Empirical Financial Statement Analysis
Time and place: May 27-30, 2024. Hanken School of Economics, Helsinki. Class times: 9-12 and 1-4 pm
Course Description
“Empirical Financial Statement Analysis” engages PhD students in advanced empirical research topics, focusing on financial reporting, disclosure practices, earnings quality, and the economic motivations behind accounting choices. Professor Shivaram Rajgopal’s rigorous teaching approach emphasizes not only understanding empirical findings but also developing a critical perspective on research methods and conclusions. The course spans four primary areas:
• Day 1: Foundations of Financial Reporting and Accounting Choice – An introduction to foundational theories on accounting choices, agency costs, and the broader economic implications of financial reporting.
• Day 2: Earnings Quality, Accruals, and Earnings Management – A comprehensive look into empirical studies on earnings quality and the mechanisms of earnings management, with a focus on accruals and real activities manipulation.
• Day 3: Disclosure Research – An exploration of disclosure quality, financial statement comparability, and the impact of transparency on investor protection and market efficiency across different regulatory environments.
• Day 4: Intangible Assets – The course concludes with a focus on the valuation and reporting of intangible assets and the role of corporate culture in shaping financial performance and long-term value creation.
Professor Rajgopal’s approach requires students to engage deeply with each reading, presenting papers as if they were the original authors, defending key ideas, and responding to critiques. Each session is structured around active discussion, with students expected to identify the research question, methodology, and conclusions of each study, while also providing well-grounded critiques of its strengths, limitations, and potential contributions. This approach fosters a rigorous environment where students learn to evaluate research holistically, considering both the technical aspects and broader implications.
The course culminates in an original research proposal, where students apply empirical and theoretical insights gained throughout the course to formulate a novel research question in financial statement analysis, detailing a clear empirical approach, anticipated challenges, and potential contributions to the field. This capstone assignment solidifies the course’s emphasis on developing the skills necessary for impactful research in accounting.
Learning Goals and Objectives
• Deepen Understanding of Empirical Financial Reporting Literature: Students will gain a strong grasp of key studies in financial statement analysis, focusing on earnings quality, accruals, disclosure, and the economic implications of accounting choices. This includes understanding the motivations behind accounting decisions and how they influence financial statement presentation.
• Critically Evaluate and Synthesize Research: Through structured discussions and written critiques, students will develop the ability to critically assess published research, identifying strengths, limitations, and gaps within empirical studies. Students will also learn to connect themes across multiple studies, assessing how different research approaches address similar questions.
• Formulate Research Ideas in Financial Statement Analysis: By the end of the course, students will be able to identify meaningful research questions and construct a coherent research proposal that addresses a relevant issue in financial statement analysis. This includes defining the question, outlining potential empirical approaches, and anticipating limitations.
Instructions and Examination
Students are expected to actively participate in each class, including presenting and critiquing assigned papers. The course assessment is divided as follows:
1. Presentation of Papers (25%): Students will present papers assigned by Henry, discussing the main ideas, defending the methodologies, and addressing any potential limitations.
2. Written Critiques/Literature Reviews (25%): Students will prepare written critiques of key papers, analyzing connections among studies and identifying gaps in the literature.
3. Original Research Proposal (50%): Students will submit a detailed proposal by the end of the course, articulating their research question, empirical approach, data sources, and anticipated limitations. This proposal will also be presented in class for peer critique.
Assignments
For each session, students must come prepared to answer three core questions for each assigned paper: (1) What is the research question? (2) How is it answered regarding approach and setting? (3) What conclusions are reached? Additionally, students must prepare critiques of the “starred” papers, identify significant gaps, and submit their written reviews at the beginning of each class. The final assignment, an original research proposal, will enable students to integrate course insights into developing a significant research question, detailing methodology, data sources, and anticipated contributions to financial statement analysis.
Credits: 5 ECTS Credits
Grading: The final grade will be assessed using a five-level grading scale: sufficient, satisfactory, good, very good, and excellent.
Prerequisites: Article package
Admittance: A maximum of 25 students will be admitted to the course. Early registration is preferred. To register, please send an email to the course coordinator. The deadline for course applications is April 28, 2025.
