Anastasia A Zakolyukina

Bridging Theory and Empirical Research in Accounting
Date Posted:Wed, 03 Apr 2024 15:07:44 -0500
Formal theory and empirical research are complementary in building and advancing the body of knowledge in accounting in order to understand real-world phenomena. We offer thoughts on opportunities for empiricists and theorists to collaborate, build on each other?s work, and iterate over models and data to make progress. For empiricists, we see room for more descriptive work, more experimental work on testing formal theories, and more work on quantifying theoretical parameters. For theorists, we see room for theories explicitly tied to descriptive evidence, new theories on individuals? decision-making in a data-rich world, theories focused on accounting institutions and measurement issues, and richer theories for guiding empirical work and providing practical insights. We also encourage explicitly combining formal theory and empirical models by having both in one paper and by structural estimation.

Internet Appendix for "How Important is Corporate Governance? Evidence from Machine Learning"
Date Posted:Tue, 04 Apr 2023 12:41:55 -0500
Internet Appendix for "How important is corporate governance? Evidence from machine learning".

How Important Is Corporate Governance? Evidence from Machine Learning
Date Posted:Thu, 29 Sep 2022 15:32:55 -0500
We use machine learning to assess the predictive ability of over a hundred corporate governance features for firm outcomes, including financial-statement restatements, class-action lawsuits, business failures, operating performance, firm value, stock returns, and credit ratings. We discover that adding corporate governance features does not improve the predictive accuracy of models over that of models constructed using only firm characteristics. Our results confirm the challenges in constructing measures of corporate governance with predictive value suggested in prior research. These results also raise doubts about the existence of strong causal effects of corporate governance on firm outcomes studied in prior research.

REVISION: Information versus Investment
Date Posted:Tue, 02 Aug 2022 08:52:03 -0500
We quantify the real implications of trade-offs between firm information disclosure and longterm investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.

REVISION: Non-GAAP Reporting and Investment
Date Posted:Mon, 23 May 2022 14:03:55 -0500
When investors use GAAP earnings to value firms’ shares, managers’ investments into intangible assets become sensitive to transitory earnings. Non-GAAP earnings can remove these transitory earnings, and thus improve investment efficiency, but also introduce opportunistic bias, and thus hide inefficient investment. We quantify this trade-off by estimating a dynamic model in which a manager makes investment and non-GAAP disclosure decisions. We find the manager’s ability to bias non-GAAP earnings creates inefficient investment choices and destroys firm value. We estimate the magnitude of overinvestment at 6% and the corresponding loss in the average firm value at just under 1%.

REVISION: Information versus Investment
Date Posted:Mon, 23 May 2022 14:03:55 -0500
We quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.

Information Versus Investment
Date Posted:Mon, 10 Jan 2022 06:27:39 -0600
We quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.

REVISION: Information versus Investment
Date Posted:Tue, 04 Jan 2022 09:34:50 -0600
We quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.

Are Narcissistic CEOs All That Bad?
Date Posted:Mon, 11 Oct 2021 02:38:54 -0500
The role that a CEO?s personality plays in corporate outcomes is a topic of considerable interest, particularly the relation between narcissistic CEOs and performance. Common perception is that CEO narcissism is highly prevalent, and considerable research suggests that narcissism is associated with worse outcomes. The majority of studies, however, are based on ?unobtrusive? methods that do not directly measure the CEO?s personality through a validated questionnaire but instead on indirect evidence thought to be indicative of narcissism.

In this Closer Look, we test some basic assumptions about the relation between narcissism and corporate outcomes using a sample of CEOs whose personality is formally assessed by long-time directors who know and have worked closely with that CEO. While most of the research into narcissism and outcomes is negative, we find unexpected associations.

We ask:
? Would the results of existing literature be replicated if CEOs were subject to a valid personality evaluation?
? What contribution does a CEO?s personality have to outcomes, and how does it manifest itself through strategy, risk, and culture?
? How much discussion does the board have about the personality of their CEO? What actions do they take when they identify personal tendencies that might be of concern?
? Are narcissists better at corporate ?window dressing? than their less narcissistic peers?

Non-Answers During Conference Calls
Date Posted:Mon, 20 Sep 2021 06:36:43 -0500
We construct a novel measure of disclosure choice by firms. Our measure is computed using linguistic analysis of conference calls to identify whether a manager's response to an analyst question is a ?non-answer.? Using our measure, about 11% of analyst questions elicit non-answers from managers, a rate that is stable over time and similar across industries. A useful feature of our measure is that it enables an examination of disclosure choice within a call. Analyst questions with a negative tone, greater uncertainty, greater complexity, or requests for greater detail are more likely to trigger non-answers. We find performance-related questions tend to be associated with non-answers, and this association is weaker when performance news is favorable. We also find analyst questions about proprietary information are associated with non-answers, and this association is stronger when firm competition is more intense.

