Earnings management around employee stock option reissues

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Journal of Accounting and Economics 41 (2006) 173–200 www.elsevier.com/locate/jae

Earnings management around employee stock option reissues$ Jeffrey L. Colesa,, Michael Hertzela, Swaminathan Kalpathyb a W.P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA College of Business and Economics, Washington State University, Pullman, WA 99164, USA

b

Received 26 February 2003; received in revised form 27 May 2005; accepted 26 August 2005 Available online 10 February 2006

Abstract We investigate market behavior in a setting where managerial incentives to manipulate earnings and market price should be apparent ex ante to market participants. We find evidence of abnormally low discretionary accruals in the period following announcements of cancellations of executive stock options up to the time the options are reissued. Nevertheless, analysts and investors are not misled. Discretionary accruals have little power in explaining stock price performance during this period. Moreover, discretionary accruals do not explain subsequent analyst forecast errors. Thus, our findings suggest that, in this transparent setting, analysts and investors do not respond to earnings management. r 2006 Elsevier B.V. All rights reserved. JEL classification: G14; G30; J33; M43 Keywords: Capital markets; Stock options; Earnings management; Discretionary accruals; Executive compensation

$ We thank session participants at the 2002 Financial Management Association meetings, 2005 Western Finance Association meetings, seminar participants at Arizona State University, Georgia State University, and University of Georgia, Daniel Bergstresser, Jim Boatsman, N. K. Chidambaran, Joe Comprix, Naveen Daniel, Patty Dechow (the referee), Christopher Dussold, Wayne Guay, Sanjay Gupta, Jim Linck, Lalitha Naveen, Lynn Rees, Craig Sisneros, Ross Watts (the editor) for helpful comments. Any remaining errors are our own. Corresponding author. Tel.: +1 480 965 4475; fax: +1 480 965 8539. E-mail address: [email protected] (J.L. Coles).

0165-4101/$ - see front matter r 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.jacceco.2005.08.002

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1. Introduction and motivation The extent to which earnings management by firms affects investor perceptions continues to attract interest. Academic research focuses largely on accounting adjustments to the firm’s cash flows from operations. Since the timing of cash transactions does not necessarily match the timing of economic transactions, financial reporting regulations allow firms discretion over accruals.1 The intention of standard setters and regulators in allowing some degree of reporting flexibility is to provide enough latitude so that financial statements can be made more informative. Nevertheless, in a world of asymmetric information and agency problems, the discretionary nature of accrual accounting can lead to earnings manipulation. As Healy and Wahlen (1999, p. 368) suggests, ‘‘y managers (may) use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers.’’ Although there is some evidence that accruals management yields more informative financial statements,2 there also is strong evidence that investors do not necessarily understand precisely what is communicated by accruals. Sloan (1996) finds that future abnormal stock returns are negative (positive) for firms whose earnings include positive (negative) current accruals. Collins and Hribar (2000), using quarterly earnings data, reports similar evidence that the market overprices accruals. Xie (2001) uses a modification of the Jones (1991) model to estimate normal (benchmark) accruals and finds that Sloan’s results are due primarily to the ‘‘abnormal’’ or ‘‘discretionary’’ component of accruals. Such overpricing could reflect an inability of the market to recognize the mean reversion in earnings due to the accruals component. While evidence of mispricing raises concerns about the usefulness of discretionary accrual accounting, it does not necessarily imply opportunistic manipulation by managers. To get at this issue, a number of studies have focused on firm-specific events that potentially provide strong incentives for management to manipulate market price by managing accruals. There is considerable evidence that manipulation occurs around such events3 and growing evidence that the market does not see through this type of manipulation. Of particular interest is recent results in Teoh et al. (1998a, b) and Rangan (1998) which suggest that managers aggressively manage accruals prior to initial public offerings and seasoned equity offerings, that the market overprices these accruals, and, thus, that the market overvalues the new issues. A follow-up study by Teoh and Wong 1 Standard examples of potential discretion include situations in which managers estimate lives and salvage values of long-term assets, pension benefit obligations, losses from bad debts, asset impairment, and deferred taxes. Moreover, managers choose among different methods for reporting depreciation and inventory, for managing working capital, and for structuring corporate transactions such as a business combination. See the Healy and Wahlen (1999) survey article for a more complete discussion. 2 For example, Dechow (1994) finds that current earnings are better than current cash flows in predicting future cash flows and Subramanyam (1996) finds that discretionary accruals are value-relevant. 3 Healy (1985) documents earnings manipulation in connection with managerial bonus compensation. There is strong evidence of earnings management by banks of loan loss provisions (Beaver et al. (1989), Moyer (1990), Scholes et al. (1990), and successors) and by insurers of property and casualty claim loss reserves (among others, see Petroni (1992), Beaver and McNichols (1998)). Perry and Williams (1994) finds that unexpected accruals are income-decreasing (negative) prior to an MBO. There is also evidence that managers tend to report positive discretionary accruals prior to stock-financed acquisitions (Erickson and Wang, 1999).

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(2002) examines the role of financial analyst credulity in this process. The results are consistent with the hypothesis that analysts are more overoptimistic about firms with larger pre-issue accruals and investors are not aware of the full extent of this bias. In other words, investors relying on overly optimistic analysts overvalue new equity issues. It is particularly striking that abnormal negative post-announcement stock price performance persists for up to 5 years and predictable (from prior accruals) analyst forecast errors have significant power to explain the long-run underperformance.4 Thus, the evidence in these studies suggests that analysts and investors are boundedly rational in that they are slow to recognize and unravel these accounting manipulations once the equity issue has been announced and the incentive to manage accruals prior has been revealed. In this paper, we investigate the extent of analyst and investor rationality in a unique experimental setting in which the incentive to manage earnings in the future should be apparent ex ante to market participants.5 In particular, we examine earnings management around the cancellation and subsequent reissue of executive (and other employee) stock options. A firm that alters the structure of managerial compensation using this method first cancels the outstanding options and then, after a clearly and publicly specified period of time, reissues new options.6 In the typical case, the firm announces the plan to reissue and then allows a month or so for employees to decide how many options to tender. This offer period is then closed, and, typically, 6 months and 1 day later the options are reissued with the strike price set at the then-current (reissue day) market price. Since managers of such ‘‘6-and-1’’ firms benefit from a lower strike price for the reissued options, investors and analysts should be able to anticipate managerial attempts to manage accruals downward prior to the reissue date.7 Based on a sample of 159 reissues, we find strong evidence of abnormally low accruals leading up to the option reissue date. Reissuing firm discretionary accruals are significantly negative and significantly lower than discretionary accruals for a control sample of firms with similar characteristics, specifically, firms that reprice their employee options in the traditional manner. Thus, even in a setting where investors are aware of the incentives to manipulate stock price, the evidence is consistent with the notion that managers attempt to manage accruals to their own benefit. Our analysis of contemporaneous and future stock returns, however, suggests that analysts and investors are not misled. Discretionary accruals between the announcement 4 These findings suggest that either investors make the same sort of mistakes as analysts or analysts’ errors are impounded in market prices by investors who rely on analysts for guidance. We also note a caveat concerning the results from earlier studies that are based on the modified-Jones method of Dechow et al. (1995). As discussed in Section 4.1, the use of this approach in the presence of sales growth can mechanically generate positive discretionary accruals. 5 Our setting stands in sharp contrast to earlier studies where events may not be anticipated, as in the case of equity issues, standard executive option repricing, or control contests. In those settings, market participants do not necessarily know prior to the announcement of the event that managers had the incentive to manage accruals. Only at the announcement of such events, which will be after the manipulation of earnings and market price occurred, will market participants have confirmation of the incentive to manipulate. 6 Recent accounting changes [FASB FIN 44 (March 31, 2000) and the December 4, 1998 FASB announcement foreshadowing FIN 44] have given rise to this method for dealing with underwater, out-of-the-money employee stock options. Alternatives are simply to issue new options and/or reprice existing options in the traditional way. 7 The New York Times article (March 15, 2002), ‘‘Option absurdity: Hoping for lower prices,’’ expresses the commonly-held suspicion that a cancellation and reissue provides the perverse incentive for employees to drive down the stock price by the time of reissue.