Instructor: Shivaram Rajgopal, Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing, Columbia Business School
Homepage: https://business.columbia.edu/faculty/people/shivaram-rajgopal
e-mail: sr3269@gsb.columbia.edu
Course coordinator and contact information: Henry Jarva, henry.jarva@hanken.fi
Reading list
Day 1: Foundations of Financial Reporting and Accounting Choice
This session introduces foundational theories related to accounting choices, agency costs, conservatism, and the economic implications of corporate financial reporting.
*** represents 6 assigned papers per day.
1. ***Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
2. ***Watts, R. L., & Zimmerman, J. L. (1979). The demand for and supply of accounting theories: The market for excuses. The Accounting Review, 52(3), 273-305.
3. Watts, R. L., & Zimmerman, J. L. (1986). Positive Accounting Theory. Englewood Cliffs, NJ: Prentice-Hall. [Chapter 10]
4. Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: A ten-year perspective. The Accounting Review, 65(1), 131-156.
5. Holthausen, R. W., & Leftwich, R. W. (1983). The economic consequences of accounting choice. Journal of Accounting and Economics, 5, 77-117. [Through the end of Section 3]
6. ***Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73.
7. Watts, R. L. (2003a). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17(3), 207-221.
8. Watts, R. L. (2003b). Conservatism in accounting part II: Evidence and research opportunities. Accounting Horizons, 17(4), 287-301.
9. ***Givoly, D., & Hayn, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of Accounting and Economics, 29(3), 287-320.
10. Kothari, S. P., Ramanna, K., & Skinner, D. J. (2010). Implications for GAAP from an analysis of positive research in accounting. Journal of Accounting and Economics, 50(2-3), 246-286.
11. Lambert, R. A. (2010). Discussion of ‘Implications for GAAP from an analysis of positive research in accounting.’ Journal of Accounting and Economics, 50(2-3), 287-295.
12. Holmstrom, B. (1999). Managerial incentive problems: A dynamic perspective. Review of Economic Studies, 66(1), 169-182.
13. ***Graham, J. (2022). Presidential address: Corporate finance and reality. The Journal of Finance, 77(4), 1975-2049.
14. ***Ball, R. (2024). By what criteria do we evaluate accounting? Some thoughts on economic welfare and the archival literature. Journal of Accounting Research, 62(1), 7-54.
Day 2: Earnings Quality, Accruals, and Earnings Management
Must know studies
1. ***Dichev, I. and P. Dechow. “The Quality of Earnings and Accruals,” The Accounting Review 77 (2002): 35-59.
2. ***Burgstahler, D. and I. Dichev. “Earnings Management to Avoid Earnings Decreases and Losses.” Journal of Accounting and Economics 24(1) (1997): 99-126.
3. ***Hayn, C. “The Information Content of Losses.” Journal of Accounting and Economics 20(2) (1995): 125-153.
4. ***Basu, S. “The Conservatism Principle and the Asymmetric Timeliness of Earnings.” Journal of Accounting and Economics (1997): 3-38.
5. Stein, J.C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics 104(4) (1989): 655-669.
Literature reviews
6. Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344-401. (Read sections 1 and 2 before class)
7. Healy, P. M., and J. M. Wahlen. “A Review of the Earnings Management Literature and its Implications for Standard Setting.” Accounting Horizons 13(4) (1999): 365-383.
8. Dechow, P. M., and D. J. Skinner. “Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators.” Accounting Horizons 14(2) (2000): 235-250.
9. Fields, T., Lys, T., and L. Vincent. “Empirical Research on Accounting Choice.” Journal of Accounting and Economics 31(1-3) (2001): 255-307.
10. DeFond, M. L. “Earnings Quality Research: Advances, Challenges and Future Research.” Journal of Accounting and Economics 50(2-3) (2010): 402-409.
Methodology pieces
11. Collins, D.W., and P. Hribar. “Errors in Estimating Accruals: Implications for Empirical Research.” Journal of Accounting Research 40(1) (2002): 105-134.
12. Hribar, P and D. C. Nichols. “The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management.” Journal of Accounting Research 45(5) (2007): 1017-1053.