REVISION: What Is CEO Overconfidence? Evidence from Executive Assessments
Date Posted:Thu, 24 Jun 2021 05:59:59 -0500
We use detailed assessments of CEO personalities to explore the nature of CEO overconfidence
as it is commonly measured. Longholder, the option-based measure of CEO overconfidence introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures, is significantly related to several specific characteristics that are associated with overconfident individuals as well as individuals of lower ability. Similar relations hold for overconfidence measures based on CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. After controlling for ability and other characteristics, Longholder CEOs’ investments remain significantly more sensitive to cash flows. These results suggest that overconfidence, as measured by Longholder, is correlated with lower ability but still reflects empirically distinct aspects of overconfidence.

REVISION: Non-GAAP Reporting and Investment
Date Posted:Fri, 18 Jun 2021 08:47:30 -0500
Managers’ incentives depend on their firms’ stock prices, which are often determined by investors using earnings. When investors use GAAP earnings, managers’ investment decisions into internally generated intangible assets become sensitive to the transitory items in these earnings. Non-GAAP earnings can remove these transitory items, and thus improve investment efficiency, but also introduce opportunistic bias, and thus hide inefficient investment. We quantify this trade-off by estimating a dynamic model in which a manager makes investment and non-GAAP disclosure decisions and where investors rationally anticipate his incentives. We find the manager’s ability to distort non-GAAP earnings creates inefficient investment choices and destroys firm value. We estimate the magnitude of the loss in the average firm value at just under 1%.

REVISION: Non-answers during Conference Calls
Date Posted:Thu, 06 May 2021 09:42:02 -0500
We construct a novel measure of disclosure choice by firms. Our measure is computed using linguistic analysis of conference calls to identify whether a manager’s response to an analyst question is a “non-answer.” Using our measure, about 11% of analyst questions elicit non-answers from managers, a rate that is stable over time and similar across industries. A useful feature of our measure is that it enables an examination of disclosure choice within a call. Analyst questions with a negative tone, greater uncertainty, greater complexity, or requests for greater detail are more likely to trigger non-answers. We find performance-related questions tend to be associated with non-answers, and this association is weaker when performance news is favorable. We also find analyst questions about proprietary information are associated with non-answers, and this association is stronger when firm competition is more intense.

REVISION: Non-answers during Conference Calls
Date Posted:Fri, 12 Feb 2021 10:44:58 -0600
We construct a novel measure of disclosure choice by firms. Our measure is computed using linguistic analysis of conference calls to identify whether a manager’s response to an analyst question is a “non-answer.” Using our measure, about 11% of analyst questions elicit non-answers from managers, a rate that is stable over time and similar across industries. A useful feature of our measure is that it enables an examination of disclosure choice within a call. Analyst questions with a negative tone, greater uncertainty, greater complexity, or requests for greater detail are more likely to trigger non-answers. We find performance-related questions tend to be associated with non-answers, and this association is weaker when performance news is favorable. We also find analyst questions about proprietary information are associated with non-answers, and this association is stronger when firm competition is more intense.

REVISION: Non-GAAP Reporting and Investment
Date Posted:Mon, 08 Feb 2021 07:44:02 -0600
When managers care about their firms’ stock prices, their investment decisions become sensitive to transitory items in GAAP earnings. Non-GAAP earnings can remove these transitory items, and thus improve investment efficiency, but also introduce opportunistic bias, and thus hide inefficient investment. We quantify this trade-off by estimating a dynamic model in which a manager makes investment and non-GAAP disclosure decisions, and where investors rationally anticipate his incentives. We find the manager’s ability to distort non-GAAP earnings creates inefficient investment choices and destroys firm value.We estimate the magnitude of the loss in the average firm value at just under 1%.

What is CEO Overconfidence? Evidence from Executive Assessments
Date Posted:Mon, 28 Sep 2020 13:41:11 -0500
We use detailed assessments of CEO personalities to explore the option-based measure of CEO overconfidence, Longholder, introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures. Longholder is significantly related to several specific characteristics and is negatively related to general ability. These relations also hold for overconfidence measures derived from CEOs? earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. Overall, Longholder CEOs have many of the same characteristics traditionally associated with overconfident individuals, including lower general ability, supporting the interpretation of this measure as reflecting overconfidence.