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date and the reissue date have little power to explain stock price performance over the 9 months prior or the 6 months following the reissue date. The same is true for the collection of 5-day windows surrounding quarterly earnings announcements prior to the reissue date—the estimated discretionary accruals response coefficient is insignificantly different from zero. Moreover, discretionary accruals have no power to explain subsequent analyst forecast errors. Thus, in contrast to evidence from earlier studies where the incentives to manipulate are not necessarily foreseeable, in our setting, in which earnings management can be anticipated, analysts and investors do not respond to discretionary accruals. One interpretation of our results is that our findings are consistent with the hypothesis that the simplicity of our setting, based on cancellation and reissue of executive stock options, is well within the bounds of rationality of investors and analysts. That is, market participants possess cognitive capacity that exceeds the demands of our setting, in which it is relatively easy to evaluate incentives, accruals, and market price. In contrast, in other studies, such as Teoh et al. (1998a, b) and Teoh and Wong (2002), investors and analysts appear to be unable to recognize the accounting deception ex ante and, apparently, are slow to unravel the deception ex post. One possibility is that investors and analysts have reasonable cognitive capabilities but incentives and accounting manipulation around these particular corporate events are not particularly transparent. Another possibility is that investors and analysts, limited by behavioral biases and the inability to penetrate and comprehend the situation, can be misled by simple accounting deceptions. Our evidence provides more support for the first of these possibilities, that investors possess at least some sophistication, and less support for the second. We also recognize the finding of no relation between stock returns and discretionary accruals could be due to error in measuring discretionary accruals. The remainder of the paper is organized as follows. Section 2 describes the details of resetting the strike price of employee stock options by cancellation and reissue. Section 3 describes how we select the sample of cancellations and reissues and collect the control sample of standard employee stock option repricings. Section 4 describes how we construct measures of earnings management and reports the results on the extent of earnings management, and Section 5 presents results on the effects of such management on analyst forecasts and stock returns. Section 6 concludes.

2. Earnings management and cancellation/reissue of employee stock options 2.1. Institutional background on cancellation and reissue of stock options The Financial Accounting Standards Board (FASB) announced on December 4, 1998 that it was planning to implement detailed standards on how companies must account for their employee (including executive) stock options. On March 31, 2000, the FASB officially issued Interpretation No. 44 (FIN 44), under which repricing is considered a modification of an option. Thus, under the new rules, any option repriced after July 1, 2000 must be marked to the market every accounting period from the repricing date through the date of exercise (or expiration, if left unexercised). The rules, while applicable to all options granted after July 1, 2000, also are retroactively applicable to options that were repriced

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Announcement

Filing

Cancellation

177

Reissue

Mean = 4 days Median = 0 days

Mean = 35 days Median = 31 days

Mean = 183 days Median = 184 days Fig. 1. Timeline of cancellation and reissue of employee stock options. Note: The figure displays the timeline associated with the cancellation and reissue of employee stock options for 159 firms that announce the program in 2001 and 2002.

after December 15, 1998.8 Prior to the rule change, firms that repriced employee stock options were not required to record compensation charges when the stock price moved above the reset (lowered) exercise price. Under the new rules, this is no longer the case. The repricing can imply significant compensation charges over the option life if the stock price moves above the strike price at which the options are reset. Companies that cancel options and then wait for at least 6months and 1 day before reissuing new options can avoid recording compensation charges resulting from FIN 44.9 This is accomplished by way of an exchange agreement between the company and the option holder. The Securities and Exchange Commission (SEC) Exchange Act of 1934 considers option exchanges to be issuer tender offers. A company must comply with Rule 13e-4 under the Securities Act, and provide information required by Schedule TO with the SEC. In this exchange offer, firms provide the option holders the choice to tender their options for cancellation and subsequent reissue. Fig. 1 shows the timeline associated with this procedure. In the typical case, the firm closes the offer a month or so after the initial announcement/filing (hereafter the ‘‘announcement date’’). The cancellation date is usually the day following the closing of the offer. The firm typically sets the reissue date at 6 months and 1 day following the cancellation date. Firms commit to reissue new ‘‘at-themoney’’ options on the reissue date. The date of the reissue and the percentage of employees who tendered their options are communicated by way of a Schedule 14(d)(1) filing. For ease of exposition, we often refer to the date of reissue of stock options, for firms that cancel and reissue stock options, and the repricing date for firms that reprice existing 8

The period from December 15, 1998 to July 1, 2000 is considered a transition period. Any repricing during this period was subject to prospective marking-to-the-market relative to the stock price as on July 1, 2000. Carter and Lynch (2003) documents an abnormally-high rate of repricings during the 12-day window between the announcement date (December 4, 1998) and the proposed effective date (December 15, 1998). 9 Under FIN 44, repricing is deemed to have occurred if the grant of new options and cancellation of existing options occur within six months of each other.

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options, as the strike price reset date. Relative to a traditional repricing, the possible benefit of a 6-and-1 exchange is avoiding the earnings charge, while the cost is that the new strike price of the employee options is both uncertain and in the future.

2.2. Prior literature on timing of stock option grants and stock option repricing We are not aware of any literature on earnings management around the cancellation and reissue or the repricing of stock options. Related work includes a recent study by Bergstresser and Philippon (2006) which finds that CEOs of firms that use discretionary accruals to increase reported earnings exercise abnormally large amounts of stock options and sell unusually large quantities of shares. There also is some evidence on timing of executive stock option grants (Aboody and Kasznik (2000), Yermack (1997)) and repricings (Callaghan et al., 2004). Callaghan et al. (2004), using data over the period 1992 through 1997, tests whether firms time executive stock option repricing around favorable stock price movements. In particular, Callaghan et al. finds that the repricing dates are set such that they precede favorable earnings announcements or follow unfavorable earnings releases. The authors interpret the run-up in stock price immediately following the repricing as evidence of opportunistic managerial behavior rather than positive incentive effects.10

3. Sample selection and sample characteristics 3.1. Sample selection We use Primark’s Global Access (Disclosure) to identify a sample of 159 firms that undertook an option exchange program over the period 2001 through the second quarter of 2002.11 Of these 159 firms, 54 made a public announcement of the exchange program that appeared on Dow Jones Newswire. If cancellation and reissue announcements occur, they almost always precede the exchange offer filing (identified through Primark) and always precede the actual cancellation.12 10 Several papers examine the cross-sectional determinants of stock option repricing (see Carter and Lynch (2001), Chance et al. (2000), Chidambaran and Prabhala (2003a)). Brenner et al. (2000) derives a model that values stock options with a repricing feature, and finds that the ex post gain in option value arising from repricing is substantial. Johnson and Tian (2000) examines value and incentive effects of nontraditional options, and observes that stock options with repriceable features have lower deltas and higher vegas than traditional options. Acharya et al. (2000) derives conditions under which some amount of repricing is beneficial. Jin and Meulbroek (2002) suggests that the sensitivity of executive stock option value to share price does not fall much with a decline in stock price. Driving this stickiness is the longer maturity of the options and higher stock price volatility. Subramanian et al. (2003) and Chidambaran and Prabhala (2003b) find that managerial retention is a motive for repricing. Rogers (2005), Coles et al. (2003), and Kalpathy (2003) find that realignment of incentives, particularly managerial risk-taking incentives, is a motivation for resetting the option strike price. 11 We conduct a text search in Primark’s Global Access (Disclosure) using the search string (‘‘six month!’’ w/3 ‘‘one day’’). We specify ‘‘Filing Type ¼ SC 14D1’’. This yields a total of 169 firms. Of these, CUSIP numbers are available for 160 firms. Kana Software Inc. canceled their exchange offer because of its merger with Broadbase Software Inc. The resulting sample size is 159. We find no events for the year 2000. 12 All announcements either preceded or coincided with the date of exchange offer filing, with the exception of six events where the announcement took place after the filing.