13. Dechow, P. M., Ge. W., Larson, C., and R. Sloan. “Predicting Material Accounting Misstatements.” Contemporary Accounting Research 28(1) (2011): 17-82.
14. Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197.
15. Dechow, P. M., Sloan, R., and A. P. Sweeney. “Detecting Earnings Management.” The Accounting Review 70(2) (1995): 193-225.
16. ***Roychowdhury, S. “Earnings Management through Real Activities Manipulation.” Journal of Accounting and Economics 42(3) (2006): 335-370.
Surveys/Field studies
17. ***Dichev, I. D., Graham, J. R., Harvey, C. R., and Rajgopal, S., “Earnings Quality: Evidence from the Field.” Journal of Accounting and Economics (2013)
18. Nelson, M. W., Elliott, J. A., R. L. Tarpley. “Evidence from Auditors about Managers’ and Auditors’ Earnings Management Decisions.” The Accounting Review 77 (2002): 175-202.
Day 3: Disclosure Research
Part 1
Comparability of financial statements
1. ***Defranco, G., Kothari, S.P. and R. Verdi. “The Benefits of Financial Statement Comparability.”, Journal of Accounting Research 49(4) (2011): 895-931.
2. Barth, M., Landsman W. and M. Lang, “Are IFRS-based and U.S. GAAP-based Accounting Amounts Comparable?”, Journal of Accounting and Economics 54(1) (2008): 68-93.
Voluntary disclosure including non-GAAP numbers
1. Lang, M., and R. Lundholm, “Corporate Disclosure Policy and Analyst Behavior.”, The Accounting Review 71(4) (1996): 467-492.
2. There are several papers by the same author team on non-GAAP or pro-forma earnings. Here is one representative example: Black, D., Christensen, T., Ciesielski, J., and B. Whipple, “Non-GAAP reporting: Evidence from Academia and Current Practice.” Journal of Business Finance and Accounting 45(3-4) (2018): 259-294.
3. ***Cohen, L., Malloy, C., & Nguyen, Q. (2020). Lazy prices. The Journal of Finance, 75(3), 1371-1415.
International accounting and disclosure
1. Bradshaw, M.T., and G. S. Miller. “Will Harmonizing Accounting Standards Really Harmonize Accounting? Evidence from Non-US Firms Adopting US GAAP.” Journal of Accounting, Auditing and Finance 23 (2008): 233-263.
2. ***Daske, H., L. Hail, C. Leuz, and R. S. Verdi. “Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences.” Journal of Accounting Research 46 (2008): 1085-1142.
3. Ball, R., “What is the Actual Economic Role of Financial Reporting?” Accounting Horizons 22(4) (2008)
4. Leuz, C., Nanda, D.J., and P. Wysocki. “Earnings Management and Institutional Factors: An International Comparison.” Journal of Financial Economics 69(3) (2003): 505-527.
5. Bushman, R. and J. Piotroski. “Financial Reporting Incentives for Conservative Accounting: The Influence of Legal and Political Institutions.” Journal of Accounting and Economics 42 (2006): 107-148.
6. Bushman, R., Piotroski, J., and A. Smith. 2004. “What Determines Corporate Transparency?” Journal of Accounting Research 42 (2004): 207-252.
7. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., R. Vishny. “Legal Determinants of External Finance.” Journal of Finance 52 (1997): 1131–1150.
8. La Porta, R., Lopez-De-Silanes, F., Shleifer, A., R. Vishny. “Law and Finance.” Journal of Political Economy 106 (1998): 1113–1155.
9. La Porta, R., Lopez-De-Silanes, F. and A. Shleifer. “What Works in Securities Laws?” The Journal of Finance 61 (2006): 1-32.
Part 2
Reducing mandatory disclosure
1. Dambra, M., Field, L. C., and M. Gustafson. “The JOBS Act and IPO Volume: Evidence that Disclosure Costs Affect the IPO Decision.” Journal of Financial Economics 116 (2005): 121-13.
2. Glaeser, S. “The Effects of Proprietary Information on Corporate Disclosure and Transparency: Evidence from Trade Secrets.” Journal of Accounting and Economics 66 (2018):163-193.
