these forecast errors are positively associated with contemporaneous and future returns. Our results are weaker in non-US samples, in part reflecting deflation and upward revaluations, consistent with our US results capturing biased asset turnover ratios due to historical cost measurement.