What Is CEO Overconfidence? Evidence from Executive Assessments
Date Posted:Thu, 27 Aug 2020 16:33:59 -0500
We use detailed assessments of CEO personalities to explore the nature of CEO overconfidence
as it is commonly measured. Longholder, the option-based measure of CEO overconfidence introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures, is significantly related to several specific characteristics that are associated with overconfident individuals as well as individuals of lower ability. Similar relations hold for overconfidence measures based on CEOs? earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. After controlling for ability and other characteristics, Longholder CEOs? investments remain significantly more sensitive to cash flows. These results suggest that overconfidence, as measured by Longholder, is correlated with lower ability but still reflects empirically distinct aspects of overconfidence.

REVISION: What Is CEO Overconfidence? Evidence from Executive Assessments
Date Posted:Thu, 27 Aug 2020 07:34:00 -0500
We use detailed assessments of CEO personalities to explore the option-based measure of CEO overconfidence, Longholder, introduced by Malmendier and Tate (2005a) and widely used in the behavioral corporate finance and economics literatures. Longholder is significantly related to several specific characteristics and is negatively related to general ability. These relations also hold for overconfidence measures derived from CEOs’ earnings guidance. Investment-cash flow sensitivities are larger for both Longholder and less able CEOs. Overall, Longholder CEOs have many of the same characteristics traditionally associated with overconfident individuals, including lower general ability, supporting the interpretation of this measure as reflecting overconfidence.

REVISION: Information versus Investment
Date Posted:Fri, 31 Jul 2020 03:36:37 -0500
The accuracy of firm information disclosures and the efficiency of long-term investment both play crucial roles in the economy and capital markets. We estimate a dynamic model that captures a trade-off between these two goals that arises when managers confront realistic incentives to misreport financial statements and distort their real investment choices. Managers in our model distort reported profits by 6.7% of sales on average. Counterfactual analysis reveals that while eliminating this misreporting through disclosure regulation is possible, it incentivizes managers to distort real investment, which results in a 1% drop in average firm value, reflecting a quantitatively meaningfully tradeoff.

REVISION: Information versus Investment
Date Posted:Thu, 30 Jul 2020 03:23:34 -0500
The accuracy of firm information disclosures and the efficiency of long-term investment both play crucial roles in the economy and capital markets. We estimate a dynamic model that captures a trade-off between these two goals that arises when managers confront realistic incentives to misreport financial statements and distort their real investment choices. Managers in our model distort reported profits by 6.7% of sales on average. Counterfactual analysis reveals that while eliminating this misreporting through disclosure regulation is possible, it incentivizes managers to distort real investment, which results in a 1% drop in average firm value, reflecting a quantitatively meaningfully tradeoff.

REVISION: Non-answers during Conference Calls
Date Posted:Fri, 24 Apr 2020 12:03:55 -0500
We construct a novel measure of disclosure choice by firms. Our measure is computed using linguistic analysis of conference calls to identify whether a manager’s response to an analyst question is a “non-answer.” Using our measure, about 11% of analyst questions elicit non-answers from managers, a rate that is stable over time and similar across industries. A useful feature of our measure is that it enables an examination of disclosure choice within a call. Analyst questions with a negative tone, greater uncertainty, greater complexity, or requests for greater detail are more likely to trigger non-answers. We find that performance-related questions tend to be associated with non-answers, and this association is weaker when performance news is favorable. We also find analyst questions about proprietary information are associated with non-answers, and this association is stronger when firm competition is more intense.

Non-GAAP Reporting and Investment
Date Posted:Fri, 20 Dec 2019 21:36:05 -0600
The wide-spread reporting of non-GAAP earnings suggests efficiency gains from doing so. By estimating a dynamic investment model, we examine the real implications of investors using both GAAP and non-GAAP earnings to value firms. When investors use the firm?s GAAP earnings only, the firm?s manager?who cares about current stock prices?underinvests, and his investment is sensitive to transitory earnings. Non-GAAP earnings can improve investment efficiency by adjusting for these transitory earnings, but can also hide inefficient investment by introducing opportunistic bias. Although non-GAAP earnings induce overinvestment, they dominate GAAP-only reporting. Counterfactual analysis reveals supplementing GAAP earnings with biased non-GAAP earnings increases firm value by 3.4% relative to GAAP-only reporting. Precluding bias reduces overinvestment and further increases firm value by 1%.

