Peter D. Wysocki
Associate Professor of Accounting | MIT Sloan School of Management

"Investor Protection and Earnings Management: An International Comparison" (with C. Leuz and D. Nanda)
Journal of Financial Economics, Volume 69, No. 3, September 2003.
Download paper from SSRN

(1) Leuz, Nanda and Wysocki (2003) was identified as the "New Hot Paper" in Economics and Business for 2004 by ISI Essential Science Indicators. See description of this "New Hot Paper" here.

Abstract:
This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders' ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our evidence is consistent with this prediction. The findings suggest a link between corporate governance and the quality of reported earnings, and complement prior finance research that treats the quality of corporate reporting as exogenous.

NEW: "Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors" (with L. Hail and C. Leuz)
MIT Sloan School of Management Working Paper (February 2009).
Download paper from SSRN

Abstract:
Drawing on the academic literature in accounting, finance and economics, we analyze economic and policy factors related to the potential adoption of International Financial Reporting Standards (IFRS) in the U.S. We highlight the unique institutional features of U.S. markets to assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We discuss the compatibility of IFRS with the current U.S. regulatory and legal environment as well as the possible effects of IFRS adoption on the U.S. economy as a whole. We also consider how a switch to IFRS may affect worldwide competition among accounting standards and standard setters, and discuss the political ramifications of such a decision on the standard setting process and on the governance structure of the International Accounting Standards Board. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit tradeoff between (1) recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings that will largely accrue to multinational companies, and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. We conclude by outlining several possible scenarios for the future of U.S. accounting standards, ranging from maintaining U.S. GAAP, letting firms decide whether and when to adopt IFRS, to the creation of a competing U.S. GAAP-based set of global accounting standards that could serve as an alternative to IFRS.

NEW: "Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for Future Research" (with C. Leuz)
MIT Sloan School of Management Working Paper (March 2008).
Download paper from SSRN

Abstract:
This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms' reporting and disclosure activities and then use this framework to discuss potential costs and benefits of regulating these activities and to organize the key insights from the literature. Our survey highlights important unanswered questions and concludes with numerous suggestions for future research.

"Do Managers Withhold Bad News?" (with S. Kothari and S. Shu)
Journal of Accounting Research, Volume 47, No. 1, March 2009.
Download paper from SSRN

Abstract:
In this study, we examine whether managers delay disclosure of bad news relative to good news. If managers accumulate and withhold bad news up to a certain threshold, but leak and immediately reveal good news to investors, then we expect the magnitude of the negative stock price reaction to bad news disclosures to be greater than the magnitude of the positive stock price reaction to good news disclosures. We present evidence consistent with this prediction. Our analysis suggests that management, on average, delays the release of bad news to investors.

"Discretionary Disclosure and Stock-based Incentives" (with V. Nagar and D. Nanda)
Journal of Accounting and Economics, Volume 34, No. 1, January 2003.
Download paper from SSRN

Abstract:
We examine the relation between managers' disclosure activities and their stock price-based incentives. Managers are privy to information that investors demand and are reluctant to publicly disseminate it unless provided appropriate incentives. We argue that stock price-based incentives in the form of stock-based compensation and share ownership mitigate this disclosure agency problem. Consistent with this prediction, we find that firms' disclosures, measured both by management earnings forecast frequency and analysts' subjective ratings of disclosure practice, are positively related to the proportion of CEO compensation affected by stock price and the value of shares held by the CEO.

"Earnings Management, Tax Compliance, and Institutional Factors": A  Discussion of Ultimate Ownership, Income Management, and Legal and Extra-Legal Institutions
Journal of Accounting Research, Vol. 42, No. 2, May 2004.
Download paper

Abstract:
This discussion re-examines two major elements of Haw et al (2004). First, I present empirical evidence suggesting that tax compliance and earnings management are endogenous outcomes around the world. This result raises questions whether tax compliance is a causal determinant of either private control benefits or earnings management. I therefore outline a competing view, with supporting empirical evidence, that suggests that better investor protection laws and accounting standards can mitigate earnings management and, as a side benefit, increase corporate tax compliance. Second, I investigate the empirical validity of the Haw et al (2004) earnings management proxy. I find that it exhibits no association with relevant economic factors or with previously validated earnings management and accounting quality measures.

"The Walkdown to Beatable Analyst Forecasts: The Roles of Equity Issuance and Insider Trading Incentives" (with S. Richardson and S. Teoh)
Contemporary Accounting Research, Vol. 21, No. 4, December 2004.
Download paper from SSRN

Abstract:
Security regulators and the business press have alleged that firms play an 'earnings-guidance game' where analysts make optimistic forecasts at the start of the year and then 'walk down' their estimates to a level the firm can beat by the end of the year. In a comprehensive sample of I/B/E/S individual analysts' forecasts of annual earnings from 1983-1998, we find strong support for the claim in the post-1992 period. We examine whether the 'walk down' to beatable targets is associated with managers' incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (insider trades). Consistent with these hypotheses, we find that the 'walk down' to beatable targets is most pronounced in firms that are either net issuers of equity or in firms where managers are net sellers of stock after an earnings announcement. These findings provide new insights on how capital market incentives affect communications between managers and analysts.