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We collect a control sample of firms that reasonably could have canceled and reissued options, but chose instead simply to reprice existing stock options in the traditional way. One of the two primary reasons for using repricing firms as a control sample (a reason which we discuss in more detail below) is to compare our cancellation/reissue firms to firms with similar characteristics, including industry, prior performance, and the incentive to reset employee stock option strike prices. The second reason is that earnings management around traditional repricings is also, in and of itself, of interest. To obtain the control sample of firms that repriced employee stock options, we search Primark’s Global Access.13 For the period 1999–2002, 86 firms repriced employee stock options, of which 80 also have CRSP and Compustat data available. In each case, we obtain the repricing date from the relevant proxy statement. We obtain stock price data from the Center for Research in Security Prices (CRSP) database, accounting data from Standard & Poor’s COMPUSTAT database, and analyst forecasts of quarterly earnings per share from the Institutional Brokers Estimate Systems (IBES) database. 3.2. Sample characteristics Panel A of Table 1 shows the distribution of cancellation and reissue dates by calendar year and quarter. Panel A also contains the distribution of repricing dates for the control sample. During 1999 and 2000 there were a total of 52 repricings and no cancellations and reissues. Starting in 2001, there is a significant shift from repricings to cancellations and reissues. Entering 2002, cancellation and reissue appears to be the dominant mechanism, with a quarterly volume that exceeds (1999 and 2000) or matches (1998 and earlier) the quarterly rate of repricings.14 The switch from repricing to cancellation and reissue appears to have been relatively slow. Although the formal FASB announcement came in March 2000, the proposed change was announced in December 1998. Yet the move to cancellation and reissue gained impetus only in the second quarter of 2001. Finally, Panel A shows that the timing of option reissue reflects a gap of at least 6 months after the cancellation of the original options. Panel B of Table 1 reports the industry distribution of the reissuers and repricers. For the reissuers, we observe that 47% of the firms are clustered in the ‘‘business services’’ industry segment. These are firms primarily engaged in software development and networking services. Carter and Lynch (2001) documents that over 54% of their sample consists of firms that belong to the high-technology industry, while the number is about 38% in Chidambaran and Prabhala (2003a).15 Other than in business services (SIC 73), reissuers and repricers are distributed similarly across industries. 13 We conduct a text search in Primark’s Global Access (Disclosure) using the search string (‘‘year w/5 (option! repric!)’’). 14 Carter and Lynch (2001) obtains a final sample of 22 companies that reprice executive stock options in 1999 (after the December 1998 FASB announcement); Chidambaran and Prabhala (2003a), and Brenner et al. (2000) analyze samples containing an average of 36 and 34 (respectively) repricings per year. 15 The difference in percentage of firms in high-technology industry in these two papers may be due to differences in sample selection. In Chidambaran and Prabhala (2003a), the sample is limited to firms that are covered by EXECUCOMP, while in Carter and Lynch (2001) non-EXECUCOMP firms are also included in the sample. See Carter and Lynch (2001) for explanation.

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Table 1 Time and industry distribution for a sample of 159 firms that cancel and reissue executive stock options and 80 firms that reprice stock options Panel A: time distribution Cancellation (for reissuers)

Reissue (for reissuers)

Repricing (for repricers)

1999 Q1 Q2 Q3 Q4

5 5 6 8

2000 Q1 Q2 Q3 Q4

7 4 6 11

2001 Q1 Q2 Q3 Q4 2002 Q1 Q2 Q3 Q4 Total

5 34 39 38 27 16

159

5 34

2 6 4 7

40 36 27 17 159

2 3 1 3 80

Panel B: Industry distribution SIC code

Industry

Reissuers Frequency

10 13 15 23 25 27 28 30 34 35 36

Metal mining Oil & gas extraction General building contractors Apparel & other textile products Furniture & fixtures Printing & publishing Chemical & allied product Rubber & misc. plastics products Fabricated metal products Industrial machinery & equipment Electronic & other electric eqpmt.

w2

Repricers %

Frequency

%

1 3 2

1.25 3.75 2.50

1

0.63

1

1.25

1 1 3

0.63 0.63 1.89

5

6.25

1

0.63

1

1.25

1

0.63

1

1.25

15

9.43

6

7.50

24

15.09

7

8.75

1.89

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Table 1 (continued ) 37 38 39 44 45 48 49 50 51 56 58 59 60 62 63 64 67 70 73 78 79 80 83 87 Total

Transportation equipment Instruments & related products Misc. manufacturing industries Water transportation Transportation by air Communications Electric, gas, & sanitary services Wholesale trade— Durable goods Wholesale trade— Nondurable goods Apparel & accessory stores Eating & drinking places Miscellaneous retail Depository institutions Security & commodity brokers Insurance carriers Insurance agents, brokers, & service Holding & other investment offices Hotels, rooming houses, camps, and others Business services Motion pictures Amusement & recreation services Health services Social services Engineering & management services

1

0.63

5

3.14

6

7.50

1

0.63

2

2.50

10 1

6.29 0.63

1 1 7 2

1.25 1.25 8.75 2.50

3

1.89

1

1.25

2

1.26 1

1.25

1

0.63

1

1.25

2

1.26

3 2

3.75 2.50

1

0.63 2 1

2.50 1.25

4

5.00

17 1

21.25 1.25

1

1.25

1

0.63

1

0.63

74

46.54

1

0.63

1 7

0.63 4.40

159

100.0

80

14.43***

100.0

Notes: The cancellation and reissue dates are obtained from Primark’s Global Access (Disclosure). The repricing dates are obtained from proxy statements of firms that reprice stock options. Industry groupings are based on two-digit SIC codes. Pearson chi-square statistic for difference in proportion is reported in the last column. ***, **, * denote significance at the 1%, 5% and 10% respectively.

Table 2 reports statistics on various characteristics of the reissuing (column 1) and repricing (column 2) firms over the fiscal year ending most recently prior to the strike price reset date. In addition, column 4 of Table 2 reports the same statistics for reissuing firms for the fiscal year ending most recently prior to the date of the announcement of the cancellation and reissue, which typically precedes the reissue date by 7 months. Aligning the data in this manner allows a comparison of reissuers and repricers oriented around the time when the market learns that the option strike price will be reset.

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Table 2 Descriptive statistics for reissuers and repricers

Total assets ($ mil) Change in sales Return on assets Prop., plant & eqpmt. Change in receivables Market-to-book ratio Sales ($ mil) MV of equity ($ mil) Leverage Earnings per share ($) Operating cashflow Analyst forecast error Analyst following (#) Stock return Market-adjusted return

159 Reissuers (before reissue date)

80 Repricers (before repricing date)

(1)

(2)

2206.41 (173.03) 0.08 (0.02)
0.34 (
0.15) 0.25 (0.18)
0.01 (
0.01) 1.77 (1.26) 954.46 (121.43) 1558.80 (192.56) 0.13 (0.02)
1.67 (
0.87)
0.04 (
0.01) 0 (0) 8.64 (5.50)
0.28 (
0.55)
0.13

541.84 (108.86) 0.06 (0.04)
0.43 (
0.13) 0.46 (0.28) 0.03 (0.01) 2.06 (1.28) 196.77 (40.35) 411.27 (89.38) 0.24 (0.13)
1.69 (
0.74)
0.14 (
0.05) 0 (0) 4.29 (2.25)
0.44 (
0.53)
0.48

(
0.43)

(
0.61)

Reissuers (before reissue date) versus repricers (3) 0.173/0.061 0.834/0.112 0.440/0.435 0.000/0.031 0.006/0.001 0.257/0.423 0.073/0.000 0.058/0.026 0.002/0.002 0.979/0.431 0.008/0.102 0.728/0.870 0.001/0.000 0.077/0.192 0.000/0.000

159 Reissuers (before ann.or filing date) (4) 2418.25 (195.93) 0.22 (0.14)
0.27 (
0.10) 0.31 (0.24) 0.07 (0.02) 2.40 (1.37) 1024.47 (121.43) 3293.97 (296.24) 0.12 (0.02)
1.14 (
0.75)
0.06 (
0.01)
0.01 (0) 8.16 (6)
0.60 (
0.69)
0.45

Reissuers (before ann or fil date) versus repricers (5) 0.140/0.005 0.023/0.051 0.185/0.270 0.004/0.308 0.122/0.065 0.381/0.642 0.081/0.000 0.039/0.000 0.000/0.001 0.350/0.850 0.073/0.194 0.286/0.687 0.001/0.000 0.003/0.038 0.470/0.026

(
0.52)

Notes: The table provides descriptive statistics for 159 firms that cancel and reissue employee stock options, and 80 firms that reprice stock options. Median figures are reported in paranthesis. Accounting data are measured at the fiscal year-end immediately prior to the earlier of announcement and filing dates, and reissue date for the reissuers, and repricing date for the repricers. Figures in columns (3) and (5) denote p-values for difference in means test/Wilcoxon rank-sum test of equality of medians. Change in sales, prop., plant & eqpmt., change in receivables, and oper. cashflow are deflated by beginning-of-year assets. Return on assets is defined as the income before extraordinary items divided by total assets. Market-to-book ratio is defined as (total assets-common equity+market value of equity) divided by total assets. Leverage is defined as (long-term debt+short-term debt) divided by total assets. Analyst forecast error is the average of the last four quarters [(actual eps-consensus eps estimate)/prior period stock price]. Analyst following is the average of the last four quarters number of analysts following the company. Stock return is the compounded total stock returns one year prior to the relevant dates. Market-adjusted-return is the buy-and-hold market-adjusted return using CRSP value-weighted index.

