This paper examines systematic differences in the level of accounting conservatism between high-tech and low-tech firms. Relying on the recent development in theoretical models and empirical measures of conservatism, we investigate conservative accounting practices and earnings management behavior in high-tech and low-tech firms. The results based on comparisons of cumulative nonoperating accruals, regression coefficients from the income timeliness models in Basu (1997), the distribution of earnings, and discretionary accruals between the two groups are consistent with a higher level of accounting conservatism in high-tech firms vis-à-vis low-tech firms. Additional analyses show that the effect of conservatism cannot be used as a defense for the over-valuation of high-tech firms. Copyright Springer Science + Business Media, LLC 2006High-tech, Low-tech, Conservatism, Earnings management,
This paper examines the systematic differences between high-tech and low-tech firms in compensation policies, the sensitivity of compensation to market and accounting performance, and earnings management in the presence of investment opportunities. We find that the level of industry participation (i.e., high-tech versus low-tech) has incremental contracting value beyond the investment opportunity set (IOS) in determining executive compensation. When we control for the IOS factor, we find that high-tech firms generally pay higher levels of total compensation by granting larger amounts of stock options than low-tech firms, even though they typically offer lower cash salaries and bonuses than their low-tech counterparts. The relationship between compensation and stock return is higher for high-tech firms, and there appears to be no difference in the association between compensation and accounting return in both groups. More importantly, we find that the association between bonus and discretionary accruals is higher for high-tech firms than for low-tech firms, especially when earnings before discretionary accruals are lower than analyst-forecasted earnings. Furthermore, even in cases where premanaged earnings exceed earnings expectations, or in cases where the probability of meeting analysts' forecasts is low, high-tech firms are more likely to reward managers who use discretionary accruals to meet earnings forecasts. This is consistent with the practice of compensation committees of hightech firms rewarding CEOs for using discretionary accruals to signal private information to reduce information asymmetry.
This study focuses on variation in managers' accounting choices given motivations to use accounting accruals opportunistically. Prior research identifies a number of motivations arising from accounting-based contracts that encourage opportunistic reporting by managers. However, prior research implicitly assumes all managers respond identically to the same contractual motivations. This study identifies variation in managers' responses to contractual motivations involving accruals that is related to managers' stewardship of corporate assets. Evidence shows that modeling how managers use corporate assets enhances the explanation of their accounting choices given motivations to (a) use accruals opportunistically, and (b) to smooth income via accruals. Managers with high ratings on judicious use of corporate assets are less responsive to motivations to use accruals opportunistically, and to smooth income via accruals, than managers with low ratings. This evidence suggests that not all managers are equally opportunistic, and that modeling this factor helps explain cross-sectional differences in managers' accounting choices. Copyright Blackwell Publishers Ltd 2002.
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