ACC386K.3-Jennings-2007spring

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Empirical Research in AccountingACC 386K.3

Professor Ross Jennings

University of Texas at Austin

Spring 2007

Course Contacts

Professor: Ross Jennings

Office: CBA 4M.222

E-mail: [email protected]

Office Hours: By appointment, contact Mary Ann Fair at

[email protected] or 471-1251

Introduction

This course is a survey of empirical-archival research in accounting, primarily financialaccounting. We will also read some papers in tax accounting and international (financial)

accounting. There are three main purposes that we want to accomplish.

First, by the end of the class you should understand some of the topics that have been

studied, especially in financial accounting, over the last five years. Nearly all of the

papers we will read in the class have been published in a top accounting journal duringthat period, or are currently active working papers. On the other hand, there are many

topics we will not have time to cover and we will cover no topic in depth.

Second, by the end of the class you should be better able to critically evaluate empirical-

archival research by asking the right questions to identify the limitations of research

papers. Being able to identify weaknesses in others studies and your own, is a skill that

you will use throughout your career.

Finally, by the end of the semester you should be better able to identify possibleextensions to papers that you read. Obviously, this is also an important skill, being able

to identify new research issues that build upon published work.

We will work on these three objectives every class session on every paper. In addition to

this, you will develop their own map of empirical-archival financial accounting

research. We will begin this process on the first day of class. This map should help youto better understand how various studies and research issues relate to each other, as well

as to identify where opportunities for new research lay.

Course Materials

Copies of all papers will be provided to you in class.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Weekly Assignments

Each class session we will read two research studies (occasionally there will be a thirdstudy that is background). For each study, students will assume one of three roles. Each

role has both a written component and an oral in-class component. The roles are (a) to

summarize, (b) to critique, and (c) to extend.

Summarize The purpose of this role is to tee-up the paper by providing a brief

overview. The in-class component is to spend three to five minutes (no more than five)

summarizing the paper. This summary should include a clear statement of the researchissue, the motivation, the analysis that was conducted, the data that were used and the

conclusions that were reached. The purpose of this role is to put the paper in its best

possible light. If the authors did a poor job of explaining their paper, you should do abetter job. If you dont believe the results you should still faithfully report what the

authors concluded. You do not need to defend the authors positions, but you need to

faithfully report them. The written component for this role is a maximum two-pagesummary of the comments made in class (double-spaced, normal fonts and margins). To

meet the two-page limit this summary may be at a higher level than the oral summary in

class.

Critique The purpose of this role is to critically evaluate the paper. We want to

identify the strengths of the paper to convince ourselves that the results are credible and

to add to our understanding about how to conduct a credible study ourselves. We want toidentify the weaknesses of the paper to challenge the credibility of the results in the paper

so that we can avoid similar mistakes in our own work and get better at identifying them

in the work of others. The in-class component is to sequentially raise issues fordiscussion as you are called upon. These issues should be organized from most important

to least important, and can be either particular strengths or weaknesses of the paper. Toidentify these issues you should ask yourself the following questions:

- Is the research issue clear, interesting, and well-motivated?

- Is the research design appropriate to the question and well-executed?

- Are the data appropriate to the analysis (i.e. valid measures of the constructs)?

- Are the inferences appropriate for the empirical results?

You can view your role as providing feedback to the authors of the paper on what part of

the paper they have done well and what part can be improved. The written component

for this role is a maximum two-page summary of the strengths and weaknesses that youidentified (double-spaced, normal fonts and margins). To meet the two-page limit this

summary may be at a higher level than the comments made in class.

Extend The purpose of this role is to suggest ways in which the paper can be extended.

The in-class component is to sequentially raise possible extensions of the research in the

paper as you are called upon. These possible extensions should be organized from most

interesting/executable to least interesting/executable. To identify these issues you shouldask yourself the following questions:


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- Can the data used in the study be improved?

- Can the methodology used in the study be improved?

- What is the next thing we would like to know?