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Property, plant & equipment (PPE), change in sales, change in receivables, and operating cash flow all are deflated by beginning-of-period total assets. Return on assets (ROA) is defined as income before extraordinary items divided by total assets, market-to-book is (total assets—common equity+market value of equity)/total assets, and leverage is (long-term debt+short-term debt)/total assets. Analyst forecast error is the average of the last four quarters [(actual EPS—consensus EPS estimate)/ prior period stock price], and analyst following is the average, over the last four quarters, of the number of analysts following the company. Stock return is the compounded total stock return over the fiscal year ending most recently prior to the relevant date, while market-adjusted-return is the buy-and-hold market-adjusted return using the CRSP valueweighted index. Column 3 of Table 2 contains the results of statistical tests comparing reissuers with repricers at the time of the strike price reset. As measured by ROA, earnings per share, operating cash flow, stock return, and market-adjusted stock return, both repricers and reissuers, as expected, have poor prior performance. Reissuers have higher prior market-adjusted stock returns than repricers, but for no other measure of performance, including ROA and sales growth, is there a significant difference. In univariate comparisons, reissuing firms tend to have higher analyst following and lower leverage, PPE, and receivables growth than repricers. Otherwise, reissuers and repricers are quite similar. The results are generally similar when comparing reissuers and repricers at the reset announcement date (statistical tests are in column 5 of Table 2).16 The main differences are that prior sales growth is higher and prior raw stock return is lower for reissuers. Table 3 reports logit regression results that allow us to isolate differences between the reissuers and repricers while controlling for other characteristics. The dependent variable takes the value of one if the firm is a reissuer and zero if the firm is a repricer. The righthand-side variables are as defined in Table 2. Aligning the data on the strike price reset date, models 1 and 2 show that control firms and reissuers have similar performance using a broad set of measures, including ROA, operating cash flow, and sales growth. Reissuers and repricers also are roughly similar in terms of analyst forecast error, market value of equity, and market-to-book ratio. Reissuers, however, have significantly (at the 5% level) higher prior raw stock return, higher market-adjusted stock return, lower PPE, and higher analyst following. Models 3 and 4, which align the repricing date for repricers with the announcement date for reissuers, yield roughly similar results. Repricers and reissuers have similar ROA, operating cash flow, and sales growth, as well as similar market value of equity and market-to-book ratio (of assets). Unlike the results in models 1 and 2, raw and marketadjusted stock return are both similar across reissuers and repricers. Analyst forecast error, leverage, PPE, and unadjusted stock return are lower for reissuers than for repricers, but analyst following is higher. The results for all models are essentially the same when we include an indicator variable for SIC 73 (business services). Moreover, these results broadly are consistent with those of Zheng (2003), who, based on a more parsimonious

16 Reissuers are more likely to be business services (SIC 73) firms than are repricers (Table 1, Panel B). We compare reissuers in SIC 73 versus reissuers in all other industries on the dimensions in Table 2. We find no significant differences.

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Table 3 Logit regressions of the determinants of cancel and reissue versus repricing

Intercept Change in sales Return on assets Prop., plant & eqpmt. Market-to-book ratio Log(MV of equity) Leverage Earnings per share Operating cashflow Analyst forecast error Analyst following Market-adjusted return

Before reissue date for reissuers, and repricing date for repricers

Before earlier of ann. or filing dates for reissuers, and repricing date for repricers

Model 1

Model 2

Model 3

Model 4

2.99*** (10.46) 0.12 (0.10) 0.58 (1.82)
1.75** (5.64)
0.10 (0.85)
0.23 (1.44)
1.76 (2.68)
0.10 (1.12) 0.36 (0.11)
9.61 (0.87) 0.16*** (7.57) 2.01*** (12.23)

2.83*** (10.38) 0.05 (0.02) 0.57 (1.85)
1.80*** (6.75)
0.11 (1.02)
0.23 (1.51)
1.80* (3.18)
0.09 (1.07) 0.73 (0.51)
10.52 (1.19) 0.16*** (7.34)

2.06** (5.97) 0.96 (2.02) 0.29 (1.04)
1.64** (5.60)
0.06 (0.59)
0.10 (0.35)
1.30 (1.86) 0.01 (0.01) 0.26 (0.11)
17.12* (3.27) 0.14** (5.01) 1.01 (2.28)

1.25 (2.24) 0.85 (1.56) 0.27 (0.91)
1.54** (5.28)
0.06 (0.66)
0.05 (0.09)
1.31 (1.92) 0.05 (0.36) 0.62 (0.62)
18.10* (3.67) 0.11* (3.46)

Stock return Pseudo R2 Wald w2

29.5% 32.73***

1.13*** (6.67) 24.6% 28.63***

19.7% 24.72***


0.60 (1.07) 19% 23.88**

Notes: The table displays the results of logit regressions of the determinants of cancel and reissue, and repricing of stock options. The accounting data, described in Table 2, are measured at the fiscal year-end immediately prior to the earlier of announcement and filing dates, and the reissue date for the reissuers, and the repricing date for the repricers. The indicator variable is set to 1 if the firm cancels and reissues stock options, and 0 if the firm reprices the stock options. Wald w2 statistic is reported in parentheses. ***, **, * denote significance at the 1%, 5% and 10%, respectively.

specification, finds that reissuers have higher analyst following and lower book-to-market ratio (of equity).17 The logit regressions suggest that firm characteristics likely to be associated with the benefits and costs of resetting the option strike price, such as the extent of incentive realignment, employee retention, and wealth transfer to employees, are similar for reissuers and repricers. For example, recent prior performance and market-to-book, which are likely to be correlated with all three of these motives for resetting strike price, are alike for reissuers and

17

Also see Kalpathy (2003) for a comparison of repricers and reissuers using qualitative response models.

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repricers. The results from Table 3 suggest it is not particularly likely that firm characteristics drive both the decision to reissue (versus reprice) and the use of discretionary accruals. 4. Earnings management around reissues and repricings 4.1. Measuring earnings management There is considerable debate surrounding the measurement of discretionary accruals. Due to potential problems associated with using the modified Jones approach (Dechow et al., 1995) in the presence of trending sales growth, we follow the approach of Jones (1991). Our concern with the modified approach is that it causes all of the effect of a change in accounts receivable to be placed in discretionary accruals. Given the likelihood that most of the change in accounts receivable is really non-discretionary, the modified approach overstates discretionary accruals for firms experiencing sales growth (as is typically the case for equity-issuing firms) and understates discretionary accruals for firms experiencing poor performance (as we might expect to be the case for firms that reprice stock options). For our study, this bias is particularly problematic in that it would favor the hypothesis that managers manipulate earnings downward to obtain lower exercise prices for reissued options.18 The Jones (1991) model of accruals is ACCRi;t =TAi;t
1 ¼ a1 ½1=TAi;t
1  þ a2 ½DREVi;t =TAi;t
1  þ a3 ½PPEi;t =TAi;t
1  þ ei;t ,

ð1Þ

where ACCRi,t is total accruals19 for firm i in quarter t, TAi,t
1 refers to beginning of quarter total assets, DREVi,t refers to change in net revenue, and PPEi,t refers to property, plant, and equipment. We estimate the above cross-sectional regression separately for each quarter and twodigit SIC code. Based on the above model, nondiscretionary (or predicted) accruals is given by PREDACCRi;t ¼ a^ 1 ½1=TAi;t
1  þ a^ 2 ½ðDREVi;t Þ=TAi;t
1  ^

þ a3 ½PPEi;t =TAi;t
1 ,

ð2Þ

where a hat indicates that the parameter has been estimated. Discretionary (or abnormal) accruals is defined as the residual: ABNACCRi;t ¼ ACCRi;t =TAi;t
1
PREDACCRi;t .

