Entropy-balanced accruals

McMullin, Jeff L.; Schonberger, Bryce

doi:10.1007/s11142-019-09525-9

Cited by 475 publications

(114 citation statements)

References 46 publications

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“…Entropy balancing creates a set of weights for the control sample such that the first, second, and higher moments of the covariate distributions in the treatment and the reweighted control sample are equalized (Hainmueller 2012). To achieve this, entropy balancing places higher weights on Canadian firms that are similar to the US firms along the chosen balancing dimensions (Ferri et al 2018;McMullin & Schonberger 2020;Shroff et al 2017). Entropy balancing is particularly helpful in preserving the size of the control sample, which is pertinent when the size of the treated and control samples are vastly different (Laurion 2020).…”

Section: Appendix a Description Of Reporting Changes Mandated By Asu mentioning

confidence: 99%

“…One drawback of entropy balancing is that it could assign large weights to a handful of control observations, especially when there is less overlap between the treated and control sample (McMullin & Schonberger 2020). This becomes a problem particularly in sub-sample analysis, where the number of control firms is low.…”

Section: Appendix a Description Of Reporting Changes Mandated By Asu mentioning

confidence: 99%

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Location, location, location! Real effects from the mandated removal of pension expected return from operating income

2021

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The accounting for defined-benefit (DB) pension expense in U.S. GAAP involves offsetting pension costs against an expected (rather than actual) return on pension assets. Pensions commentators argue that this expensing model tilts pension portfolios towards riskier assetsas sponsoring firms can benefit from assuming higher expected rates of return on riskier assets (which reduce pension expense and boost reported income), without bearing the cost of higher volatility in reported income. We examine a recent regulatory change in U.S. GAAP, which mandates the relocation of the expected return on pension assets from "above the line" of to "below the line" of operating income. Consistent with this change reducing the financial reporting incentives for risk-taking, we predict and find that a sample of U.S. firms subject to this mandate reduces risk-taking in pension assets following the change, relative to a control sample of Canadian firms not subject to the change. In cross-sectional tests, we find that the reduction in risk-taking is more pronounced in (1) firms where the financial reporting incentives for risk-taking were stronger in the pre-period, and in (2) firms where the regulatory change particularly reduced those benefits. Our findings imply that managers are willing to undertake real actions (i.e., invest in riskier assets) to report favorable operating income, and that these incentives are incremental to the incentives to report favorable net income. They also provide evidence that financial reporting incentives serve as a driver of pension asset allocation decisions.

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Section: Appendix a Description Of Reporting Changes Mandated By Asu mentioning

confidence: 99%

Section: Appendix a Description Of Reporting Changes Mandated By Asu mentioning

confidence: 99%

Location, location, location! Real effects from the mandated removal of pension expected return from operating income

2021

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“…While other methods attempt to deal with this by discarding control observations to arrive at a match control observation (e.g., propensity score matching), entropy balancing is a maximum entropy method that identifies an appropriate weight to each of the control observations in order to achieve covariate balance between the treatment and control samples (Hainmueller, 2012). 14 An additional benefit of entropy balancing is its ability to handle nonlinear relationships (McMullin & Schonberger, 2020).…”

Section: Controlling For the Propensity For A Revenue Recognition Restatementmentioning

confidence: 99%

Managerial discretion in revenue recognition amidst financial restatements and implications for GAAP compliance

Burnett

Martin

Reppenhagen

2020

Business Fin & Account

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In this study, we examine GAAP-compliant and noncompliant revenue accruals among non-fraud, non-error restated firm-years. The restatement setting isolates and quantifies managerial discretion in the revenue recognition process and provides insight into the role of GAAP compliance in producing predictive information. We find consistent evidence that non-GAAP-compliant revenue accruals are predictive of future cash receipts and total sales. We find that this main result is strongest for accrued revenues rather than deferred revenues. We find additional evidence that non-GAAP-compliant revenue accruals are generally more or similarly predictive of future cash receipts or total sales when compared to GAAP-compliant revenue accruals for both restated and non-restated firm-years.Our findings suggest that managers' discretion provides predictive information in the restatement setting, where managers' judgment is likely most prevalent. We also find that ex-post compliance with US GAAP does not isolate and remove less predictive information. Last, we fail to find reliable evidence that managers in our sample use their discretion over revenue accruals to smooth revenues or to meet or beat revenue and earnings benchmarks.

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“…EB is a data preprocessing method used to eliminate differences in observable covariates across treatment and control groups. Specifically, EB assigns weights to observations such that the covariate distributions of the control group match those of the treatment group on the set of pre-specified moments (Hainmueller [2012], McMullin andSchonberger [2020]). 17 To implement the methodology, we first identify treatment firms that have experienced CDS coverage initiation during the sample period and have sufficient data for the analysis in at least four of the eight quarters immediately preceding and in at least four of the eight quarters immediately following the CDS coverage initiation quarter.…”

Section: Entropy Balancing and Difference-in-differences Designmentioning

confidence: 99%

Credit Default Swaps and Non-GAAP Earnings Disclosure.

Black¹

2020

Preprint

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We examine the effect of credit default swap (CDS) coverage on voluntary disclosure using firmprovided non-GAAP earnings as a laboratory. For a large sample of U.S. firms, we find that for companies with CDS coverage, the persistence of non-GAAP exclusions is lower, implying higher disclosure quality. The effect manifests across a range of performance measures and measurement windows and is strongest among non-investment-grade firms, entities for which monitors are more likely to rely on public accounting reports. This improvement in quality comes as a counterpoint to a decrease in the frequency of non-GAAP disclosure among firms that experience CDS coverage initiation. Collectively, our findings suggest firms counteract the perceived negative externalities associated with CDS coverage with higher-quality voluntary disclosure.

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Entropy-balanced accruals

Cited by 475 publications

References 46 publications

Location, location, location! Real effects from the mandated removal of pension expected return from operating income

Location, location, location! Real effects from the mandated removal of pension expected return from operating income

Managerial discretion in revenue recognition amidst financial restatements and implications for GAAP compliance

Credit Default Swaps and Non-GAAP Earnings Disclosure.

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