This paper examines the implications of using the absolute value of discretionary accruals when testing for earnings management. First, we analytically develop the mean and variance of the distribution of absolute discretionary accruals, and show that the expected value is an increasing function...

In this paper, we examine whether recognizing higher option-based compensation expense leads to lower quality operating cash flows when options are exercised. FAS 123(R) changes the classification of the tax benefit from employee stock options in the statement of cash flows by splitting it into...

What incentives do managers face that might give rise to inefficient investments in leases? If managers make inefficient investments in leases, what economic consequences arise for those managers and their firms? We develop a model of expected investments in leased assets and use the residuals...

Regulation FD recommends press releases as a primary avenue for timely disclosure of material information to market participants. Firms commonly issue product-related and business expansion information through press releases, yet no study examines how analysts respond to these information...

An earnings manipulation detection model based on forensic accounting principles (Beneish 1999) has substantial out-of-sample ability to predict cross-sectional returns. We show that the model correctly identified, ahead of time, 12 of the 17 highest profile fraud cases in the period 1998-2002....

We introduce a new approach to predicting market returns using the cross-section of earnings and book values to explain current stock prices and extract aggregate expected returns. The proposed measure is countercyclical; it portends a significant fraction of the time-series variation in stock...

What factors enhance investment efficiency in leased assets, and what incentives give rise to over-investments? If firms over-invest in leases, what economic consequences arise? We develop a model of expected investment in leased assets, and use the residuals from the model as proxies for...

We develop a profile of overvalued equity, and show that firms meeting this profile experience abnormal stock returns net of transaction costs of -22 to -25 percent over the twelve months following portfolio formation. We show our model is distinct from predictors proposed in prior work, and our...

Although financial reporting fraud generates considerable losses, we find that investors do not fully exploit publicly available information relevant for detecting fraud. We show that firms with a high probability of overstated earnings have lower future earnings, less persistent...

The paper provides evidence that the relation between accruals and future returns is not symmetric. We find that firms with low accruals generate insignificant abnormal returns in asset pricing regressions that control for either earnings quality or operating volatility. In contrast, we find...