Term
| Why did Lev and Zarowin (1999) support R&D capitalization? |
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Definition
| To better capture new Technoogy firms values because accounting systems were based on old style tech firms. A decrease in accounting information was coming from new firms with high R&D but since it is expensed the value was not evidenced by accounting info. |
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Term
| According to Lev and Zarowin (1999), why did the usefulness of accounting decline over time? |
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Definition
| Stock prices were not being reflected by accounting information because of dramatic changes in business processes like R&D and intangeable assets |
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Term
| What positive accounting theory hypothesis was being tested by Jones (1991) |
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Definition
| Jones tested the exposure to political costs hypothesis by conducting a study on firmsapplying for federal government relief. These firms adopted accounting policies to lower netincome making the company appear to have been more damaged by unfair foreign competitionthen the company was in reality. The easiest manner for a company to change reported netincome is to manipulate accounting policies relating to accruals. |
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Term
| What positive accounting theory hypothesis was being tested by Healy (1985)? |
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Definition
| Bonus Plan Hypothesis. Managers choose accounting policies to maxamize earnings. |
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Term
| What positive accounting theory hypothesis was being tested by Dichev and Skinner (2002)? |
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Definition
Debt Covenant Hypothesis.
Managers choose accounting policies to maintain covenant ratios; managers work harder to avoid first covenant violation. |
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Term
| What is the primary finding of Beatty Weber and Yu (2008)? |
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Definition
"We find contract modifications are more likely when agency costs are higher
and litigation, tax and equity demands for conservatism are lower. However, we find a
positive association between unexplained reporting conservatism and contract modifica-
tions, suggesting contractual modifications alone do not fulfill lenders’ demands for
conservatism.' |
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Term
| In Healy (1985), what did the author find related to discretionary accruals and bonus plans? |
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Definition
| Managers have incentive to select income-decreasing discretionary accruals when their bonus plan's upper and lower bounds are binding. When the bounds are not binding the manager has an incentive to choose income-increading discreationary accruals. |
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Term
| According to Dechow Sloan and Sweeny (1996), what are some reasons that firms manipulate earnings? |
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Definition
Motivations
-Need for external capital
-Contracting (bonus and debt hypotheses from PAT)
Firms with weak governance structures more likely to be an earnings manipulator |
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