- Can this method be used for a different issue?

The objective here should not be a shotgun of ideas that comes from 15 minutes ofbrainstorming. The best outcome would be one idea that is really good that leads you to

actually write a publishable paper. The written component for this role is a maximum

two-page summary of the possible extensions that you identified (double-spaced, normalfonts and margins). To meet the two-page limit this summary may be at a higher level

than the suggestions made in class.

Larger Assignments

Research Framework This can be in any form, from an outline to a flow chart to anyother form that you think works well. Regardless of the format you choose, you are to

place each weeks topic in your framework, and it should be flexible enough to hold justabout any archival empirical paper in accounting. We will jointly discuss a framework

on the first day of class. In subsequent weeks, as time permits, we may relate that days

reading to the framework.

Journal Review On March 7, I will provide you with a draft of a paper that was

submitted to a journal and that I was asked to review. You will be required to write areview of this paper and submit it to me in class on March 21. A review combines the

roles of summarizing (very briefly) and critiquing, so you will have had lots of practice at

this by March 7.

Literature Review You will be asked to write a research proposal for this class, but we

will do it in stages. This is the first stage, the literature review. This assignment gives

you the opportunity to read in greater depth in a topic of interest to you. This topic maybe related to readings on the syllabus or may be in an area not covered on the syllabus. I

expect you to identify at least five papers that are related and provide a critical summary

of their conclusions. The papers you are summarizing must be approved by me inadvance. You should provide me with a list of the papers no later than March 21. You

are welcome to seek my approval earlier if you wish to begin the paper earlier. The

summary should be five to seven pages (double-spaced, normal fonts and margins), andis due on April 4.

Research Proposal This research proposal should be based on the literature review you

previously completed. You are to determine a very specific extension of that literature toa new research question. Extensions that involve improving on the data or method are

permitted, but extensions that identify the next thing we want to know are preferred.

This draft should include your revised literature review, expanded by adding anintroduction, hypothesis development, and methodology sections. This paper should be

no more than 20 pages (double-spaced, normal fonts and margins), and is due on May 7 th

at 5pm.


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Class Participation

In this class we are more of a learning community than we are students and teacher. I

will probably learn more during the semester than anyone else, but I hope we all learn a

great deal. A good participant is clarifying their own learning while they enhance thelearning of others. I will be evaluating both aspects of your participation. Each session,

several of you will be assigned several different roles (summarize, critique, extend).Your performance in that capacity will be part of your class participation grade. Beyondthat, I expect that all students will contribute to the critiquing and extending roles even

though only one or two students are formally responsible for these roles.

Class Sessions

We will begin each class session with an oral summary of paper A. I will then ask the

person(s) assigned to critique paper A to raise their single most important point. Thispoint may be either a strength or weakness. We will discuss this point and then move

down the list of the student assigned to critique the paper. I expect that the conversation

may tend to wander and blend issues. It is the responsibility of those assigned to critiquethe papers to keep the conversation focused on what they think are the most important

issues. We will then repeat this process for paper B. After we have discussed the

strengths and weaknesses of both papers we will turn to those assigned to extend the

research to see what ideas they have. We wont stick to a rigid schedule, but I expect thatin general we will have five minutes of summary of paper A, followed by an hour of

discussion, then five minutes of summary of paper B, followed by an hour of discussion.

If we take a break between the two papers we should still have 30 to 40 minutes todiscuss extensions.

Grades

Grades for the course will be determined on the basis of the following assignments and

weights.

Grading Summary

Points Percent

Weekly Writing Assignments 100 20%

Journal Review 100 20%

Literature Review 50 10%

Research Proposal 100 20%

Research Framework 50 10%

Class Participation 100 20%

Total 500 100%

Scholastic Dishonesty

Discussion of the course outside of class is strongly encouraged. For all written

assignments, students may share ideas but they should NOT share ANY electronic or

paper documents. In addition, when borrowing ideas or words from any allowablesource, that source should be appropriately cited. Violations will be considered to be

violations of the Honor Code.