(3)

4.2. Discretionary accruals prior to reissues and repricings We investigate discretionary accruals for reissuers and repricers over the period prior to the strike price reset date. Again, the strike price reset date is: (a) the reissue date for firms that cancel and reissue stock options; and (b) the repricing date for firms that reprice 18

Nonetheless, all results are qualitatively similar when we use the modified Jones approach. Total accruals is measured as the change in current assets (Compustat quarterly data item #40) minus change in current liabilities (#49) minus change in cash and cash equivalents (#36) plus change in debt included in current liabilities (#45) minus depreciation and amortization expense (#5). 19

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Table 4 Descriptive statistics of accruals and return on assets of firms that cancel and reissue (or reprice) their stock options for four quarters prior to the date of option strike price reset Qtr–4

Qtr–3

Qtr–2

Qtr–1

Pooled

Cumulative

Panel A: Asset-scaled discretionary accruals of reissuers and repricers relative to the option reset date estimated using the Jones (1991) model Mean
0.025***
0.023***
0.019***
0.019***
0.076*** Reissuers
0.009** (
1.99) (
3.38) (
3.09) (
3.47) (
5.97) (
5.87) Repricers
0.001
0.018
0.002
0.010
0.008
0.032 (
0.08) (
1.22) (
0.28) (
1.46) (
1.46) (
1.61) Difference
0.009
0.007
0.021*
0.009
0.011*
0.045* Reiss-Repr (
0.67) (0.45) (
1.84) (
0.88) (
1.84) (
1.87) Median Reissuers Repricers Wilcoxon Z Observations Reissuers Repricers


0.007*** [0.00]
0.004 [0.21]
0.121 [0.90]


0.023*** [0.00]
0.006 [0.14]
1.568 [0.11]


0.022*** [0.00] 0.003 [0.49]
1.739* [0.08]


0.016*** [0.00]
0.004 [0.19]
1.173 [0.24]


0.016*** [0.00]
0.004** [0.02]
2.438** [0.02]


0.061*** [0.00]
0.044* [0.06]
1.740* [0.08]

145 57

147 59

148 60

145 59

575 230

145 57

Panel B: Asset-scaled total accruals Mean Reissuers
0.021*** Repricers
0.016 Difference
0.005 Reiss-Repr (
0.42) Median Reissuers Repricers Wilcoxon Z


0.019***
0.014***
0.699

of reissuers and repricers relative to the option reset date
0.040***
0.032**
0.008 (
0.51)


0.027***
0.016**
0.011 (
1.28)


0.026***
0.018**
0.008 (
0.93)


0.028***
0.020***
0.008 (
1.36)


0.030***
0.023***
1.273


0.028***
0.016**
1.150


0.022***
0.009**
1.543


0.024***
0.015***
2.363**

Panel C: Asset-scaled nondiscretionary accruals of reissuers and repricers relative to the option reset date estimated using the Jones (1991) model Mean Reissuers
0.011***
0.014***
0.004
0.006
0.009*** Repricers
0.015*
0.014***
0.011
0.008**
0.012*** Difference 0.004 0.000 0.007 0.002 0.003 Reiss
Repr (0.41) (0.10) (0.79) (0.25) (0.75) Median Reissuers Repricers Wilcoxon Z


0.003***
0.002***
0.324


0.001***
0.004*** 1.136


0.001***
0.003*** 0.526

Panel D: Return on assets of reissuers and repricers Mean Reissuers
0.069
0.071
0.057 Repricers
0.083
0.075
0.063


0.001***
0.003*** 1.073


0.001***
0.003*** 1.100


0.067
0.091


0.066
0.078

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Table 4 (continued ) Median Reissuers Repricers


0.036
0.026


0.043
0.024


0.033
0.027


0.031
0.026


0.035
0.026

Notes: Accruals is computed for the quarters prior to the date the strike price is reset for the stock options. The relevant date is the repricing date for the sample of repricers and the reissue date for the sample of firms that cancel their stock options and reissue them after six months and one day. Total accruals is measured as the change in current assets (Compustat quarterly data item 40) minus change in current liabilities (49) minus change in cash and cash equivalents (36) plus change in debt included in current liabilities (45) minus depreciation and amortization expense (5). Total accruals is scaled by the beginning of quarter total assets. Discretionary accruals is the asset-scaled excess accruals estimated using the Jones (1991) model. Nondiscretionary accruals is estimated as NDAi,t ¼ a1[1/TAi,t
1]+a2[DREVi,t/TAi,t
1]+a3[PPEi,t/TAi,t
1]. TAi,t
1 refers to beginning of quarter total assets, DREVi,t refers to change in net revenue, and PPEi,t refers to property, plant, and equipment. Discretionary accruals are measured as Total accruals (described earlier) minus the estimated nondiscretionary accruals. Return on assets is measured as the income before extraordinary items (Compustat quarterly item number 8) divided by beginning of quarter total assets. Pooled and cumulative numbers denote the average and summation (respectively) of relevant variables across the four quarters. Numbers in parentheses denote t-statistics. Numbers in square brackets denote p-values of signed rank statistic for medians, and rank sum statistic for difference in medians. ***, **, and * denote significance at less than the 1%, 5% and 10% levels, two-tailed tests, respectively using the t-test for means and signed-rank test for medians. Wilcoxon Z denotes the rank sum test of equality of medians for the reissuers and repricers.

existing options. We focus on the four quarters prior to the reset date to examine the timeseries pattern of accruals management. We scale discretionary, nondiscretionary and total accruals by total assets at the beginning of the quarter and, following Rangan (1998), we report return on assets (ROA) over the same period in order to provide a sense for the magnitude of these accrual measures. Panel A of Table 4 reports asset-scaled discretionary accruals. For the sample of reissuers, mean and median discretionary accruals are significantly negative over the year prior to the reissue date. The t-test comparing discretionary accruals to zero is significant in quarters
4 (p ¼ 0.048),
3 (p ¼ 0.000),
2 (p ¼ 0.002), and
1 (p ¼ 0.000) relative to the reissue date, as well as for all four prior quarters pooled (t ¼
5.97, p ¼ 0.000). Mean discretionary accruals accumulated over all four quarters prior to the reissue date equals
0.076 with a t-statistic of
5.87 (p ¼ 0.000). Based on the Wilcoxon signed-rank test, median discretionary accruals are significantly less than zero at the one percent level in quarters
4 (p ¼ 0.006),
3 (p ¼ 0.000),
2 (p ¼ 0.000), and
1 (p ¼ 0.000), pooled (p ¼ 0.000), and cumulated (p ¼ 0.000) relative to the reissue date. The negative discretionary accruals prior to the reissue date are quite large in economic terms. By way of comparison, discretionary accruals are large in absolute value relative to both total accruals (Panel B) and the nondiscretionary component of accruals (Panel C). In addition, based on Panel D, the mean discretionary accruals constitute about 28%, 40%, 35% and 13% of ROA for quarters
1,
2,
3 and
4. Quarterly discretionary accruals pooled over the entire year average 29% of quarterly ROA. Tests relative to the control sample of repricing firms also reveal that reissuing firms manage discretionary accruals downward in the period prior to the reset of the option stock price. In Panel A, the Wilcoxon Z-statistic from the rank-sum test of the difference in discretionary accruals between the two samples is significant at the 10% level for

