November 2009

Beneficial or Detrimental Legislation?
Responding to reports of corrupt business behavior by Enron, Tyco, and other large corporations, the U.S. Congress passed the Sarbanes-Oxley Act in 2002. Thomas Lys suggests that the legislation has fallen short of its goal of controlling illegal business practices.

Daniel Cohen

Aiyesha Dey

Thomas Lys

October 2009

Is Accounting that’s Good for General Motors Good for Detroit?
People interested in government organizations have different information needs than investors in for-profit businesses. Allan Drebin maintains that the objectives of financial reporting for business and government should also be different.

Allan Drebin

September 2009

Suspiciously Short
Stock options are often seen as a way to align both executive and shareholder interests. Yet accepted accounting principles leave management with some leeway when reporting earnings, inviting the possibility of stock price manipulation. Anup Srivastava and his colleagues discovered a surprising link between executive compensation packages and firms that miss earnings targets.

Mary Lea McAnally

Anup Srivastava

Connie D Weaver

July 2009

Banks, Bonds, and Accounting Quality
When corporations want to borrow, they have a several options. Jayanthi and Shyam Sunder show how a borrower’s financial reporting quality affects not only the choice between private and public debt markets but also the loan agreement terms.

Sreedhar Bharath

Jayanthi Sunder

Shyam Sunder

June 2009

Driven Offshore
In 2002 the U.S. Congress responded to the corporate governance crisis that followed the scandal-ridden behavior of Enron, Tyco, WorldCom, and other high-profile corporations by passing the Sarbanes-Oxley Act (SOX). The legislation set out to restore investors’ confidence in financial markets by improving corporate governance. However, in the case of at least one group of companies, the act seems to have produced unexpected results. A study co-authored by Thomas Lys (Professor of Accounting Information & Management at the Kellogg School of Management) indicates that the managements of poorly governed foreign-domiciled firms responded to the act by closing shop in the United States.

Peter Hostak

Emre Karaoglu

Thomas Lys

Yong Yang

March 2009

Reforming Credit Reform
The federal budget deficit will nearly triple to a historically unprecedented $1.2 trillion for the 2009 budget year, grim Congressional Budget Office figures reported in January. Thanks to all of the bailouts in the financial industry and the assumption of Fannie Mae and Freddie Mac, the deficit for the first four months of fiscal 2009 exceeded all of 2008.

Deborah Lucas

Marvin Phaup

December 2008

Discounted Diapers and Stockpiles of Soup
What did Enron, WorldCom, and Tyco all have in common? Accounting abuses on a grand scale and massive financial deception from the very highest levels of management. As investors lost billions of dollars, the earnings management game with its fuzzy math and earnings magic came under fire, and stronger, sweeping legislation was enacted to reform American business practices.

Craig J. Chapman

Thomas J. Steenburgh

December 2008

Seeing Profit Despite Misunderstood Pricing Strategy
Can a company improve its bottom line by pricing its products incorrectly? The answer is yes, in certain cases, according to recent research conducted by Kellogg professors Nabil Al-Najjar, Sandeep Baliga, and David Besanko.

Nabil Al-Najjar

Sandeep Baliga

David A. Besanko

September 2008

Communicating the Risks of Investments in Intellectual Property
Investors examining financial statements in the United States may encounter two primary sets of financial reporting standards. Generally Accepted Accounting Principles (GAAP) are generally used by companies based in the United States. However, firms in much of the rest of the world use International Financial Reporting Standards (IFRS). Recently, the U.S. Securities and Exchange Commission decided that foreign companies can provide U.S. investors with financial statements prepared according to IFRS without having to reconcile them to GAAP. According to research by Kellogg School of Management accounting professor Robert Magee, not only are the statements prepared using the international standards better at communicating certain information to potential investors, the use of these standards promotes better corporate decision-making about how to invest in research and development.

Robert Magee

June 2008

Bear or Bull Market Indicators?
Joseph Kennedy, the father of President John F. Kennedy and Massachusetts Senator Edward Kennedy, made his fortune by short selling. He sold securities that he had borrowed with the expectation that he would be able to buy them back for a lower price when he had to return them to the lender. The price difference became Kennedy’s profit on the transactions.

Hemang Desai

K. Ramesh

S. Ramu Thiagarajan

Bala V. Balachandran

May 2008

When Executives Sell
It's no secret that executives often sell substantial amounts of their equity holdings in their firm. This begs the question of how firms re-contract with executives after they sell these shares. Do firms simply replace the divested incentives? How does the change in executive wealth composition influence contract design? According to research by Kellogg School of Management Professor Brian Cadman, firms do not fully replenish shares divested from the firm. In addition, he finds that following executive equity sales that diversify executive wealth, firms increase the proportion of equity in annual compensation and target greater equity incentives.

Brian D. Cadman

May 2008

The Promise, Perils, and Performance of Private Equity
Private equity—the class of investments that includes venture capital investments and buyouts—accounts for a relatively small and, to date, little analyzed percentage of overall investments. Studies have shown that institutional investors—such as university endowment funds, corporate and public pension funds, private advisors, banks, and insurance companies—generally outperform individual investors. However, researchers have unearthed virtually no information on the success rates of different types of institutional investors.

