UNIVERSITY OF CALIFORNIA AT BERKELEY Haas School of Business. PHDBA229A Macro-Accounting/Interdisciplinary Capital Markets Research for PhDs Fall 2015

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1 UNIVERSITY OF CALIFORNIA AT BERKELEY Haas School of Business PHDBA229A Macro-Accounting/Interdisciplinary Capital Markets Research for PhDs Fall 2015 Instructor: Class location: Class time: Instructor location (office hours): Professor Yaniv Konchitchki C330 Wednesday 6:00-9:00pm (6:10-7:40, 8:00-9:00pm) Room F496 (anytime, by appointment) 1. Course Objective and Format This course objective is to let you gain familiarity with financial accounting research. The course provides an opportunity to develop and execute your research ideas. Each student will present a topic related to financial accounting research. Importantly, the assigned student will be in charge of: 1. Posting on the class website one week in advance of the class: A. The background papers listed on the syllabus as related to the topic. B. Additional key/new papers related to the topic. C. Any complementary material that can enrich the learning experience of the class, such as more related papers, related news articles, and research design/econometrics explanations. 2. Printing for the class the notes/presentation outline of 1.A-1.B above. All students are required to study the posted readings that the assigned presenter posted on class website, in advance of our meetings so as to come prepared and contribute to the class. Each class is organized in two parts: In the first part, the assigned student will critically present extant research related to the selected topic. The assigned student is in charge of leading the discussions. However, everyone is required to participate by asking and answering questions. Note that the papers below are not organized in a specific order; the assigned student should present the papers based on a logical flow. In the second part, the assigned student will motivate and identify open research questions related to the topic. The assigned student should focus on the following when discussing each paper: What is the research question? How does it fit in the literature? What is the research design? What are the main findings and takeaways? What is the strongest/weakest point in the paper? Open related research questions?

2 2. Grading % of Grade Class Participation 30 Research Presentation 35 Research Proposal 15 Constructive Contribution % Class Participation: Strongly encouraged. All forms of class participation will be considered for grading purposes, excluding responses where the student is clearly unprepared or voluntary contributions that are clearly not helpful. Research Presentation: You need to demonstrate familiarity with the literature related to your topic. You should lead a constructive discussion in class that will also inspire new research ideas. Research Proposal: You are required to submit a written proposal, potentially related to your research topic although not necessary. Your proposal should be organized as follows: Introduction: What is your research question and motivation? Background and Related Research: How does your research question relate to the extant literature? Research Design: What is the research design that fits best your research question? Data: What are the data sources needed to address your research question? Preliminary Results (required only for 3rd and 4th year students): Present and describe your empirical evidence (Tables and Figures). Potential Contribution to the Literature. The written research proposals are due on the last day of class: 4th-year students are required to present their proposals in the week before the last one. 3rd- and 2nd-year students are required to present their proposals in the last week. Constructive Contribution: Based on positive and quality contributions shared in and out of class. Key factors that I will use in my assessment: A positive attitude that enriches the learning experience of the class (e.g., showing excitement towards the course and the topic), in and out of the classroom. In-class participation. Enriching the learning experience of the students with additional related research papers, sharing with the class (by printing for the class and/or uploading materials to bspace) notes, research articles, news articles related to the class, research design comments (e.g., how to conduct an event study), helpful research summaries, etc. Helping other students. Bad attitude, leaving or disturbing during class, and/or lack of attendance will have a negative effect on the grade. 2

3 3. Tentative Course Outline The course outline is likely to be revised as the course proceeds. The tentative course outline is as follows: Week Date Topic 1 09/02/2015 Topic 1: Introduction and Overview of my Research (Yaniv) 2 09/09/2015 Topic 2: Cost of Capital; Accounting Quality (Henry) 3 09/16/2015 Topic 3: Information Content of Earnings Announcements and the Post-Earnings-Announcement Drift (Nika + Help) 4 09/23/2015 Topic 4: Earnings Management (Sam + 20 min by Merve) 5 09/30/2015 External Presentation 6 10/07/2015 External Presentation 7 10/14/2015 Topic 5: Accruals and Cash Flows (Jin) 8 10/21/2015 Topic 6: Financial Statement Analysis (Annika + John) 9 10/28/2015 Topics 7-8 Combined (Margaret + Sumit + Nika): 10 11/03/2015 (Tue) Topic 7: Accounting Information and the Macroeconomy Topic 8: Ongoing Macro-Accounting Research 11 11/11/2015 Topic 9: Fall Recess 12 11/17/2015 (Tue) Topic 10: Mispricing (Jin) 13 11/23/2015 (Mon) 15 12/02/ /07/2015 (Mon; Strictly Mandatory) 16 12/10/2015 Official Classes End Date Topics Combined (several presenters): Topic 11: Highlights from Various Research Topics - Debt Contracting (30 min by Sumit) - Textual Analysis (20 min by Sam) - Corporate Governance (30 min by Nika) - Accounting and the Bond Market - Other Topic 12: Additions; Recent Research Highlights; Concurrent Research Updates Topic 13: Presentations of Research Proposals (split between students in years 2, 3, and 4) Topic 13: Presentations of Research Proposals (Contd.) Further details are as follows: 3