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Detailed Schedule

Session Date Topic/Papers

1 1-17 Introduction

Review Paper

2 1-24 Valuation I

Dechow, P., A. Hutton, and R. Sloan, An Empirical Assessment of

the Residual Income Valuation Model,Journal of Accounting &

Economics (January 1999), 1-34.

Francis, J., P. Olsson, and D. Oswald, Comparing the Accuracy

and Explainability of Dividend, Free Cash Flow and Abnormal Earnings

Equity Valuation Models,Journal of Accounting Research (Spring

2000), 45-70.

3 1-31 Valuation II

Liu, J., D. Nissim, and J. Thomas, Equity Valuation Using

Multiples,Journal of Accounting Research (March 2002), 135-172.

Cheng, Q., What Determines Residual Income?Accounting Review

(January 2005), 85-112.

4 2-7 Fundamental Analysis

Mohonram, Partha S., Separating Winners from Losers among Low

Book-to-Market Stocks using Financial Statement Analysis,Review of

Accounting Studies (2005), 133-170.

Monahan, Steven J., Conservatism, Growth and the Role of

Accounting Numbers in the Fundamental Analysis Process,Journal of

Accounting Research (September 2005), 413-451.


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5 2-14 Accounting Measurement

Ohlson, James A., A Practical Model of Earnings Measurement The

Accounting Review (January 2006), 271-279.

Dichev, Ilia D. and Vicki Wei Tang, Matching and the Properties

of Accounting Earnings Over the Last 40 Years, Working Paper,

University of Michigan

Klein, April and Carol A. Marquardt, Fundamentals of

Accounting Losses, The Accounting Review (January 2006), 179-206.

6 2-21 Income Smoothing

Tucker, J. and P. Zarowin, Does Income Smoothing Improve

Earnings Informativeness?Accounting Review (January 2006), 251-270.

Lee, Chi-Wen Jevons, Laura Yue Li, and Heng Yue,

Performance, Growth and Earnings Management,Review of

Accounting Studies (2006), 305-334.

7 2-28 Recognition versus Disclosure

Ahmed, A., E. Kilic, and G. Lobo, Does Recognition versus

Disclosure Matter? Evidence from Value-Relevance of Banks

Recognized and Disclosed Derivative Financial Instruments,

Accounting Review (May 2006), 567-588.

Davis-Friday, Paquita Y., Chao-Shin Liu, and H. Fred

Mittelstaedt, Recognition and Disclosure Reliability: Evidence from

SFAS 106, Contemporary Accounting Research (Summer 2004), 399-

429.


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8 3-7 SEC Regulation

Jung, Boochun, Konduru Sivaramakrishnan, and NaomiSoderstrom, Informational Effects of Regulation Fair Disclosure on

Equity Analysts Responses to Debt Rating Changes, Working Paper,

University of Colorado, 2006.

Beaver, William H., Catherine Shakespeare, and Mark T.

Soliman, Differential Properties in the Ratings of Certified versus

Non-Certified Bond-Rating Agencies,Journal of Accounting and

Economics (2006), 303-334.

Paper to be reviewed will be provided in class.

3-14 SPRING BREAK

9 3-21 Research and Development

Lev, B. and T. Sougiannis, The Capitalization, Amortization, and

Value-Relevance of R&D,Journal of Accounting & Economics

(February 1996), 107-138.

Chambers, Dennis, Ross Jennings and Robert B. Thompson II,

Excess Returns to R&D-Intensive Firms,Review of Accounting Studies

(2002), 133-158.

Review due in class.

List of papers for literature review due in class.

10 3-28 Pensions

Picconi, M., The Perils of Pensions: Does Pension Accounting Lead

Investors and Analysts Astray?Accounting Review (July 2006), 925-55.

Jin, L., R. Merton, and Z. Bodie, Do a Firms Equity Returns

Reflect the Risk of its Pension Plan?Journal of Financial Economics

(July 2006), 1-26.


