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Empirical Research in Accounting

ACC 386K.3 Professor Ross Jennings University of Texas at Austin Spring 2007

Course Contacts Professor: Ross Jennings Office: CBA 4M.222 E-mail: Ross.Jennings@mccombs.utexas.edu Office Hours: By appointment, contact Mary Ann Fair at maryann.fair@mccombs.utexas.edu or 471-1251 Introduction This course is a survey of empirical-archival research in accounting, primarily financial accounting. 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 during that 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 empiricalarchival 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 possible extensions 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 you to 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.

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Weekly Assignments Each class session we will read two research studies (occasionally there will be a third study 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 research issue, 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 a better 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-page summary 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 to identify 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 for discussion 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. To identify 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 you identified (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 should ask yourself the following questions:

-3- 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 of brainstorming. 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, normal fonts 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 any other 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 just about 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 a review 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 may be 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 in advance. 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), and is 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 to a 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 an introduction, 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 7th at 5pm.

-4Class 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 the learning 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. Beyond that, 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. This point 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 critique the 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 that in 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 to discuss extensions. Grades Grades for the course will be determined on the basis of the following assignments and weights. Grading Summary Weekly Writing Assignments Journal Review Literature Review Research Proposal Research Framework Class Participation Total Points 100 100 50 100 50 100 500 Percent 20% 20% 10% 20% 10% 20% 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 allowable source, that source should be appropriately cited. Violations will be considered to be violations of the Honor Code.

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Detailed Schedule
Session 1 Date 1-17 Topic/Papers 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.

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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.

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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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Session 5

Date 2-14

Topic/Papers 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.

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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.

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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), 399429.

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Session 8

Date 3-7

Topic/Papers SEC Regulation Jung, Boochun, Konduru Sivaramakrishnan, and Naomi Soderstrom, 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.


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SPRING BREAK
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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Session 11

Date 4-4

Topic/Papers 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

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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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Session 14

Date 4-25

Topic/Papers 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.

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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), 501538.

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Research Proposal due at 5pm.

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Role Assignments Week 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 Paper Dechow et al Francis et al Liu et al Cheng Mohonram Monahan Dichev & Tang Klein & Marquardt Tucker & Zarowin Lee et al Ahmed et al Davis-Friday et al Jung et al Beaver et al Lev & Sougiannis Chambers et al Picconi Jin et al Lev & Nissim Hanlon Hanlon et al Ayers et al Bradshaw et al Lang et al Barth & Hutton Gu & Chen Botosan & Plumlee Easton & Monahan Summarize
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