This paper theoretically and empirically investigates the role of CEO career concerns on accruals based and real activities earnings management. We develop a model of earnings management, rooted in career concerns, that alternatively incorporates the features of the accrual accounting performance measurement system and the negative value-destroying effects of real activities earnings management...

Burgstahler and Eames (2003) present evidence that analysts commonly anticipate earnings management to avoid small losses, but often incorrectly predict its occurrence. Here we consider whether the market’s behavior mimics that of analysts. Our results suggest that analysts exhibit more forecast optimism in their zero earnings forecasts than in their other small earnings forecast levels, and ma...

The widespread use of accounting information by investors and financial analysts to help value stocks creates an incentive for managers to manipulate earnings in an attempt to influence short-term stock price performance. This paper examines the role of earnings management in affecting a firm’s cost of capital. Using an agency model with multiple firms whose cash flows are correlated, we demons...

Theory suggests that managers issue earnings forecasts to reduce information asymmetry. An earnings forecast is more effective in reducing information asymmetry if it contains earnings news that is relatively more informative about the firm’s value. We hypothesize that a manager is more likely to issue an earnings forecast if investors perceive that earnings are more informative. We measure ear...

We analyze the impact of news (information shocks) in economies where liquidity plays a role. While we also consider news about real factors, like productivity, one motivation is that central bank announcements evidently affect markets, as taken for granted by advocates of forward guidance policy. The dynamic effects can be complicated, with information about monetary policy or real factors aff...

Should Old-Age Benefits Be Earnings-Tested? We study the welfare effects of earnings testing flat-rate old-age benefits in a quantitative overlapping generations model with idiosyncratic labor income risk. In our model economy, even a moderate earnings testing reduces individuals’ expected lifetime utility, whenever other taxes are taken into account. Moreover, it also lowers the realized lifet...

Market makers in over-the-counter markets often make offsetting trades and have significant market power. We develop a market making model that captures this market feature as well as other important characteristics such as information asymmetry and inventory risk. In contrast to the existing literature, a market maker in our model can optimally shift some trade with the informed to other discr...

Existing microstructure literature cannot explain the empirical evidence that bid-ask spreads can decrease with information asymmetry and ignores either information asymmetry or inventory risks. We develop a market making model that highlights the asset pricing impact of market makers’ capability of making offsetting trades in markets where both information asymmetry and inventory risk are sign...

This study tests assertions that Economic Value Added (EVAt) is more highly associated with stock returns and firm values than accrual earnings, and evaluates which components of EVA, if any, contribute to these associations. Relative information content tests reveal earnings to be more highly associated with returns and firm values than EVA, residual income, or cash flow from operations. Incre...