No abstract

We investigate whether historical cost measurement of assets lowers the usefulness of DuPont analysis for investors. Because firms report assets at modified historical cost under US GAAP, accounting ratios can be biased upward when assets have appreciated. Thus, variation in asset turnover, which is the DuPont ratio most affected by asset measurement, can be due to both economic forces and measurement effects. We assess the extent of measurement effects using the average age of a firm's assets and find that asset turnover ratios are higher and more persistent for firms with older assets. Forecast errors of asset turnover are associated with the change in asset age, and these forecast errors are positively associated with contemporaneous and future returns. Our results are weaker in non-US samples, in part reflecting deflation and upward revaluations, consistent with our US results capturing biased asset turnover ratios due to historical cost measurement.

We present evidence that although individuals with accounting expertise bring key skills to the financial reporting responsibilities of the chief financial officer (CFO) position, they tend to lack educational and career experiences relevant to nonaccounting responsibilities (e.g., operations and strategy). Assuming boards’ perceptions of CFO accounting expertise are correct on average, we provide evidence of tradeoffs of CFO accounting expertise by examining how differences in CFO backgrounds shape executive employment decisions. Firms with greater demand for nonaccounting expertise are less likely to hire an accounting expert CFO, consistent with ex ante firm-manager matching. Ex post, significant declines in firm-manager fit predict CFO turnover and other compensating changes in the composition of the senior management team. Accounting expert CFOs are also less likely to become chief executive officers, suggesting that CFO experience does not fully mitigate these tradeoffs. Collectively, the results suggest important tradeoffs inherent to CFO accounting expertise that shape the structure of the senior management team. This paper was accepted by Suraj Srinivasan, accounting.

Staff at the U.S. Securities and Exchange Commission (SEC) conduct recurring reviews of firms’ filings to deter misconduct and facilitate investor access to high-quality information. We identify the names of SEC staff who work on a comment letter and examine whether their prior involvement (i.e., continuity) is associated with comment letter quality. Our results are consistent with continuity leading to lower quality comment letters. Continuity is associated with fewer substantive comments, agreed-upon disclosure changes, and greater similarity between consecutive comment letter reviews. These results are consistent with continuity increasing staffs’ tendency to focus on familiar issues and overlook other areas of potential deficiencies. Time, changes in firms’ operations, and increasing staffs’ feelings of accountability can mitigate the negative effect of continuity on comment letter quality. Our study suggests benefits to a fresh perspective in regulatory monitoring.