3. Heinle, M., Samuels, D., and D. J. Taylor. “Proprietary Costs and Disclosure Substitution: Theory and Empirical Evidence.” Working Paper (2020)
Disclosure on firm or enterprise risks
4. Beaver, W. H., Kettler, P., and M. Scholes. “The Association Between Market Determined and Accounting Determined Risk Measures.” The Accounting Review 45 (1970): 654-682.
1. Boone, J. “Revisiting the Reportedly Weak Value Relevance of Oil and Gas Asset Present
Values: The Roles of Measurement Error, Model Misspecification, and Time-period
Idiosyncrasy.” The Accounting Review 77 (2002): 73-106.
2. Dambra, M., Omri Even-Tov and James P. Naughton. “The Economic Consequences of GASB Financial Statement Disclosure.” Journal of Accounting and Economics 75(2–3), April–May 2023.
3. Rajgopal, S. “Early Evidence on the Informativeness of the SEC’s Market Risk Disclosures: The Case of Commodity Price Risk Exposure of Oil and Gas Producers.” The Accounting Review 74(3) (1999): 251-280.
Disclosure regulation
1. Leuz, C. and P. Wysocki. “The Economics of Disclosure and Financial Reporting
Regulation: Evidence and Suggestions for Future Research.” Journal of Accounting Research 54 (2016): 525-622.
2. Bushee, B. and C. Leuz, 2006. “Economic Consequences of SEC Disclosure Regulation: Evidence from the OTCBB.” Journal of Accounting and Economics 39: 233-264.
3. ***Iliev, P., “The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices.” Journal of Finance 65 (2009): 1163-1196.
4. Ross, S., “The Economics of Information and the Disclosure Regulation Debate,” in Issues in Regulation, Franklin Edwards (ed.), New York, McGraw Hill (1979)
5. Shleifer, A., “Understanding Regulation.” European Financial Management 11 (2005): 439-451.
6. ***Coffee. J., “Market Failure and the Economic Case for a Mandatory Disclosure System.”,
Virginia Law Review 70 (1984): 717-753.
7. Hochberg, Y. V., P. Sapienza, and A. Vissing-Jørgensen. “A Lobbying Approach to
Evaluating the Sarbanes-Oxley Act of 2002.” Journal of Accounting Research 47(2) (2009): 437-445.
8. Cohen, D. A., Dey, A., and T. Z. Lys. “Real and Accrual‐Based Earnings Management in the Pre‐ and Post‐Sarbanes‐Oxley Periods.” The Accounting Review 83(3) (2008): 757–787.
9. Stulz, R. “Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization.” Journal of Accounting Research 47 (2009): 349-389.
10. Li, B., Khan, U., and M. Venkatachalam. “Do the FASB’s Standards Add Shareholder Value?” The Accounting Review 93(2) (2018): 209-247.
11. Leuz, C. 2011. Different approaches to corporate reporting regulation: How jurisdictions differ and why? 2011: 229-256. Accounting and Business Research (recommended for reasons why mandatory disclosure is necessary given the voluntary incentives to disclose).
12. Lang, M, J. Pinto and E. Sul. 2023. MiFID II unbundling and sell-side analyst research. Journal of Accounting and Economics (forthcoming). See https://www.sciencedirect.com/science/article/abs/pii/S0165410123000411
13. ***Armstrong, C., J. Kepler, D. Samuels and D. Taylor. 2
Causality redux: The evolution of empirical methods in accounting research and the growth of quasi-experiments. Journal of Accounting and Economics 74(2–3), November–December 2022. Available at https://www.sciencedirect.com/science/article/abs/pii/S0165410122000441.
Day 4: Intangible Assets
1. ***Lev, B. and T. Sougiannis. “The Capitalization, Amortization, and Value-Relevance of R&D.” Journal of Accounting and Economics 21 (1996): 107-138.
2. Lev, B. and P. Zarowin. “The boundaries of financial reporting and how to extend them.” Journal of Accounting Research (1999): 353- 385.
3. Francis, J. and K. Schipper. “Have financial statements lost their relevance?” Journal of Accounting Research 37 (1999): 319-352.