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cumulative scaled discretionary accruals and at the 5% level for discretionary accruals averaged across all quarters. The t-test for the difference in means yields similar inferences for pooled and cumulative accruals. Overall, the results in Panel A indicate that discretionary accruals are consistently negative and economically significant for reissuers for the four quarters leading up to the reissue of stock options. 20 Finally, we note that while potentially there is a substantial incentive for repricers to push stock price down prior to the reset date, we find no evidence of abnormally low discretionary accruals for repricing firms. Panel A shows mean discretionary accruals are close to zero prior to the repricing date and median discretionary accruals tend to be negative but insignificant. As a percent of ROA (Panel C), discretionary accruals of repricers (in absolute value) are less than half those of reissuers. These findings are puzzling, especially in light of the more aggressive earnings management undertaken by reissuing firms in an environment that arguably is more transparent to market participants. That is, repricers do not announce the option strike price reset in advance, so they may be in a better position to mislead investors and analysts. Perhaps repricers, because of flexibility in timing, have less need to manage discretionary accruals to reset strike price at a low level.21 Or, because investors don’t see it coming, repricers get a larger market response for a given level of discretionary accruals and, thus, manage accruals downward but so slightly that our empirical methods fail to detect it. A final possibility is that if abnormally low accruals serve as a signal to investors and analysts that a repricing is forthcoming, investors then will trade on this expectation, thereby moving market price, which would interfere with the ability to time the strike price reset at the bottom. Perhaps firms that expect to reprice existing options avoid signaling that intention by exercising restraint in managing discretionary accruals. 4.3. Are discretionary accruals low because performance is poor? An alternative to the downward manipulation explanation is that the negative discretionary accruals reflect poor firm performance. These firms are performing poorly (as suggested by the decline in their stock price and hence their selection in the sample as a reissue firm) and the discretionary accruals could, because of measurement error, capture some performance related nondiscretionary accruals. To partially address this concern, we examine total accruals and nondiscretionary accruals over the period prior to the reset date. Panel B indicates that mean and median total accruals are negative for both reissuers and repricers, though some of the tests do not reject the null that the measure of central tendency is zero. Total accruals for reissuers are statistically indistinguishable from those of repricers. Because discretionary accruals are lower for reissuers, this suggests that nondiscretionary accruals are larger for reissuers. Panel C confirms this supposition. Nondiscretionary accruals for repricers and reissuers generally are significantly negative but, if anything, tend to be higher (not lower) for reissuers than for repricers. These results suggest that, while poor performance plays a role, the negative discretionary accruals we 20

We find no strong evidence that the results on accruals are driven by business services firms. Discretionary accruals for reissuers tend to be lower for business services (SIC 73) reissuers than for reissuers in other industries, but the results of statistical tests are mixed. Comparing discretionary accruals for reissuers and repricers, when we exclude SIC 73 firms our tests again indicate that reissuers have significantly lower discretionary accruals than repricers. 21 See Callaghan et al. (2004) for evidence on timing of repricings.

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document in Panel A are unlikely to be driven in large part by prior poor performance of the reissuing firms. 5. Analyst and investor response to discretionary accruals The evidence in the previous section shows that firms manage discretionary accruals prior to the reissue of stock options. We now consider the investor and analyst response. In particular, we test whether abnormally low accruals drive down stock price and/or analyst forecasts prior to the reset date and whether such effects reverse after the reset date. We begin this section with a discussion of stock price performance patterns for reissuers and repricers around the strike price reset date. 5.1. Performance patterns around the strike price reset date The raw and market-adjusted stock price performance of reissuers and repricers around the reset date is displayed in Figs. 2a and 2b, respectively. For reissuers, the stock price performance appears to be relatively flat with no abnormal stock price behavior either before or after the reset date. This pattern is not consistent with a successful manipulation of stock price through downward management of accruals. To provide some initial evidence on the cross-sectional importance of discretionary accruals in explaining stock price performance, we also track (not shown in the figure) stock price performance for quartiles of reissuers formed according to the level of discretionary accruals over the three quarters leading up to the reset date.22 Differentiating among reissuers in this way yields no evidence that the market was misled by aggressive downward accruals management (as represented by the bottom quartile) over this period. The pattern of stock price performance around the strike price reset date also suggests that reissuers have poor timing ability. In contrast, repricers appear to have good timing ability—the stock price declines prior to the reset date and increases thereafter.23 A comparison of timing ability, however, is made difficult by the 6-months-and-a-day interval between the announcement of the cancellation and the subsequent resetting of the option strike price. Thus, for comparison purposes, we plot stock price performance for reissuers around the announcement (or filing) of the cancel and reissue. Fig. 2c shows that, similar to repricers at the strike price reset date, reissue announcements tend to occur when the stock price is at a low.24 It seems that executives of both types of firms have similar incentives to reset the option strike price of existing stock options. Reissuing firms appear to manage earnings but with 22

Relative to all Compustat firms over the same time period, the average firm in our sample is in decile 3 (where decile 1 has the lowest accruals). Consistent with our finding that managers tend to manage accruals downward prior to the option reissue date, we note that approximately 74% of our sample firms fall in the lowest five accrual deciles. 23 These results are similar to the findings in Callaghan et al. (2004) based on an earlier sample (1992–1997, prior to the new FASB rule on repricings). 24 We further investigated timing ability by examining whether the strike price of the reissued options is lower than the strike price of the cancelled options, measured as the weighted (by number of shares) average exercise price of options tendered. We find that the new strike is lower in 91% of the reissues as compared to 100% for repricers. Thus, committing to the reset six months in the future appears to reduce the ability of reissuers to lower the strike price. In fact, if reissuers were able to reset the strike price on the announcement date, the new strike price would be lower in all cases.

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Mean buy-and-hold returns

190

0.1 0.05 0 -250

-200

-100

-50

0

50

100

150

-0.05 -0.1 -0.15

Abnormal returns Raw returns

-0.2

-0.25 Trading days relative to the date of reissue of options

(a) Mean buy-and-hold returns

-150

0.05 0 -250

-200

-150

-100

-50

-0.05

0

50

100

150

-0.1 -0.15 -0.2 Abnormal returns Raw returns

-0.25 -0.3 -0.35

-0.4 Trading days relative to the date of repricing of options

Mean buy-and-hold returns

(b)

0.1 0 -250

-200

-150

-100

0

50

100

150

-0.1 -0.2 -0.3 -0.4 Abnormal returns Raw returns

(c)

-50

-0.5

-0.6 Trading days relative to the date of announcement (or filing) of cancel & reissue of options

Fig. 2. (a) Plot of stock returns around reissue date for firms that cancel and reissue employee stock options. Notes: The figure displays the mean buy-and-hold returns for the sample of 159 firms that cancel and reissue employee stock options. Day 0 is the date these firms reissue the canceled stock options. (b) Plot of stock returns around repricing date for firms that reprice employee stock options. Notes: The figure displays the mean buy-andhold returns for the sample of 80 firms that reprice employee stock options. Day 0 is the date these firms reprice the options. (c) Plot of stock returns around announcement (or filing) date for firms that cancel and reissue employee stock options. Notes: The figure displays the mean buy-and-hold returns for the sample of 159 firms that cancel and reissue employee stock options. Day 0 is the date these firms announce (or file) the program to cancel and reissue stock options.