REVISION: Non-GAAP Reporting and Investment
Date Posted:Fri, 20 Dec 2019 11:36:41 -0600
GAAP earnings often contain transitory items that can distort firms’ investment decisions when a manager cares about his firm’s stock price. Non-GAAP earnings can alleviate investment distortions because they allow the manager to remove transitory items. In addition to removing transitory items, the manager can also opportunistically bias non-GAAP earnings. We quantify this trade-off by estimating a dynamic model in which the manager makes an investment and a non-GAAP disclosure decision, and where the stock market rationally anticipates the manager’s incentives. The estimated parameters suggest managers care about stock prices significantly more than fundamentals. In the estimated model, investment and non-GAAP disclosure serve as complements. Because of that, relative to a scenario where managers can only provide GAAP earnings, managers who can provide non-GAAP earnings increase investment, but do so opportunistically. We find that permitting bias in non-GAAP earnings creates ...

REVISION: Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Date Posted:Thu, 17 Oct 2019 06:23:16 -0500
In this paper, we use accounting fundamentals to measure systematic risk of distress. Our main testable prediction—that this risk increases with the probability of recessionary failure, P(R|F)—is based on a stylized model that guides our empirical analyses. We first apply the lasso method to select accounting fundamentals that can be combined into P(R|F) estimates. We then use the obtained estimates in asset-pricing tests. This approach successfully extracts systematic risk information from accounting data—we document a significant positive premium associated with P(R|F) estimates. The premium covaries with the news about the business cycle and aggregate failure rates. Additional tests underscore the importance of the “structure” imposed through recessionary-failure-probability estimation. The “agnostic” return predictor that relies only on past correlations between the same fundamental variables and returns exhibits markedly different properties.

REVISION: Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Date Posted:Fri, 14 Jun 2019 04:02:19 -0500
In this paper, we use accounting fundamentals to measure systematic risk of distress.
Our main testable prediction—that this risk increases with the probability of recessionary failure, P(R|F)—is based on a stylized model that guides our empirical analyses. We first apply the lasso method to select accounting fundamentals that can be combined into P(R|F) estimates. We then use the obtained estimates in asset-pricing tests. This approach successfully extracts systematic risk information from accounting data—we document a significant positive premium associated with P(R|F) estimates. The premium covaries with the news about the business cycle and aggregate failure rates. Additional tests underscore the importance of the “structure” imposed through recessionary-failure-probability estimation. The “agnostic” return predictor that relies only on past correlations between the same fundamental variables and returns exhibits markedly different properties.

REVISION: Non-answers during Conference Calls
Date Posted:Thu, 31 Jan 2019 10:07:23 -0600
We construct a novel measure of disclosure choice by firms. Our measure uses linguistic analysis of conference calls to flag a manager’s response as providing an explicit “non-answer” to an analyst’s question. Using our measure, about 11% of questions elicit non-answers, a rate that is stable over time and similar across industries. Consistent with extant theory, we find firms are less willing to disclose when competition is more intense, but more willing to disclose prior to raising capital. An important feature of our measure is that it yields several observations for each firm-quarter, which allows us to examine disclosure choice within a call as a function of properties of the question. We find product-related questions are associated with non-answers, and this association is stronger when competition is more intense, suggesting product-related information has higher proprietary cost. While firms are more forthcoming prior to raising capital, the within-call analyses for ...

REVISION: Non-answers during Conference Calls
Date Posted:Wed, 09 Jan 2019 07:43:23 -0600
We construct a novel measure of disclosure choice by firms. Our measure uses linguistic analysis of conference calls to flag a manager’s response as providing an explicit “non-answer” to an analyst’s question. Using our measure, about 11% of questions elicit non-answers, a rate that is stable over time and similar across industries. Consistent with extant theory, we find firms are less willing to disclose when competition is more intense, but more willing to disclose prior to raising capital. An important feature of our measure is that it yields several observations for each firm-quarter, which allows us to examine disclosure choice within a call as a function of properties of the question. We find product-related questions are associated with non-answers, and this association is stronger when competition is more intense, suggesting product-related information has higher proprietary cost. While firms are more forthcoming prior to raising capital, the within-call analyses for ...

REVISION: Information versus Investment
Date Posted:Wed, 09 Jan 2019 06:21:08 -0600
Firms' efficient long-term investment and accurate reporting of information about performance both serve crucial roles in the economy and capital markets. We argue quantitatively that the two goals are in direct conflict in the presence of realistic manager compensation contracts, which provide managers with incentives both to misreport financial statements and to distort their real investment choices. We build a dynamic structural model rich enough to capture a natural tradeoff between investment and information. The model matches a range of observable moments constructed from data on firm investment and periods of detected misreporting by firms. Counterfactuals show that regulations preventing misreporting do in fact incentivize managers to distort real investment, whose volatility rises. This excess volatility lowers firm value, suggesting a quantitatively meaningfully tradeoff.

