June 2, 2010
Two UC Berkeley Accounting Professors Honored for Contributions to Accounting and Governance Research
Widely-cited study identified common causes of earnings manipulations and shaped public policy over the past decade
Research by two UC Berkeley accounting professors that helped fuel an explosion of subsequent governance-accounting studies has been recognized for its significant and enduring impact on the discipline and consequently, regulatory reform.
Patricia Dechow and Richard Sloan, professors at the University of California, Berkeley’s Haas School of Business, have received the American Accounting Association’s inaugural Distinguished Contribution to Accounting Literature Award for their research paper, “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC.” The paper’s findings demonstrate that firms most frequently manipulate earnings to lower the short-run cost of raising new financing and that weak governance structures facilitate such behavior. Co-author Amy Hutton, professor of accounting, Boston College, is also a recipient.
“We are delighted to receive this recognition of our work from our colleagues, more so because our findings were controversial at the time of publication and we initially faced an uphill battle in gaining broader acceptance of our conclusions,” said Sloan.
The study focused on firms facing alleged violations of Generally Accepted Accounting Principles (GAAP) in accounting enforcement actions taken by the SEC. Dechow, Sloan, and Hutton identified links between corporate governance characteristics (such as lack of board independence and excessive managerial power) and accounting manipulations. The award’s nominating committee wrote that the paper “documented a fundamentally important linkage – arguably weak corporate governance characteristics are associated with bad accounting outcomes. In other words, when it comes to quality accounting, corporate governance is important.”
The 1996 paper has received over 1,000 citations on Google Scholar. Furthermore, resulting regulatory reforms were consistent with the study’s findings. For example, listed companies were required to have a majority of independent directors on their boards and audit committees comprised solely of independent directors.
“It was controversial at the time it was written in that it challenged existing academic thinking such as the efficient markets hypothesis and the hypothesis that then existing governance structures were optimal,” says Dechow. “It also anticipated the causes and consequences of subsequent accounting crises such as Enron and WorldCom. We recently updated the database used for this research and we plan to make it available to researchers and practitioners through Haas’ Center for Financial Reporting and Management (CFRM).”
Dechow is the Donald H. and Ruth F. Seiler Professor in Public Accounting. She previously held faculty positions at Wharton and the University of Michigan’s Ross School of Business. Her research focuses on accounting accruals, the quality and reliability of earnings, the use of earnings information in predicting stock returns, and the effect of analysts’ forecasts on investors’ perceptions of firm value. Dechow’s work has been published in numerous accounting journals.
Sloan is the L. H. Penney Professor of Accounting. He was previously managing director and head of equity research at Barclays Global Investors from 2006 to 2008. His research focuses on the role of accounting information in investment decisions and is published in leading accounting, finance, and economics journals. He has received numerous awards for his research on earnings quality, including the AAA’s Notable Contributions Award in 2001 and 2009.
Founded in 1916, the AAA is a worldwide organization for accounting educators and researchers. In 2010, the AAA created the Distinguished Contribution to Accounting Literature Award to recognize accounting research of exceptional merit that has significantly impacted the discipline over a period of at least 10 years. In awarding the inaugural prize to Dechow and Sloan, the AAA determined that their research demonstrates a major contribution to accounting education and practices. The prestigious award and a $2500 check will be presented to the three winners at the association’s annual meeting in San Francisco on August 3, 2010.
The paper was published in the journal Contemporary Accounting Research, Vol. 13, No. 1, Spring 1996.