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some frequency fail to succeed in timing the bottom on the option price reset. In contrast, repricing firms appear to do little to manage earnings but are successful in resetting the strike price at a low level. There are several possible explanations consistent with the pattern of returns around the reset date. One is that repricing firms have sufficient flexibility to time the bottom and do not need to resort to accruals management. Second, accruals management by repricers is undetected by our empirical methods but does help management drive stock price down to allow the firm to reset the option strike price at a low point. Third, the concordance of the reset date with a minimal stock price represents capitalization of positive net incentive25 or retention effects associated with resetting the exercise price. Based on this story, for firms that cancel and reissue, the positive stock performance between trading days –175 and –120 (Fig. 2a) potentially is due to the anticipated positive net incentive effects associated with the option strike price reset. It is during this time window, 6–8 months prior to the reset date, or equivalently 120–175 trading days prior to the reset, that the announcement (and/or filing) of the plan to cancel and reissue occurs. 5.2. Does the market price pre-reset date discretionary accruals? We now conduct a cross-sectional regression test of whether accruals management over the three quarters prior to the reset date has any impact on stock price over the same period. The dependent variable in the regression analysis is CARi, which is the compounded stock return for firm i net of the CRSP value-weighted index, adjusted for both dividends and splits. We calculate the cumulative abnormal stock return over the 9 months prior to the option strike price reset date. Similarly, each of the explanatory variables is cumulated over the three quarters prior to the reset date. We choose this aggregation period because, for all reissuing firms in our sample, the interval between the cancellation announcement and the reissue date contains exactly three quarterly earnings announcements (elapsed calendar time tends to be about 7 months). For the repricing sample, we follow the same procedure relative to the option strike price reset date. Our primary test variable is cumulative, asset-scaled, discretionary accruals. Because Subramanyam (1996), in comparing various estimated specifications, finds that scaled operating cashflow has power to explain cumulative annual stock returns, we control for this measure, aggregated over three quarters. In order to measure earnings surprises, we also include the cumulative change in EPS over the three quarters (CUMCHEPS) as an independent variable. This measure is based on a simple random walk model of earnings where the change in EPS in a particular quarter is measured as that quarter’s EPS minus EPS in the same quarter in the previous year scaled by prior-quarter stock price. In some specifications we use the ‘‘analyst forecast error’’ (AFE) as a measure of earnings surprise. We obtain data on analyst EPS forecasts from the IBES detailed estimates tape. CUMAFE is the aggregation across three quarters of quarterly actual EPS minus the consensus estimate of EPS all scaled by prior-quarter stock price.26 25 See Acharya et al. (2000) for a discussion of the tension between the ex ante and ex post incentive effects of repricing executive stock options. 26 Though Teoh and Wong (2002) and DeFond and Park (2001) note that this definition of analyst forecast error is standard in the prior literature, AFE and CUMAFE are best thought of measures of EPS surprise relative to the benchmark of the consensus analyst forecast. Thus, these measures are the negative of forecast error, as would be conventionally defined, and negative values of AFE and CUMAFE represent analyst optimism, and vice versa.

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Cumulative discretionary and nondiscretionary accruals (CUMABNACCR and CUMPREDACCR, respectively) are cumulative versions of discretionary and nondiscretionary accruals (as defined in Section 4.1). Teoh and Wong (2002) argues that discretionary accruals most likely are contaminated by nondiscretionary components. Thus, we address the possibility of bias in regression coefficients by including nondiscretionary accruals in the model. To control for industry effects, we include dummy variables for industries, DIND, in the regression specifications. We use the 17 industries in the classification scheme of Teoh and Wong (2002). Table 5 (Models 1–3) reports results from regressing the cumulative abnormal returns over the period leading up to the reissue date on the above set of explanatory variables for the sample of reissuers. The estimated coefficient on discretionary accruals is positive and insignificant. If management can move market price up or down with higher or lower discretionary accruals, respectively, we would observe a significantly positive coefficient. Thus, one interpretation of the insignificant coefficient is that that the market understands the incentives of managers to report lower accruals during this time period. Table 5 (Models 4–6) also reports results obtained by pooling the reissue and repricing samples. To capture and test for differences between the two methods of resetting strike price, we include the interaction of the relevant variables with a dummy variable indicating that the strike price reset was executed by cancellation and reissue (Dum ¼ 1; ¼ 0 if repricing). The estimated coefficient on discretionary accruals is positive but, again, is insignificant. Thus, as is the case for reissuers, the market is not influenced significantly by discretionary accruals of firms in advance of the repricing of existing options. The interaction of the cancellation and reissue dummy with the discretionary accruals measure is negative and, generally, not statistically significant. Regardless of the method used to reset the option price, the market does not appear to be misled by discretionary accruals. Consistent with Subramanyam (1996), we find that operating cash flow has significant explanatory power; the estimated coefficient on cumulative operating cash flow is positive and significant at the 1% level. Unlike Subramanyam (1996), however, we do not find evidence that the market attaches value to nondiscretionary accruals; the coefficient on cumulative nondiscretionary accruals is not statistically significant at any conventional levels. Finally, we find that the cumulative earnings surprise variables have little explanatory power. 5.3. Market reaction to earnings and accruals announcements prior to the reset date In the tests presented in Table 5, we use a window containing three fiscal quarters prior to the reset date to test whether the market contemporaneously prices the discretionary accruals. For earnings and accruals surprises, however, the market is likely to respond more quickly. Using a longer window for returns, that contains other days in addition to earnings announcement days, could introduce noise in the returns measure and reduce explanatory power. Thus, we narrow the window over which we measure returns in order to estimate response coefficients for earnings, nondiscretionary accruals, and discretionary accruals. In particular, we estimate the same specifications as in Table 5 but use the 5-day return from the window centered on the earnings/accruals announcement day (days –2 through +2 relative to the announcement day 0). Pooling all three quarterly announcement dates, we regress the 5-day abnormal returns on measures of earnings surprise (change in earnings or analyst forecast error), operating cash flow, nondiscretionary accruals, and discretionary accruals. All explanatory variables are as

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Table 5 Cross-sectional regression of 9-month buy-and-hold returns (prior to strike price reset date) on discretionary accruals for reissuers and repricers

Intercept CUMABNACCR DumCUMABNACCR CUMPREDACCR DumCUMPREDACCR CUMCHGEPS DumCUMCHGEPS

Reissuers only (Models 1–3)

Reissuers and Repricers (Models 4–6)

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

0.382 (1.22) 0.732 (0.77)

0.350 (1.02) 0.445 (0.43)

0.373 (1.19) 0.802 (0.85)

1.274 (1.36)

1.055 (1.06)

1.316 (1.40)

0.035 (0.15) 1.036 (1.06)
1.018 (
0.81) 1.593 (1.02)
1.102 (
0.66) 0.002 (0.69) 0.046 (1.21)


0.016 (
0.07) 1.387 (1.41)
1.968 (
1.55) 1.361 (0.87)
1.237 (
0.73)

0.045 (0.19) 1.292 (1.39)
1.225 (
1.01) 1.657 (1.07)
1.137 (
0.69)


0.268 (
0.16) 1.254 (0.53) 0.995** (2.37) 0.510 (0.63) 6.49% 1.51* 154

0.419 (1.01) 1.489* (1.89) 1.91% 1.18 179

0.041 (1.14)

CUMAFE

0.619 (0.35)

DumCUMAFE CUMOPCF DumCUMOPCF Adj. R2 F-Statistic No. of obs.

1.868*** (2.73)

1.642** (2.17)

1.931*** (2.83)

7.36% 1.67* 128

11.10% 1.94** 114

7.11% 1.69* 128

0.308 (0.71) 1.555* (1.93) 1.07% 1.09 177

Notes: The table displays estimated coefficients from an OLS model of 9-month buy-and-hold returns of firms that cancel and reissue employee stock options (reissuers) and firms that reprice the stock options (repricers). The dependent variable, CAR, is the buy-and-hold return computed using the CRSP value weighted index for 9 months prior to the date the option price is reset. CUMABNACCR is the cumulative discretionary accruals for quarters 1, 2 and 3 prior to the date of reissue of stock options and following the announcement of cancellation and reissue of stock options for the reissuers, and quarters 1, 2 and 3 prior to the date of repricing of stock options for the repricers. CUMPREDACCR is the cumulative estimated nondiscretionary accruals for the above quarters. The discretionary accruals and the estimated nondiscretionary accruals are calculated as described in Table 4. CUM_EARNINGS_SURPRISE is measured using both CUMAFE and CUMCHGEPS. CUMAFE is the cumulative analyst forecast error. Analyst forecast error is computed as: [(actual EPS–consensus EPS estimate)] and is scaled by the stock price at the end of the previous quarter. CUMCHGEPS is the cumulative change in EPS for the above quarters. Change in EPS is computed using the random walk model and is measured as this quarter’s EPS minus EPS in the same quarter in the previous year, and is scaled by the stock price at the end of the previous quarter. CUMOPCF is the cumulative operating cash flow for the above quarters. Operating cash flow is the asset-scaled operating cash flow (Compustat quarterly item # 108). Cancel dummy is set to 1 if the firm cancels and reissues the employee stock option, and 0 if the firm reprices the stock option. DIND are industry dummy variables. Estimates for these variables are not reported for brevity, and are available upon request. ***, **, and * denote significance at less than the 1%, 5% and 10%.