4 TOPIC 1: INTRODUCTION AND OVERVIEW OF MY RESEARCH Konchitchki, Y Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices. The Accounting Review 86 (3), Konchitchki, Y Accounting and the Macroeconomy: The Case of Aggregate Price- Level Effects on Individual Stocks. Financial Analysts Journal 69 (6), Konchitchki, Y, and P. N. Patatoukas Accounting and Gross Domestic Product. Journal of Accounting and Economics 57 (1-2), Barth, M. E., Y. Konchitchki, and W. R. Landsman Cost of Capital and Earnings Transparency. Journal of Accounting and Economics 55 (2-3), DeFond, M. L., Y. Konchitchki, J. L. McMullin, and D. E. O Leary Capital Markets Valuation and Accounting Performance of Most Admired Knowledge Enterprise (MAKE) Award Winners. Decision Support Systems 56 (1), Konchitchki, Y., Y. Luo, M. L. Ma, and F. Wu Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy. Review of Accounting Studies, forthcoming. DeFond, M. L., E. Bartov, and Y. Konchitchki The Consequences of Untimely Quarterly and Annual Financial Reporting. Accounting Horizons, forthcoming. Konchitchki, Y, and P. N. Patatoukas Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation. The Accounting Review 89 (2),

5 TOPIC 2: COST OF CAPITAL; ACCOUNTING QUALITY Botosan, C. A Disclosure Level and the Cost of Equity Capital. The Accounting Review 72, (Discuss only a few minutes) Botosan, C. A., and M. Plumlee A Re-Examination of Disclosure Level and Expected Cost of Equity Capital. Journal of Accounting Research 40, Barth, M. E., Y. Konchitchki, and W. R. Landsman Cost of Capital and Earnings Transparency. Journal of Accounting and Economics 55 (2-3), Konchitchki, Y., Y. Luo, M. L. Ma, and F. Wu Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy. Review of Accounting Studies, forthcoming. Francis, J., R. LaFond, P. Olsson, and K. Schipper Costs of Equity and Earnings Attributes. The Accounting Review 79, Frankel R., and C. M. C. Lee Accounting Valuation, Market Expectation, and Cross- Sectional Stock Returns. Journal of Accounting and Economics 25 (3), Core, J. E., W. R. Guay, and R. S. Verdi Is Accruals Quality a Priced Risk Factor? Journal of Accounting and Economics 46, Dechow, P. M., and I. D. Dichev The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review 77, (Discuss only a few minutes) Diamond, D. W., and R. E. Verrecchia Disclosure, Liquidity, and the Cost of Capital. The Journal of Finance 46, Gebhardt, W. R., C.M.C. Lee, and B. Swaminathan Toward an Implied Cost-of- Capital. Journal of Accounting Research, Easton, P., and S. Monahan An Evaluation of Accounting-Based Measures of Expected Returns. The Accounting Review 80, Lambert, R., C. Leuz, and R. Verrecchia Accounting Information, Disclosure, and the Cost of Capital. Journal of Accounting Research 45, Amihud, Y., and H. Mendelson Asset Pricing and the bid-ask spread. Journal of Financial Economics 17,

6 TOPIC 3: INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS AND THE POST- EARNINGS-ANNOUNCEMENT DRIFT Ball, R., and P. Brown An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research, Beaver, W. H The Information Content of Annual Earnings Announcements. Journal of Accounting Research, Landsman, W. R., and E. Maydew Has the Information Content of Quarterly Earnings Announcements Declined over the Past Three Decades? Journal of Accounting Research, Kothari, S. P Capital Markets Research in Accounting. Journal of Accounting and Economics, Bernard, V., and J. Thomas Evidence That Stock Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings. Journal of Accounting and Economics, Konchitchki, Y., and D. E. O Leary Event Study Methodologies in Information Systems Research. International Journal of Accounting Information Systems 12 (2),

