Faculty & Research

Valeri Nikolaev

Associate Professor of Accounting

Phone :
1-773-834-4116
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Valeri Nikolaev studies the intersection of financial reporting and corporate finance. His current research focuses on understanding the quality of accounting information and on how contracting needs shape financial reporting. His broad interests include the role of accounting in credit markets, corporate governance, transparency, and earnings management. His dissertation “Debt Covenants and Accounting Conservatism” was published in the Journal of Accounting Research. His other papers include "Capital versus Performance Covenants in Debt Contracts" with Hans Christensen, published in the Journal of Accounting Research; "Deflating Profitability" with Ray Ball, Joseph Gerakos, and Juhani Linnainmaa published in Journal of Financial Economics; "On Estimating Conditional Conservatism" with Ray Ball and S.P. Kothari published in European Accounting Review; and “Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?” with Hans Christensen published in The Review of Accounting Studies.

Nikolaev is on editorial boards of Journal of Accounting Research and European Accounting Review and also serves as an ad hoc reviewer for the Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, Contemporary Accounting Research, Journal of Accounting and Public Policy, and European Accounting Review. He has made presentations across the globe, including at Maastricht University, University of Antwerp, Catholic University of Leuven, Free University of Amsterdam, as well as nationally at Emory University, MIT, Northwestern University, NYU, Stanford University, University of Pennsylvania, UCLA, University of North Carolina, and University of Michigan.

Born in Belarus, Nikolaev lived and studied in the Netherlands and Czech Republic before joining the University of Chicago. He earned his PhD in accounting cum laude in 2007 from the Center for Economic Research at Tilburg University in The Netherlands. His research was supported by grants from the Netherlands Organization for Scientific Research (NWO). He earned his master's degree in economics in 2002 from the Center for Economic Research and Graduate Education at Charles University in Prague. His bachelor's degree in economics with distinction was earned in 1999 from the Minsk’s Institute of Management in Belarus. He is fluent in English and Russian.

 

2014 - 2015 Course Schedule

Number Name Quarter
30000 Financial Accounting 2015 (Winter)

2015 - 2016 Course Schedule

Number Name Quarter
30000 Financial Accounting 2016 (Winter)

Research Activities

Role of accounting information in contracts; transparency and quality of financial reporting; voluntary disclosure; accounting regulation.

With H. Christensen, “Capital versus Performance Covenants in Debt Contracts,” Journal of Accounting Research 50, 75-116 (2012).

“Debt Covenants and Accounting Conservatism,” Journal of Accounting Research 48, 51-89 (2010).

With L. van Lent, “The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy,” European Accounting Review 14, 677-721 (2005).

For a listing of research publications please visit ’s university library listing page.

REVISION: Scope for Renegotiation in Private Debt Contracts
Date Posted: Apr  30, 2015
Frequent contract renegotiation is a puzzling phenomenon. I attempt to shed more light on this subject by examining the economic determinants and information content of the renegotiations of financial contracts. My sample approximates the population of material private debt contract renegotiations in the U.S. I find that the frequency of renegotiation has a rich set of cross-sectional determinants, including exogenous uncertainty and investment opportunities. One of the strongest determinants of renegotiation frequency is financing frictions (agency and information problems). Because the demand for information increases with such frictions, the evidence is consistent with renegotiation being an integral part of the monitoring process carried out by private lenders. In line with this hypothesis, I also find that the extent to which lenders rely on different monitoring mechanisms is positively associated with renegotiation frequency. Additionally, renegotiations transmit new ...

New: Disproportional Control Rights and the Governance Role of Debt
Date Posted: Apr  29, 2015
We examine the governance role of debt in the context of US-based dual class ownership structures. We hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders. We document that dual class firms have higher leverage and a greater propensity to issue private debt; they also more frequently use cash sweeps and performance-based covenants. Dual class firms with greater agency conflicts and a greater need to access the capital market appear to rely more extensively on debt. These findings are consistent with controlling insiders bonding against the agency costs associated with dual class ownership. The governance role of debt is further corroborated by the valuation effect of debt for dual class companies. Private debt issuances trigger greater positive market reactions to the inferior dual class stock in relation to both the superior dual class stock and a matched sample of single class firms. Further, leverage ...

REVISION: Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns
Date Posted: Apr  18, 2015
Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research finds that expected returns increase in firm profitability. However, firms with high accruals generate lower returns than firms with low accruals, and this "accrual anomaly" strengthens when evaluated using asset pricing models that include a profitability factor. We show that a cash-based operating profitability measure (that excludes accruals) outperforms other measures of profitability (that include accruals) and subsumes accruals in predicting the cross section of average returns. Surprisingly, an investor can increase a strategy's Sharpe ratio more by adding just a cash-based operating profitability factor to his investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.