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11 4-4 Tax Accounting I

Lev, Baruch and Doron Nissim, Taxable Income, Future Earnings

and Equity Values, The Accounting Review (2004), 1039-74.

Hanlon, Michelle, The Persistence and Pricing of Earnings, Accruals,

and Cash Flows When Firms Have Large Book-Tax Differences, The

Accounting Review (2005), 137-66

Literature Review due in class.

12 4-11 Tax Accounting II

Hanlon, Michelle, Edward L. Maydew, and Terry Shevlin,

Book-Tax Conformity and the Informativeness of Earnings, Working

Paper (2006) University of Michigan.

Ayers, Benjamin C., John (Xuefeng) Jiang, and Stacie K.

Laplante Taxable Income as a Performance Measure: The Effects of

Tax Planning and Earnings Quality, Working Paper (2006) University

of Georgia

13 4-18 International Accounting Topics

Bradshaw, M., B. Bushee, and G. Miller, Accounting Choice,

Home Bias, and U.S. Investment in Non-U.S. Firms,Journal of

Accounting Research (December 2004) 795-841.

Lang, M., J. Raedy, and W. Wilson, Earnings Management and

Cross Listing: Are Reconciled Earnings Comparable to US Earnings?

Journal of Accounting & Economics (October 2006), 255-283.


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14 4-25 Analysts Behavior and Skills

Barth, Mary E. and Amy P. Hutton, Analyst Earnings Forecast

Revisions and the Pricing of Accruals, Review of Accounting Studies

(2004), 59-96.

Gu, Z. and T. Chen, Analysts Treatment of Nonrecurring Items in

Street Earnings,Journal of Accounting & Economics (December 2004),

129-170.

15 5-2 Cost of Capital

Botosan, C. and M. Plumlee, Assessing Alternative Proxies for the

Expected Risk Premium, Accounting Review (January 2005), 21-53.

Easton, P. and S. Monahan, An Evaluation of Accounting-Based

Measures of Expected Returns,Accounting Review (April 2005), 501-

538.

5-7 Research Proposal due at 5pm.


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Role Assignments

Week Paper Summarize Critique Extend

2 Dechow et al Bratten Crane Crawley

2 Francis et al Wang Bratten Crane Reichert Schwab

3 Liu et al Crawley Koch Reichert

3 Cheng Wei Bratten CraneSchwab Wang

4 Mohonram Koch Reichert Schwab

4 Monahan Bratten Crane CrawleyWang Wei

5 Dichev & Tang Reichert Schwab Wang

5 Klein & Marquardt Crane Crawley KochWei Bratten

6 Tucker & Zarowin Schwab Wang Wei6 Lee et al Crawley Koch Reichert

Bratten Crane

7 Ahmed et al Wang Wei Bratten

7 Davis-Friday et al Koch Reichert SchwabCrane Crawley

8 Jung et al Wei Bratten Crane

8 Beaver et al Reichert Schwab WangCrawley Koch

9 Lev & Sougiannis Bratten Crane Crawley

9 Chambers et al Schwab Wang WeiKoch Reichert

10 Picconi Crane Crawley Koch

10 Jin et al Wang Wei BrattenReichert Schwab

11 Lev & Nissim Crawley Koch Reichert

11 Hanlon Wei Bratten CraneSchwab Wang

12 Hanlon et al Koch Reichert Schwab

12 Ayers et al Bratten Crane CrawleyWang Wei

13 Bradshaw et al Reichert Schwab Wang

13 Lang et alCrane Crawley Koch

Wei Bratten

14 Barth & Hutton Schwab Wang Wei

14 Gu & Chen Crawley Koch ReichertBratten Crane

15 Botosan & Plumlee Wang Wei Bratten

15 Easton & Monahan Koch Reichert SchwabCrane Crawley

Documents

ACC386K.3-Jennings-2007spring