In this study, we document evidence on the relation between auditor tenure and earnings quality using the dispersion and sign of both absolute Jones-model abnormal accruals and absolute current accruals as proxies for earnings quality. Our study is motivated by calls for “mandatory auditor rotation,” which are based on concerns that longer auditor tenure reduces earnings quality. Multivariate results, controlling for firm age, size, industry growth, cash flows, auditor type (Big N versus non-Big N), industry, and year, generally suggest higher earnings quality with longer auditor tenure. We interpret our results as suggesting that, in the current environment, longer auditor tenure, on average, results in auditors placing greater constraints on extreme management decisions in the reporting of financial performance.

We model the time-series relation between price and intrinsic value as a cointegrated system, so that price and value are long-term convergent. In this framework, we compare the performance of alternative estimates of intrinsic value for the Dow 30 stocks. During 1963During -1996, traditional market multiples~e.g., B0P, E0P, and D0P ratios! have little predictive power. However, a V0P ratio, where V is based on a residual income valuation model, has statistically reliable predictive power. Further analysis shows time-varying interest rates and analyst forecasts are important to the success of V. Alternative forecast horizons and risk premia are less important.MOST F INANCIAL ECONOMISTS AGREE that a stock's intrinsic value is the present value of its expected future dividends~or cash f lows! to common shareholders, based on currently available information. However, few academic studies have focused on the practical problem of measuring intrinsic value. 1 Perhaps the scant attention paid to this important topic ref lects the standard academic view that a security's price is the best available estimate of intrinsic value. Consequently, many researchers regard fundamental analysis, the study of public financial information to arrive at an independent measure of intrinsic value, as a futile exercise.The case for the equality of price and value is based on an assumption of insignificant arbitrage costs. 2 When information and trading costs are trivial, stock prices should be bid and offered to the point where they fully re-* Lee and Swaminathan are at the Johnson Graduate School of Management, Cornell University. Myers is at the University of Washington. We appreciate the helpful comments from 1693 f lect intrinsic values. However, when intrinsic values are difficult to measure and0or when trading costs are significant, the process by which price adjusts to intrinsic value requires time, and price does not always perfectly ref lect intrinsic value. In such a world, a more realistic depiction of the relation between price and value is one of continuous convergence rather than static equality. 3 Once we admit the possibility that price may diverge from value, the measurement of intrinsic value becomes paramount. Aside from an emerging set of studies in the accounting literature which we discuss later, few academic studies to date have directly addressed the many practical problems associated with implementing a comprehensive valuation model. Nor has much attention been paid to the appropriate empirical benchmark~s! for assessing alternative empirical value estimates when price itself is a noisy measure of intrinsic value.In this study, we empirically evaluate several alternative measures for the intrinsic value of the 30 stocks in the Dow Jones Industrial Average~DJIA!. As a departure from the current literature, we do not require price to equal intrinsic value at all times. 4 Instead, we model the time-series relation between price and value as a cointegrated system, so that price and value are long-term convergent. ...

Residual income (RI) valuation is a method of estimating firm value based on expected future accounting numbers. This study documents the necessity of using linear information models (LIMs) of the time series of accounting numbers in valuation. I find that recent studies that make ad hoc modifications to the LIMs contain internal inconsistencies and violate the no arbitrage assumption. I outline a method for modifying the LIMs while preserving internal consistency. I also find that when estimated as a time series, the LIMs of Ohlson (1995), and Feltham and Ohlson (1995) provide value estimates no better than book value alone. By comparing the implied price coefficients to coefficients from a price level regression, I find that the models imply inefficient weightings on the accounting numbers. Furthermore, the median conservatism parameter of Feltham and Ohlson (1995) is significantly negative, contrary to the model's prediction, for even the most conservative firms. To explain these failures, I estimate a LIM from a more carefully modeled accounting system that provides two parameters of conservatism (the income parameter and the book value parameter). However, this model also fails to capture the true stochastic relationship among accounting variables. More complex models tend to provide noisier estimates of firm value than more parsimonious models.

We examine whether three tax system characteristics—required book-tax conformity, worldwide versus territorial approach, and perceived strength of enforcement—impact corporate tax avoidance across countries after controlling for firm-specific factors previously shown to be associated with tax avoidance (i.e., performance, size, operating costs, leverage, growth, the presence of multinational operations, and industry) and for other cross-country factors (i.e., statutory corporate tax rates, earnings volatility, and institutional factors). We find that, on average, firms avoid taxes less when required book-tax conformity is higher, a worldwide approach is used, and tax enforcement is perceived to be stronger. However, the relations between tax avoidance and all three tax systems characteristics are contextual and depend on the extent to which management compensation comes from variable pay, including bonuses, stock awards, and stock options. Data Availability: Data are available from sources identified in the text.

This paper provides evidence on firms that report long “strings” of consecutive increases in earnings per share (EPS). First, we find 746 firms that report earnings strings of at least twenty quarters since 1962, and show that this frequency is much larger than would be expected by chance. We interpret this as prima facie evidence of earnings management. Next, we document that these firms enjoy abnormal returns that average more than 20 percent per year during the first five years of these strings, and these returns are larger than those of firms reporting at least five years of consecutive increases in annual (but not quarterly) EPS. We argue that these market premia, and the rapidity with which they disappear once the strings end, provide managers with incentives to maintain and extend the strings. Finally, we present several tests that document how managers of these firms use various earnings management tools to help their firms sustain and extend these strings.