Non-answers during Conference Calls
Date Posted:Fri, 04 Jan 2019 17:04:28 -0600
We construct a novel measure of disclosure choice by firms. Our measure is computed using linguistic analysis of conference calls to identify whether a manager?s response to an analyst question is a ?non-answer.? Using our measure, about 11% of analyst questions elicit non-answers from managers, a rate that is stable over time and similar across industries. A useful feature of our measure is that it enables an examination of disclosure choice within a call. Analyst questions with a negative tone, greater uncertainty, greater complexity, or requests for greater detail are more likely to trigger non-answers. We find performance-related questions tend to be associated with non-answers, and this association is weaker when performance news is favorable. We also find analyst questions about proprietary information are associated with non-answers, and this association is stronger when firm competition is more intense.

REVISION: Non-answers During Conference Calls
Date Posted:Fri, 04 Jan 2019 07:04:30 -0600
We construct a novel measure of disclosure choice by firms. Our measure uses linguistic analysis of conference calls to flag a manager’s response as providing an explicit “nonanswer” to an analyst’s question. Using our measure, about 11% of questions elicit nonanswers, a rate that is stable over time and similar across industries. Consistent with extant theory, we find firms are less willing to disclose when competition is more intense, but more willing to disclose prior to raising capital. An important feature of our measure is that it yields several observations for each firm-quarter, which allows us to examine disclosure choice within a call as a function of properties of the question. We find product-related questions are associated with non-answers, and this association is stronger when competition is more intense, suggesting product-related information has higher proprietary cost. While firms are more forthcoming prior to raising capital, the within-call analyses for ...

REVISION: Information versus Investment
Date Posted:Wed, 21 Nov 2018 00:26:31 -0600
Firms' efficient long-term investment and accurate reporting of information about performance both serve crucial roles in the economy and capital markets. We argue quantitatively that the two goals are in direct conflict in the presence of realistic manager compensation contracts, which provide managers with incentives both to misreport financial statements and to distort their real investment choices. We build a dynamic structural model rich enough to capture a natural tradeoff between investment and information. The model matches a range of observable moments constructed from data on firm investment and periods of detected misreporting by firms. Counterfactuals show that regulations preventing misreporting do in fact incentivize managers to distort real investment, whose volatility rises. This excess volatility lowers firm value, suggesting a quantitatively meaningfully tradeoff.

REVISION: Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Date Posted:Fri, 20 Jul 2018 03:46:28 -0500
In this paper, we use accounting fundamentals to measure systematic risk. We develop a statistical model that, based on accounting fundamentals, allows us to predict whether a firm’s failure will coincide with a recession. We demonstrate in a stylized model that the obtained probability of recessionary failure should reflect a firm’s systematic risk. The return-prediction tests suggest our approach successfully extracts systematic risk information from accounting data—the probability of recessionary-failure estimates are positively associated with future returns. We further show that requiring fundamental return predictors to also predict recessionary failure imposes a “structure” that is crucial for identifying risk-related return predictability. The “agnostic” return prediction that relies only on past correlations between the same fundamental variables and returns tends to detect mispricing.

REVISION: Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Date Posted:Fri, 20 Jul 2018 02:04:48 -0500
In this paper, we use accounting fundamentals to measure systematic risk. We develop a statistical model that, based on accounting fundamentals, allows us to predict whether a firm’s failure will coincide with a recession. We demonstrate in a stylized model that the obtained probability of recessionary failure should reflect a firm’s systematic risk. The return-prediction tests suggest our approach successfully extracts systematic risk information from accounting data—the probability of recessionary-failure estimates are positively associated with future returns. We further show that requiring fundamental return predictors to also predict recessionary failure imposes a “structure” that is crucial for identifying risk-related return predictability. The “agnostic” return prediction that relies only on past correlations between the same fundamental variables and returns tends to detect mispricing.

How Common Are Intentional GAAP Violations? Estimates From a Dynamic Model
Date Posted:Sun, 06 May 2018 09:49:20 -0500
This paper uses data on detected misstatements ? earnings restatements ? and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm's stock price by misstating earnings. I find the CEO's expected cost of misleading investors is low. The probability of detection over a five?year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO's retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, with 2%?22% of CEOs starting to misstate earnings in each year 2003?2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.