Josh Lerner

Antoinette Schoar

Wan Wongsunwai

May 2008

Lobbyists Speak in Numbers
Although the Sarbanes-Oxley Act has come to be known as SOX, it has nothing to do with baseball teams or fancy foot coverings. Like sports teams, however, the law spurs heated debates because it addresses a hot-button topic: corporate accountability. Since SOX was passed in 2002, people have argued whether or not it will indeed improve operations, decrease corporate mismanagement, and thus benefit shareholders. Some insist it will prove detrimental because of high compliance costs and be ineffective in preventing corporate misconduct, and that it will drive companies to list on foreign exchanges.

Yael Hochberg

Paola Sapienza

Annette Vissing-Jørgensen

April 2008

Cost-Sharing Agreements
Most managers who work in international businesses are aware that transfer prices — that is, the prices one division of their business pays or receives for products and/or services supplied to or acquired from its other divisions — can have a large effect on their total tax bill and their overall corporate-wide profitability. These tax consequences arise because of the differences in tax rates across the jurisdictions in which the various divisions of the company do business. Most managers also know that choosing transfer prices in a way that both minimizes a firm's tax liability and receives the approval of tax authorities is among the most important tax issues that their firms face. While transfer pricing regulations (e.g., §1.482 of the U.S. Treasury regulations) try to restrict firms' choices by requiring that the prices charged for the transfers of internal products or services occur at "arm's length" or market prices, firms often have discretion in selecting transfer prices because these internally transferred products or services have no identical external, or market, counterparts.

Ronald A. Dye

December 2007

Letting Go of Voting Rights May Be a Good Investment Strategy
Dividends paid by a dual class stock are at least as informative for dual-class firms as for single-class firms, if not more so. Earnings, in contrast, are less informative for dual-class firms than for single-class firms. Reduced management accountability, which both accompanies and stems from the separation of cash flow rights from voting rights in dual-class firms, is responsible for the reduced usefulness of earnings information.

Jennifer Francis

Katherine Schipper

Linda Vincent

October 2007

Softening the Blow of Bad News
Chief financial officers and investors focus on earnings per share more than any other single financial figure. Researchers in accounting have long confirmed that the price of a company's stock is punished when a company's earnings fall short of forecasted earnings or, in the lingo, the company has a “negative earnings surprise.” Common wisdom, confirmed by empirical evidence, suggests that negative earnings surprises are punished proportionately more than positive earnings surprises are rewarded. A recent survey (Graham et al., 2005) confirms that this is indeed the perception among CFOs and summarizes several strategies mentioned by CFOs to temper the market's reaction to bad news. Among them, the company may release news about leading indicators that signal the prospect of better future earnings.

Benjamin Lansford

September 2007

Are Large CEO Severance Packages Justified?
Research supports three motivations behind executive severance agreements: to encourage risk-taking, to provide job insurance, and to compensate CEOs in the instance of confidentiality requirements. While the question of whether or not CEO severance packages are excessive will certainly remain controversial, it is clear that the existence of substantial CEO severance packages has a theoretical foundation.

Thomas Lys

Tjomme O. Rusticus

Ewa Sletten

August 2007

Mandatory or Voluntary Corporate Disclosure?
“Sunlight is said to be the best of disinfectants,” wrote Supreme Court Justice Louis Brandeis on the importance of openness and transparency in society. Such sunlight can be a pretty profitable business strategy, too: companies who are forthcoming with information about the quality of the products they sell are rewarded with superior profits from appreciative customers. But Kellogg faculty Michael Fishman, the Norman Strunk Distinguished Professor of Financial Institutions, and Kathleen Hagerty, Senior Associate Dean for Faculty and Research, argue that secrecy sometimes pays, too. Their work in The Journal of Law, Economics, & Organization analyzes firms’ disclosure decisions taking account of the fact that not all consumers will be able to make sense of the information disclosed.

Michael J. Fishman

Kathleen Hagerty

June 2007

Celebrity Analyst Influence on the Stock Market
There is no question the stock market has had its ups and downs, but have you ever wondered what drives people to pull their money out or pour money into a company? Certainly investors pay attention to analyst forecasts, but which analysts are they paying the closest attention to? Beverly Walther (Kellogg School's Department of Accounting and Information Management), Sarah E. Bonner (University of Southern California) and Artur Hugon (Georgia State University) explored whether investors react stronger to “celebrity” analysts and why.

Sarah E. Bonner

Artur Hugon

Beverly Walther

May 2007

Savvy Financial Analysts Adapt to Regulation 'Fair Disclosure'
The prediction was dire: if financial analysts ceased to get preferential access to information from the companies they followed, the quality of their forecasts would suffer and cause volatility in the markets. That was the claim made by financial analysts in October 2000 when the Securities and Exchange Commission passed Regulation Fair Disclosure (Reg FD), restricting firms from disclosing nonpublic information to preferred analysts and institutional shareholders. Specifically, Reg FD required that firms conduct investor communications in such a way that all investors received material information at the same time.

Partha Mohanram

Shyam Sunder

April 2007

Bucks Not a Matter of Luck
It's a perennial debate among investors and financial professionals: Should greater market returns be attributed to superior stock-picking acumen or to mere luck? Research by Kellogg School Associate Professor of Accounting Beverly Walther and two co-authors considers the question with respect to sell-side analysts — professionals employed by brokerage houses to manage accounts and create publicly available research often relied upon by investors.

Michael B. Mikhail

Beverly Walther

Richard H. Willis