"Portfolio Preferences of Foreign Institutional Investors" (with R. Aggarwal and L. Klapper)
Journal of Banking and Finance, Vol. 29, December 2005.
Download paper from SSRN

Abstract:
This paper examines investment allocations in emerging markets by actively-managed U.S. mutual funds. We analyze both country- and firm-level characteristics and policies that influence these investment allocations. At the country-level, we find that U.S. funds invest more in open emerging markets with stronger shareholder rights, legal frameworks and accounting policies. After controlling for country characteristics, U.S. funds are found to invest more in large growing firms with high analyst following and policies such as ADR listing and more transparent accounting policies. The impact of ADR listing and better accounting policies is most pronounced in countries with weaker investor protection. Our results suggest that steps can be taken both at the country- and the firm-level to create an environment conducive to foreign institutional investment.

"Expectations Management and Beatable Targets: How Do Analysts React to Explicit Earnings Guidance?" (with J. Cotter and I. Tuna)
Contemporary Accounting Research, Vol. 23 No.3, Autumn 2006.
Download paper from SSRN

Abstract:
This study investigates security analysts' reactions to explicit management guidance to re-assess the claims by the media and prior academic studies that firms guide analysts toward beatable earnings targets. We use a large sample of quarterly management earnings forecasts to examine the content of management guidance and the timing, extent and independence of analysts' reactions to this guidance. Between 1993 and 2001, we document a structural trend toward (a) more widespread pessimistic management guidance relative to actual earnings outcomes, (b) more immediate analysts forecast revisions in response to explicit guidance, especially if it conveys 'bad news', and (c) greater likelihood that analysts switch to meetable or beatable earnings targets after management guidance. These results suggest that management is successful in guiding security analysts toward meetable and beatable earnings targets, and that explicit earnings guidance plays an important role in this process.

"Accounting for Taste: Board Member Preferences and Corporate Policy Choices"
MIT Sloan School of Management Working Paper, 2004.
Download paper from SSRN

Abstract:
This paper explores whether firms that share common directors also pursue similar corporate policies. Using a sample of 885 U.S. firms with common directors, we find that director fixed effects strongly explain variation in firms' governance, financial, disclosure, and strategic policy choices. Moreover, the director fixed effects provide incremental explanatory power over traditional economic determinants of firms' policies. Consistent with our hypotheses, the director effects are less pronounced in large firms, in firms with more outside board members, and for directors with numerous outside board appointments. Our evidence is more consistent with directors and firms "matching" their policy preferences rather than directors "imposing" their policy preferences on firms.

"(Non)Convergence in International Accrual Accounting" (with P. Joos)
MIT Sloan School of Management Working Paper, 2004.

Abstract:
This paper re-examines the issue of international convergence of firms' accounting numbers. Despite claims of growing harmonization in international accounting standards and practices, we present evidence of persistent and systematic differences in the magnitude of firms' working capital accruals across 20 countries between 1991 and 2000. We hypothesize that the persistent accrual differences arise from continuing international differences in the microeconomic and institutional (versus standards-based) determinants of accruals. Our empirical evidence supports this hypothesis. Our findings suggest that the international harmonization of accounting standards will not result in the convergence of accrual accounting practices if differences in institutional and real operating environments persist across countries.

"Investor Relations and Stock Message Boards: Who is Chatting about Your Company on the Web?"
Investor Relations Quarterly, 2000, Volume 3, No. 2.
Download paper

Other Papers and Articles:

"Stock Message Boards: The Medium is the Message"
Investor Relations Business, May 29, 2000.
Download article

"Real Options and the Informativeness of Segment Disclosures"
Download paper from SSRN

 "Cheap Talk on the Web: The Determinants of Postings on Stock Message Boards"
Download paper from SSRN

"Managerial Motives and Corporate Use of Derivatives: Some Evidence"

Teaching Bio:
Professor Wysocki is an award-winning business school teacher. Professor Wysocki has taught Business Analysis Using Financial Statements at both the MIT Sloan School of Management and the University of Michigan Business School. The complete lecture notes for Professor Wysocki’s MBA Business Analysis class can be found at the innovative OpenCourseWare site at MIT. OpenCourseWare is “a free and open educational resource for faculty, students, and self-learners around the world. OCW supports MIT's mission to advance knowledge and education, and serve the world in the 21st century.”
Link to my Business Analysis Class on MIT OpenCourseWare