New: How Common Are Intentional GAAP Violations? Estimates From a Dynamic Model
Date Posted:Sun, 06 May 2018 00:49:20 -0500
This paper uses data on detected misstatements — earnings restatements — and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm's stock price by misstating earnings. I find the CEO's expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO's retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, with 2%–22% of CEOs starting to misstate earnings in each year 2003–2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.

Information versus Investment
Date Posted:Tue, 21 Nov 2017 16:15:39 -0600
We quantify the real implications of trade-offs between firm information disclosure and longterm investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.

REVISION: Information Distortion, R&D, and Growth
Date Posted:Tue, 21 Nov 2017 06:15:40 -0600
Do firms' opportunistic withholding and disclosure of information affect their investment in R&D? To answer this question, we estimate a dynamic model that incorporates a trade-off between R&D investment and earnings manipulation. This model allows for the increase in the expected penalty for misreporting introduced by a disclosure regulation to translate into investment distortions and lost firm value. We find that incentives to distort information have a large impact on firm value of 13%. With these incentives in place, regulations to prevent information distortion spill over into distortions in real investment, whose volatility rises by 10%. This excess volatility in turn lowers firm value by half a percent.

REVISION: How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model
Date Posted:Mon, 16 Oct 2017 03:53:07 -0500
This paper uses data on detected misstatements — earnings restatements — and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm’s stock price by misstating earnings. I find the CEO’s expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO’s retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60% with 2%–22% of CEOs starting to misstate earnings in each year 2003–2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.

REVISION: How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model
Date Posted:Tue, 04 Apr 2017 03:28:54 -0500
This paper uses data on detected misstatements—earnings restatements—and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm’s stock price by misstating earnings. I find the CEO’s expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in a 8.53% loss in the CEO’s retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60% with 2%–22% of CEOs starting to misstate earnings in each year 2003–2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs with more equity or cash wealth manipulate less, and the average misstatement is larger in smaller firms.

REVISION: Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Date Posted:Fri, 20 Jan 2017 03:21:00 -0600
In this paper, we use accounting fundamentals to measure systematic risk associated with corporate failure. Prior literature, despite compelling theoretical arguments, finds little evidence of a distress risk premium associated with a firm’s probability of failure. We use a stylized model to show that a stock’s expected return depends not only on the likelihood of failure but also on the phase of the business cycle in which a firm is more likely to fail. We develop a statistical model that, based on a firm’s accounting fundamentals, allows us to predict whether the firm’s failure will coincide with a recession. We validate the obtained probability estimates out of sample and use them to construct a measure of recessionary failure risk. The return prediction tests suggest that our approach successfully extracts systematic distress risk information from accounting data — for stocks in the top quintile of distress a median hedge portfolio based on our measure generates 10% per annum.

REVISION: How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model
Date Posted:Thu, 08 Dec 2016 03:56:56 -0600
This paper estimates the extent of undetected misstatements that violate GAAP using data on detected misstatements — earnings restatements — and a dynamic model. The model features a CEO who can manipulate his firm’s stock price by misstating earnings. I find that the CEO’s expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in a 8.53% loss in the CEO’s wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs with higher equity holdings or higher cash wealth manipulate less and the average misstatement is larger in smaller firms.

CEO Personality and Firm Policies
Date Posted:Mon, 25 Jul 2016 11:48:56 -0500
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.

REVISION: CEO Personality and Firm Policies
Date Posted:Wed, 13 Jul 2016 04:22:47 -0500
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.

CEO Personality and Firm Policies
Date Posted:Fri, 08 Jul 2016 11:03:55 -0500
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.

Update: CEO Personality and Firm Policies
Date Posted:Fri, 08 Jul 2016 06:44:30 -0500
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.
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REVISION: CEO Personality and Firm Policies
Date Posted:Fri, 08 Jul 2016 02:34:20 -0500
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.

REVISION: CEO Personality and Firm Policies
Date Posted:Fri, 08 Jul 2016 02:03:57 -0500
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.

REVISION: Corporate Failure and the Business Cycle: Measuring Systematic Risk
Date Posted:Fri, 24 Jun 2016 11:07:07 -0500
Using firm fundamentals, we develop a forward-looking measure of systematic risk associated with corporate failure. Our measure is consistent with standard asset pricing theory and is equal to the ratio of probabilities of failure in recession to failure in expansion. We validate the measure using two predictions from a stylized model. First, for a given probability of failure, expected returns should increase in our measure. Second, the resulting spread in returns should be larger for more distressed stocks. We find support for both predictions. For stocks in the top quintile of distress, a median hedge portfolio based on our measure generates 10%-12% per annum, suggesting that our approach successfully extracts risk information from accounting data. Our findings have important implications for the literature on distress risk that, despite compelling theoretical arguments, finds little evidence of a distress risk premium. Instead, it documents the distress anomaly — a negative ...