7 TOPIC 4: EARNINGS MANAGEMENT Dechow, P. M., R.G. Sloan, and A. P. Sweeney Detecting Earnings Management. The Accounting Review 7 (2), Stubben, S. F Discretionary Revenues as a Measure of Earnings Management. The Accounting Review 85 (2), McNichols, M., and G. P. Wilson Evidence of Earnings Management from the Provision for Bad Debts. Journal of Accounting Research 26, McNichols, M. F Research Design Issues in Earnings Management Studies. Journal of Accounting and Public Policy 19, Dechow, P. M., A. P. Hutton, J. H. Kim, and R. G. Sloan Detecting Earnings Management: A New Approach. Journal of Accounting Research 50 (2), Some background on accruals: Sloan, R. G Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? The Accounting Review 71 (3), Dechow, P Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals. Journal of Accounting and Economics,

8 TOPIC 5: ACCRUALS AND CASH FLOWS Barth, M. E., D. P. Cram, and K. K. Nelson Accruals and the Prediction of Future Cash Flows. The Accounting Review 76 (1), Barth, M., and A. Hutton Analyst Earnings Forecast Revisions and the Pricing of Accruals, Review of Accounting Studies, Barth, M., W. Beaver, J. Hand, and W. Landsman Accruals, Cash Flow, and Equity Values. Review of Accounting Studies, Dechow, P Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals. Journal of Accounting and Economics, Dechow, P., S. P. Kothari, and R. Watts The Relation between Earnings and Cash Flows. Journal of Accounting and Economics 25,

9 TOPIC 6: FINANCIAL STATEMENT ANALYSIS Fairfield, P. M., and T. L. Yohn Using Asset Turnover and Profit Margin to Forecast Changes in Profitability. Review of Accounting Studies 6 (4), Soliman, M. T The Use of DuPont Analysis by Market Participants. The Accounting Review 83 (3), Konchitchki, Y, and P. N. Patatoukas Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation. The Accounting Review 89 (2), Piotroski, J Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Journal of Accounting Research, Ou, J. A., and S. H. Penman Financial Statement Analysis and the Prediction of Stock Returns. Journal of Accounting and Economics 11 (4), Background/related research: McLean, R. D., and J. Pontiff Does Academic Research Destroy Return Predictability? Journal of Finance, forthcoming. o Read introduction and browse through internet appendix Table A1.III. Engelberg, J., R. D. McLean, and J. Pontiff Anomalies and News. Working paper. o Read introduction Allee, K. D., and T. L. Yohn The Demand for Financial Statements in an Unregulated Environment: An Examination of the Production and Use of Financial Statements by Privately Held Small Businesses. The accounting Review 84 (1), o Read introduction and section V. Ohlson, J. A Financial Ratios and the Probabilistic Prediction of Bankruptcy. Journal of Accounting Research 18 (1), o Focus on pages , (the variables used in the model) and 121 (Table 4). Hope, O. K., and J. C. Langli Auditor Independence in a Private Firm and Low Litigation Risk Setting. The Accounting Review 85 (2), o Read abstract and the Sample subsection on pages