4. Dichev, I. and V. Tang. “Matching and the changing properties of accounting earnings over the last 40 years.” The Accounting Review 83 (2008): 1425-1460.
5. Srivastava, A. “Why have measures of earnings quality changed over time?” Journal of Accounting and Economics 57 (2014): 196–217.
6. ***Enache, L. and A. Srivastava. “Should intangible investments be reported separately or commingled with operating expenses? New evidence.” Management Science 64 (2018): 3446-3468.
7. Banker, R. D., R. Huang, R. Natarajan, & S. Zhao. “Market valuation of intangible asset: Evidence on SG&A expenditure.” The Accounting Review 94 (2019): 61-90.
8. Rajgopal, S., M. Venkatachalam and S. Kotha. “The Value Relevance of Network Advantages: The Case of E–Commerce Firms,” Journal of Accounting Research 41 (2003): 135-162.
9. Kothari, S.P., T.E. Laguerre and A.J. Leone. “Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus R&D Outlays.” Review of Accounting Studies 7 (2002): 355–382.
10. Lev, B. “The deteriorating usefulness of financial report information and how to reverse it” Accounting and Business Research 48 (2018): 465-493.
Finance and economics
11. Corrado, C.A. and C.R. Hulten. “How do you measure a technological revolution?.” American Economic Review 100 (2010): 99-104.
12. Peters, R.H. and L.A. Taylor. “Intangible capital and the investment-q relation.” Journal of Financial Economics 123 (2017): 251-272
13. Romer, P.M. “Increasing returns and long-run growth.” Journal of Political Economy 94 (1986): 1002-1037
14. Eisfeldt, A.L. and D. Papanikolaou. “The value and ownership of intangible capital.” American Economic Review 104 (2014): 189-194.
15. ***Crouzet, N. and J. Eberly. Rents and Intangible Capital: A Q+ Framework. The Journal of Finance; 78(4): August 2023, Pages 1873-1916.
16. Ewens, M., Peters, R. H., & Wang, S. (2024). Measuring intangible capital with market prices. Management Science.
17. Rajgopal, S., Srivastava, A., & Zhao, R. (2023). Do digital technology firms earn excess profits? Alternative perspectives. The Accounting Review, 98(4), 321-344..
18. Iqbal, Aneel, Shivaram Rajgopal, Anup Srivastava, and Rong Zhao. “Value of internally generated intangible capital.” Forthcoming, Management Science (2023).
Unpublished, working papers
19. Lev, B. and A. Srivastava. “Explaining the Recent Failure of Value Investing” (October 25, 2019). Working Paper. Available at: https://ssrn.com/abstract=3442539 or http://dx.doi.org/10.2139/ssrn.3442539
Corporate Culture
20. Guiso, L., P. Sapienza and L. Zingales. “The value of corporate culture.” Journal of Financial Economics 117 (2015): 60–76.
21. ***Graham, J., J. Grennan, C. Harvey and S. Rajgopal. 2022. Journal of Financial Economics 146, Issue 2, November 2022, Pages 552-593.
22. Bloom, N., E. Brynjolfsson, L. Foster, R. Jarmin, M. Patnaik, I. Saporta-Eksten and J. Van Reenen. “What drives differences in management practices?” American Economic Review 109 (2019): 1648-1683.
23. Jeffers, J. and M. Lee. “Corporate culture as an implicit contract.” (2019). Working Paper. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3426060
24. Grennan, J. “A corporate culture channel: How increased shareholder governance reduces firm value?” (2014). Working Paper. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2345384
25. Ahern, K.R., D. Daminelli, and C. Fracassi. “Lost in translation? The effect of
cultural values on mergers around the world,” Journal of Financial Economics 117 (2015):
165–189.
26. Gorton, G. and A.K. Zentefis, “Corporate Culture as a Theory of the Firm,” (April 2020). Working Paper. Available at: https://www.nber.org/papers/w27353.
27. Green, T.C. , R. Huang, Q. Wen, and D. Zhou, “Crowdsourced employer
reviews and stock returns.” Journal of Financial Economics 134 (2019): 236–251.
28. Kaplan, S. and M. Sorenson. Are CEOs Different? Journal of Finance. 76(4), August 2021, 1773-1811.