REVISION: When Is Distress Risk Priced? Corporate Failure and the Business Cycle
Date Posted:Wed, 30 Dec 2015 05:24:31 -0600
Holding probability of failure constant, a firm’s expected return increases in the likelihood of failure in recession relative to expansion. Based on this observation, we develop a measure of firm’s systematic distress risk — the ratio of probabilities of failure in recession to failure in expansion. For stocks in the top quintile of distress, a median hedge portfolio based on our measure generates a return of 10%-12% per annum. This premium is confirmed in Fama-MacBeth regressions that control for the probability of failure. Our results differ from the distress anomaly — a negative correlation between the probability of failure and stock returns.

REVISION: When is Distress Risk Priced? Evidence from Recessionary Failure Prediction
Date Posted:Tue, 19 May 2015 06:03:02 -0500
This paper introduces a new measure of firm’s exposure to systematic distress risk — the probability of a recession at the time of a firm’s failure. For stocks in the top quintile of the probability of failure, a median hedge portfolio based on our measure generates a positive risk premium of 10%-12% per annum. Our results differ from the previously documented distress-risk anomaly — a negative correlation between the probability of failure and stock returns. We argue that the probability of failure does not capture systematic distress risk well because it does not differentiate between failures occurring in recessions and expansions.

REVISION: When is Distress Risk Priced? Evidence from Recessionary Failure Prediction
Date Posted:Fri, 03 Oct 2014 01:16:44 -0500
This paper introduces a new measure of a firm’s exposure to systematic distress risk — the probability of a recession at the time of a firm’s failure. For stocks in the top quintile of the probability of failure, a median hedge portfolio based on our measure generates a positive risk premium of 5%-8% per annum. Our results differ from the previously documented distress-risk anomaly — a negative correlation between the probability of failure and stock returns. We argue that the probability of failure does not capture systematic distress risk well because it does not differentiate between failures occurring in recessions and expansions.

Accounting Fundamentals and Systematic Risk: Corporate Failure over the Business Cycle
Date Posted:Wed, 01 Oct 2014 14:51:38 -0500
In this paper, we use accounting fundamentals to measure systematic risk of distress. Our main testable prediction?that this risk increases with the probability of recessionary failure, P(R|F)?is based on a stylized model that guides our empirical analyses. We first apply the lasso method to select accounting fundamentals that can be combined into P(R|F) estimates. We then use the obtained estimates in asset-pricing tests. This approach successfully extracts systematic risk information from accounting data?we document a significant positive premium associated with P(R|F) estimates. The premium covaries with the news about the business cycle and aggregate failure rates. Additional tests underscore the importance of the ?structure? imposed through recessionary-failure-probability estimation. The ?agnostic? return predictor that relies only on past correlations between the same fundamental variables and returns exhibits markedly different properties.

REVISION: When is Distress Risk Priced? Evidence from Recessionary Failure Prediction
Date Posted:Wed, 01 Oct 2014 05:51:38 -0500
This paper introduces a new measure of a firm’s exposure to systematic distress risk — the probability of a recession at the time of a firm’s failure. For stocks in the top quintile of the probability of failure, a median hedge portfolio based on our measure generates a positive risk premium of 5%-8% per annum. Our results differ from the previously documented distress-risk anomaly — a negative correlation between the probability of failure and stock returns. We argue that the probability of failure does not capture systematic distress risk well because it does not differentiate between failures occurring in recessions and expansions.

REVISION: Measuring Intentional GAAP Violations: A Structural Approach
Date Posted:Sat, 26 Apr 2014 09:48:21 -0500
Based on a sample of about 1,400 CEOs, I estimate the extent of undetected GAAP violations and managers' manipulation costs using a dynamic finite-horizon structural model. The model features a risk-averse manager, who receives cash and equity compensation and maximizes his terminal wealth. I find that the expected cost of manipulation is low. The probability of detection is 6%, and the average misstatement results in a 24% decrease in the manager's wealth if the manipulation is detected and the manger is terminated. Based on the estimated parameters, the implied fraction of CEOs who manipulate at least once during their tenure is 73%; the value-weighted bias in the stock price across manipulating CEOs is 6.97%, and the value-weighted bias in the stock price across all CEOs is 2.82%. Finally, I find that the model-implied measure performs at least six times better in terms of the root mean squared error out-of-sample than any of the five discretionary accruals measures that, in ...