10 TOPIC 7: ACCOUNTING INFORMATION AND THE MACROECONOMY TOPIC 8: ONGOING MACRO-ACCOUNTING RESEARCH Konchitchki, Y Inflation and Nominal Financial Reporting: Implications for Performance and Stock Prices. The Accounting Review 86 (3), Konchitchki, Y., Y. Luo, M. L. Ma, and F. Wu Accounting-Based Downside Risk, Cost of Capital, and the Macroeconomy. Review of Accounting Studies, forthcoming. Anilowski, C., M. Feng, and D. J. Skinner Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance. Journal of Accounting and Economics 44 (1-2), Ball, R., G. Sadka, and R. Sadka Aggregate Earnings and Asset Prices. Journal of Accounting Research 47 (5), Cready, W. M., and U. G. Gurun Aggregate Market Reaction to Earnings Announcements. Journal of Accounting Research 48 (2), Jorgensen, B., J. Li, and G. Sadka Earnings Dispersion and Aggregate Stock Returns. Journal of Accounting and Economics 53 (1), Li, N., S. A. Richardson, and A. I. Tuna Macro to Micro: Country Exposures, Firm Fundamentals and Stock Returns. Journal of Accounting and Economics, forthcoming. Kothari, S., J. W. Lewellen, and J. B. Warner Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance. Journal of Financial Economics 79 (3), Konchitchki, Y, and P. N. Patatoukas Accounting and Gross Domestic Product. Journal of Accounting and Economics 57 (1-2), L. Shivakumar, and O. Urcan Aggregate Earnings Surprises and Inflation Forecasts. Working Paper. Konchitchki, Y, and P. N. Patatoukas Taking the Pulse of the Real Economy Using Financial Statement Analysis: Implications for Macro Forecasting and Stock Valuation. The Accounting Review 89 (2), Konchitchki, Y Accounting and the Macroeconomy: The Case of Aggregate Price- Level Effects on Individual Stocks. Financial Analysts Journal 69 (6), Dichev, I. D Quality Earnings: Insights from Comparing GAAP to NIPA Earnings. Working Paper. Konchitchki, Y Accounting Valuation and Cost of Capital Dynamics: Theoretical and Empirical Macroeconomic Aspects. Abacus, forthcoming. Balakrishnan, K., J. E. Core, and R. S. Verdi The Relation Between Reporting Quality and Financing and Investment: Evidence from Changes in Financing Capacity. Journal of Accounting Research 52 (1),

11 Konchitchki, Y., and P. N. Patatoukas. 2015a. Accounting and the Macroeconomy: Accounting Quality at the Macro Level. Working Paper. Konchitchki, Y., and P. N. Patatoukas. 2015b. Revisions to Official Macroeconomic Announcements and Firm-Level Financial Information. Working Paper. Background papers: Fama, E. F Stock Returns, Real Activity, Inflation, and Money. The American Economic Review 71 (4), Fama, E. F., and W. G. Schwert Asset Returns and Inflation. Journal of Financial Economics 5 (2),

12 TOPIC 10: MISPRICING Fama, E Efficient Capital Markets: II The Journal of Finance, Abarbanell, J., and V. Bernard Tests of Analysts Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior. The Journal of Finance, Sloan, R. G Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? The Accounting Review 71 (3), Ball, R., and E. Bartov How Naive is the Stock Market s Use of Earnings Information? Journal of Accounting and Economics 21 (3), Skinner, D., and R. Sloan Earnings Surprises, Growth Expectations, and Stock Returns or Don t Let and Earnings Torpedo Sink Your Portfolio. Review of Accounting Studies, Konchitchki, Y Accounting and the Macroeconomy: The Case of Aggregate Price- Level Effects on Individual Stocks. Financial Analysts Journal 69 (6), Grossman, S. J., and J. E. Stiglitz On the Impossibility of Informationally Efficient Markets. The American Economic Review 70 (3),

13 TOPIC 11: HIGHLIGHTS FROM VARIOUS RESEARCH TOPICS TOPIC 12: ADDITIONS; RECENT RESEARCH HIGHLIGHTS; CONCURRENT RESEARCH UPDATES - M&As - Textual Analysis - Corporate Governance - Accounting and the Bond Market - Other A: ACCOUNTING AND THE BOND MARKET Easton, P., S. Monahan, and F. P. Vasvari Some initial evidence on the role of accounting earnings in the bond market. Journal of Accounting and Economics 47, DeFond, M. L., and J. Zhang The Timeliness of the Bond Market Reaction to Bad Earnings News. Contemporary Accounting Research, forthcoming. Bhojraj, S., and B. Swaminathan How does the Corporate Bond Market Value Capital Investments and Accruals? Review of Accounting Studies 14 (1), Kwan, S. H Firm-Specific Information and the Correlation between Individual Stocks and Bonds Journal of Financial Economics 40 (1), Callen, J., J. Livnat, and D. Segal The Impact of Earnings on the Pricing of Credit Default Swaps. The Accounting Review 84, Lok, S., and S. Richardson Credit Markets and Financial Information. Review of Accounting Studies 16, B. OTHER Kravet, T. D Accounting Conservatism and Managerial Risk-Taking: Corporate Acquisitions. Journal of Accounting and Economics 57 (2-3), Louis Acquirers' Abnormal Returns and the Non-Big 4 Auditor Clientele Effect. Journal of Accounting and Economics 40 (), TOPIC 13: PRESENTATIONS OF RESEARCH PROPOSALS 12/10/2013: OFFICIAL END DATE OF CLASSES 13