REVISION: Identifying Accounting Quality
Date Posted: Dec  02, 2014
I offer a parsimonious model of the performance measurement function of accounting accruals and develop an econometric framework that permits the identification of accounting quality. The identification strategy relies on a new way of characterizing the dynamics of accounting accruals in terms of performance measurement and the accounting noise components. The characterization is intuitive and captures the institutional characteristics of accrual accounting. The identifying assumptions derive from the accounting property that both earnings and cash flows are noisy measures of the same underlying performance. My approach relies on GMM to discriminate between the accounting error and the portion of accruals that captures the underlying economic performance. The proposed framework also offers a new way of testing for the presence of earnings management.

REVISION: Deflating Profitability
Date Posted: Oct  09, 2014
Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013) concludes that it outperforms other measures of profitability such as bottom-line net income, cash flows, and dividends. One potential explanation for the measure’s predictive ability is that its numerator—gross profit—is a “cleaner” measure of economic profitability. An alternative explanation lies in the measure’s deflator. We find that net income equals gross profit in predictive power when they have consistent deflators. Deflating profit by the book value of total assets results in a variable that is the product of profitability and the ratio of the market value of equity to the book value of total assets, which is priced. We then construct an alternative measure of profitability, operating profitability, which better matches current expenses with current revenue. This measure exhibits a far stronger link with expected returns than either net income or gross profit. ...

REVISION: Debt Contracts and the Need for Mandatory Accounting Changes
Date Posted: Aug  09, 2014
We describe a mechanism through which accounting standard setters can facilitate the contracting process and improve economic resource allocation. Contracts cannot anticipate all future contingencies and, therefore, cannot specify optimal accounting treatments or necessary adjustments to GAAP in many eventualities. This contractual incompleteness opens the scope for opportunistic behavior in unanticipated states, which, being rationally anticipated at contract initiation, distorts the allocation of economic resources. Standard setters can alleviate the friction by acting as arbiters that complete GAAP ex post. We empirically test whether mandatory GAAP changes play an efficiency role by examining the revealed preferences for including vs. excluding mandatory GAAP changes in debt contracts. We find evidence consistent with standard setters playing such a role, but less so over time. Overall, the evidence suggests that there is an economic rationale for standard setting in debt ...

New: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Nov  28, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks ("news"), and how it depends on various market, political, and institutional variables. Studies typically assume the Basu [1997] asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure's validity, in the context of a model with accounting income incorporating different types of information with different lags, and with noise. We demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments, such as the length of the firm's operating and investment cycles, and its degree of diversification. We particularly examine one characteristic, the extent to which "unbooked" information (such as revised expectations about rents and growth ...

New: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Aug  02, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the co

REVISION: Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Date Posted: Jun  07, 2013
The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consist

REVISION: Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Date Posted: Feb  27, 2013
The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is consist

REVISION: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Jan  10, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the co

REVISION: On Estimating Conditional Conservatism
Date Posted: Dec  03, 2012
The concept of conditional conservatism has provided new insight into financial reporting and has stimulated considerable research since Basu (1997) developed it. While the concept encapsulated in the adage “anticipate no profits but anticipate all losses” is reasonably clear, estimating it is the subject of some discussion, notably by Dietrich et al. (2007), Givoly et al. (2007), and Ball, Kothari and Nikolaev (2011). Recently, Patatoukas and Thomas (2011) report important evidence of possi

REVISION: The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy
Date Posted: Jan  10, 2012
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm disclosu

REVISION: Capital Versus Performance Covenants in Debt Contracts
Date Posted: Sep  26, 2011
Building on contracting theory, we argue that financial covenants control the conflicts of interest between lenders and borrowers via two different mechanisms. Capital covenants control agency problems by aligning debtholder-shareholder interests. Performance covenants serve as tripwires that limit agency problems via the transfer of control to lenders in states where the value of their claim is at risk. Companies trade off these mechanisms. Capital covenants impose costly restrictions on capit

REVISION: Debt Covenants and Accounting Conservatism
Date Posted: Aug  29, 2010
Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision-making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers’ abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if th

New: Disproportional Control Rights and the Bonding Role of Debt
Date Posted: Dec  04, 2009
We examine how firms’ capital structure choices vary with the presence of dual-class ownership and the degree of disproportional control associated with it. We document that, compared to a propensity-matched sample of single-class firms, dual-class firms have higher leverage, greater propensity to issue private debt, more long-term debt, and greater reliance on financial covenants. Within our dual-class sample, the use of debt financing increases with the degree of disproportional control via vo

REVISION: Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly
Date Posted: Aug  18, 2006
We show that the agency theory of overvalued equity (see Jensen, 2005, and others) rather than investors' fixation on accruals explains the accrual anomaly, i.e., abnormal returns to an accrual trading strategy (see Sloan, 1996). Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation. Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms. In

The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate disclosure Policy
Date Posted: Jun  02, 2005
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm disclosu