REVISION: Measuring Intentional Manipulation: A Structural Approach
Date Posted:Mon, 17 Feb 2014 05:33:45 -0600
Using a sample of about 1,500 CEOs in the post-Sarbanes-Oxley Act of 2002 period, I estimate the extent of undetected intentional manipulation in earnings and managers' manipulation costs using a dynamic finite-horizon structural model. The model features a risk-averse manager, who receives cash and equity compensation and maximizes his terminal wealth. I find that the expected cost of manipulation is low. The probability of detection is estimated to be 9%, and the average misstatement results in an 11% loss in the manager's wealth if the manipulation is discovered. According to the estimated parameters, the implied fraction of manipulating CEOs is 66%, and the value-weighted bias in the stock price across manipulating CEOs is 15.5%. At the same time, the value-weighted bias in the stock price across all CEOs is 6%. Finally, I find that out-of-sample, the model-implied measure of intentional manipulation performs at least eight times better in terms of the root mean squared error ...

REVISION: Measuring Intentional Manipulation: A Structural Approach
Date Posted:Mon, 22 Apr 2013 15:24:46 -0500
Using a sample of about 1,500 CEOs in the post-Sarbanes-Oxley Act of 2002 period, I estimate the extent of undetected intentional manipulation in earnings and managers' manipulation costs using a dynamic finite-horizon structural model. The model features a risk-averse manager, who receives cash and equity compensation and maximizes his terminal wealth. I find that the expected cost of manipulation is low. The probability of detection is estimated to be 9%, and the average misstatement results ...

How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model
Date Posted:Sun, 31 Mar 2013 15:31:26 -0500
This paper uses data on detected misstatements ? earnings restatements ? and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm?s stock price by misstating earnings. I find the CEO?s expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO?s retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60% with 2%?22% of CEOs starting to misstate earnings in each year 2003?2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.

REVISION: Measuring Intentional Manipulation: A Structural Approach
Date Posted:Sun, 31 Mar 2013 10:31:28 -0500
Using a sample of about 1,500 CEOs in the post-Sarbanes-Oxley Act of 2002 period, I estimate the extent of undetected intentional manipulation in earnings and managers' manipulation costs using a dynamic finite-horizon structural model. The model features a risk-averse manager, who receives cash and equity compensation and maximizes his terminal wealth. I find that the expected cost of manipulation is low. The probability of detection is estimated to be 9%, and the average misstatement results ...

REVISION: Detecting Deceptive Discussions in Conference Calls
Date Posted:Sat, 28 Jan 2012 06:39:59 -0600
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label each call as “truthful” or “deceptive”. Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample ...

REVISION: Detecting Deceptive Discussions in Conference Calls
Date Posted:Fri, 27 Jan 2012 00:33:57 -0600
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label each call as “truthful” or “deceptive”. Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample ...

REVISION: Detecting Deceptive Discussions in Conference Calls
Date Posted:Mon, 10 Oct 2011 06:33:13 -0500
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label each call as “truthful” or “deceptive”. Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample ...

REVISION: Detecting Deceptive Discussions in Conference Calls
Date Posted:Sun, 01 May 2011 20:10:15 -0500
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label each call as “truthful” or “deceptive”. Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample ...

REVISION: Detecting Deceptive Discussions in Conference Calls
Date Posted:Mon, 02 Aug 2010 09:44:32 -0500
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label the Question and Answer section of each call as "truthful" or "deceptive". Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, ...

REVISION: Detecting Deceptive Discussions in Conference Calls
Date Posted:Wed, 17 Mar 2010 09:49:04 -0500
In this paper, we estimate classification models for deceptive discussion during quarterly earnings conference calls. Using data on subsequent restatements and a set of criteria to identify especially serious accounting problems, we label the Question and Answer section of each conference call as truthful or deceptive. Our prediction models are developed with word categories which are shown by prior psychological research to be related to deception. Using conservative statistical tests, we ...

Detecting Deceptive Discussions in Conference Calls
Date Posted:Wed, 17 Mar 2010 00:00:00 -0500
We estimate classification models of deceptive discussions during quarterly earnings conference calls. Using data on subsequent financial restatements (and a set of criteria to identify especially serious accounting problems), we label each call as ?truthful? or ?deceptive?. Our models are developed with the word categories that have been shown by previous psychological and linguistic research to be related to deception. Using conservative statistical tests, we find that the out-of-sample performance of the models that are based on CEO or CFO narratives is significantly better than random by 6%-16% and statistically dominates or is equivalent to models based on financial and accounting variables. We find that the answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholder value. In addition, deceptive CEOs use significantly more extreme positive emotion and fewer anxiety words.