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: Longitudinal Evidence from the Health Care Sector. Labro, E. and L. Stice-Lawrence (revised August 2018).

This paper provides evidence on the determinants and economic outcomes of updates of accounting systems (AS) over a 24-year time-span in a large sample of U.S. hospitals. We provide evidence that hospitals update their AS in response to three types of pressures: economic pressures, such as demand side increases in the need for information driven by state-level price regulations and supply side increases in the quality of accounting information driven by vendor rollouts of improved AS; coercive pressures imposed by regulators mandating certain practices, such as internal control practices imposed by Sarbanes-Oxley Section 404; and mimetic pressures for hospitals to conform their AS to those of their peers, such as local county and prominent “celebrity” peers. We find that only economically driven updates lead to economic benefits in the form of lower operating expenses and higher revenues. In contrast, we find some evidence that AS updates prompted by coercive regulatory and mimetic pressures actually impose economic costs in the form of higher operating expenses.