Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Unmanaged” Earnings. Hemmer, T. and E. Labro (revised August 2017).

We explore the theoretical relation between earnings and market returns as well as the properties of accounting earnings frequency distributions under the maintained hypothesis that managers use unbiased accounting information benevolently to prudently manage the firms of which they are appointed stewards. We offer this surprisingly uncommon (in the academic literature) perspective to generate untainted benchmarks against which empirically observed earnings-returns relations and aggregate earnings distributions can be evaluated. Our analysis is based on arguably the most parsimonious model of informed managerial decision making and market pricing based on reported earnings possible. It yields the following results: reported losses are less persistent than reported gains, the market response to earnings exhibits an “S-shape” and earnings relate to returns asymmetrically in the way documented by e.g. Basu (1997). Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily unimodal. Instead, it is likely to exhibit a clear discontinuity at zero and looks similar to the plots reported by Burgstahler and Dichev (1997). However, within our set-up, none of these phenomena are due to reporting noise, bias or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for prudent managerial decision making that in turn generates the future earnings on which future decisions will be based.

Updating Accounting Systems: Long-Run Evidence from the Health Care Sector. Labro, E. and L. Stice-Lawrence (revised January 2018).

This paper provides evidence on the determinants of and economic outcomes associated with updates of accounting systems over a 24-year time-span in a large sample of U.S. hospitals. We document that a set of previously unidentified determinants drives the updating decision including “waves” of vendor-pushed updates that are taking place across hospitals, and regulatory impetuses at the state and federal level, such as the implementation of price transparency websites and fair pricing measures and the enactment of Sarbanes-Oxley Section 404, that increase hospitals’ demand for high quality accounting information. Using vendor-pushed updates as an instrumental variable, we document that updating of most types of accounting systems results in immediate and significant reductions in operating expenses. Our findings have implications for settings outside of the health care sector, but they are also important in their own right given the current public policy crisis concerning the rising costs of medical care.