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defined in the previous subsection but are measured separately for each quarter rather than cumulated across the three quarters. We also include a fiscal fourth quarter dummy to control for differential market reaction for fiscal fourth quarter earnings announcements. Table 6 presents results for the three quarterly earnings announcements preceding the reset date. Models 4–6 include both the reissuers and repricers, while Models 1–3 include the reissuers only. The results show that discretionary accruals have little power in explaining announcement period returns. Specifically, the coefficient on discretionary accruals, the discretionary accruals response coefficient, is insignificant in all six models. In sum, the results in Tables 5 and 6 are consistent with the notion that the incentive to manipulate with accruals is well-understood and that investors do not respond. Of course, as is often the case, another possibility is that the explanatory variable, in this case discretionary accruals based on the Jones model, suffers from measurement error. As Guay et al. (1996) and others note, estimates of discretionary accruals using the original and modified Jones models can suffer from considerable imprecision. In univariate specifications, measurement error implies that the estimated coefficient on discretionary accruals will be biased towards zero. The effect of measurement error on the parameter estimates in multivariate specifications depends on how the measurement error is correlated with other variables in the regression model. 5.4. The relation between pre-reset discretionary accruals and post-reset stock returns We now examine whether post-reset returns are explained by pre-reset accruals. Teoh et al. (1998a, b) and Rangan (1998) address the analogous question for firms conducting seasoned equity offerings (SEO) and initial public offerings (IPO). Those papers find a strong negative relation between pre-issue accruals and post-issue long-run stock performance and conclude that the market overprices the (positive) discretionary accruals of the issuing firms. We measure post-reset stock return as the compounded return for a firm net of the CRSP value-weighted index. We compound daily returns for 6 months following the reset date. Pre-reset discretionary accruals (CUMABNACCR
1) and nondiscretionary accruals (CUMPREDACCR
1) are calculated exactly the same way as in Section 5.2. Similarly, the other explanatory variables are calculated as in Section 5.2, but are contemporaneous and defined over the two quarters following the reset date. Table 7 shows regression results for reissuers only (Models 1–3) and both repricers and reissuers (Models 4–6). In all specifications, the coefficient on discretionary accruals, the variable of interest, is positive and insignificant. Moreover, the estimated coefficient on the interaction of discretionary accruals and the indicator for cancellation and reissue is positive and insignificant. In manipulating stock price by using accruals, managers would hope for a rebound after the reset date, in which case stock return after the reset data would be negatively related to discretionary accruals prior to the reset date. We do not find this in the data for reissuers or repricers. It appears that stock price performance does not respond to past discretionary accruals in the direction that would add value to the reset options.27 27

As a check on the power of this test, we examine whether changes in post-issue accruals are negatively related to the change in pre-issue accruals. That is, if accruals do not reverse our tests may be less likely to detect a stock price effect. Because of seasonalities in quarterly data we use year-over-year accruals. We do find a significant negative correlation; the Pearson correlation coefficient is
0.46 (p-value ¼ 0.000).

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Table 6 Market reaction to earnings surprise and accruals around earnings announcements: Cross-sectional regression of cumulative abnormal returns on discretionary accruals and earnings surprise for reissuers and repricers

Intercept ABNACCR DumABNACCR PREDACCR DumPREDACCR CHGEPS DumCHGEPS

Reissuers only (Models 1–3)

Reissuers and repricers (Models 4–6)

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6


0.002 (
0.21)
0.126 (
0.68)


0.015 (
0.96)
0.369 (
1.51)


0.002 (
0.18)
0.107 (
0.57)


0.083 (
0.39)


0.796 (
1.58)


0.079 (
0.37)


0.001 (
0.18) 0.002 (0.02)
0.158 (
0.62)
0.203 (
0.60) 0.067 (0.17) 0.041 (0.71) 0.053 (0.76)


0.006 (
0.51) 0.009 (0.04)
0.343 (
1.05)
0.601 (
1.42)
0.180 (
0.27)


0.001 (
0.19) 0.017 (0.10)
0.155 (
0.61)
0.180 (
0.53) 0.046 (0.12)

0.047 (0.10) 1.002 (1.27) 0.237* (1.72)
0.227 (
0.77) 1.34% 1.43 286

0.198 (1.61) 0.324 (1.47) 1.19% 1.78* 455

0.094** (2.57)

1.067** (1.99)

AFE DumAFE OPCF DumOPCF Adj. R2 F-Statistic No. of obs.

0.520*** (2.95)

0.001 (0.01)

0.534*** (3.00)

4.44% 3.76*** 298

1.86% 1.67 179

2.60% 2.99** 298

0.195 (1.59) 0.316 (1.44) 2.09% 2.08** 455

Notes: The table displays estimated coefficients from an OLS model of cumulative abnormal returns of firms that cancel and reissue employee stock options (reissuers) and firms that reprice the stock options (repricers). The dependent variable, CAR, is the cumulative abnormal return computed using the CRSP equally weighted index for the window (
2,+2) around three earnings announcements prior to strike price reset. ABNACCR, the discretionary accruals and PREDACCR, the estimated nondiscretionary accruals are calculated as described in Table 4. Q4 dummy is set to 1 for fiscal fourth quarter, and estimates are not reported for brevity. EARNINGS_SURPRISE is measured using both AFE and CHGEPS. OPCF, AFE and CHGEPS are as described in Table 5. AFE and CHGEPS, the earnings surprise variables, are scaled by the stock price at the end of the previous quarter. The reference date (t ¼ 0) is the repricing date for the sample of repricers, and the reissue date for the sample of firms that cancel their stock options and reissue them after six months and one day. Consensus EPS estimates are obtained from IBES’ detailed estimates tape and uses one-quarter-ahead EPS forecast. Cancel dummy is set to 1 if the firm cancels and reissues the employee stock option, and 0 if the firm reprices the stock option. ***, **, and * denote significance at less than the 1%, 5% and 10%.

While an explanation related to delayed reaction to discretionary accruals or mean reversion in earnings due to discretionary accruals might be reasonable, it is inappropriate at this point to attach any strong interpretation. The results of Teoh et al. (1998a, b) and Rangan (1998) are based on post-issue performance over long horizons up to 4 years.

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5.5. Analyst forecast errors and discretionary accruals Evidence in Teoh and Wong (2002) indicates that analysts respond to discretionary accruals and do not incorporate properly the mean reversion in earnings that are due to accruals when issuing EPS forecasts. This credulity extends not only to firms that issue new equity, but also to non-issuing firms with high accruals. Teoh and Wong observe that the credulity of analysts is reflected in forecasts for a full 4 years subsequent to the equity issues, and that the forecast errors that follow from discretionary accruals explain long-run post-issue underperformance. Their evidence suggests that investors overvalue firms that issue equity on account of their reliance on the overoptimistic forecasts of analysts and that both analysts and investors are surprised when earnings of high accrual firms do not persist. Given the transparent nature of the reissuing process, financial analysts should be aware of the incentives to record lower accruals and to manage earnings downwards. Consequently, EPS forecasts should not be overly pessimistic based on abnormally low accruals. Of course, tests based on forecast errors over a longer horizon (e.g., up to 4 years) following the option strike price reset will need to wait for more data, but some tests are possible now using available data. In particular, we examine EPS consensus forecasts that are issued for the first quarter subsequent to the option strike price reset date. Following Teoh and Wong (2002), we test whether analysts incorporate the mean reversion in accruals when they issue the forecasts. In particular, we regress analyst forecast errors on discretionary accruals, nondiscretionary accruals, and controls for size, industry, and fiscal quarter. The analysts’ forecast error (AFE) is the actual EPS minus the consensus forecast of EPS, scaled by the prior period (end of quarter) stock price. We follow the literature and winsorize AFE at 710% to make sure outliers do not affect the estimated regression coefficients. We use the detailed estimates tape from IBES to construct the consensus forecasts. The accruals variables, ABNACCR and PREDACCR are computed as shown in Section 4.1. To maintain comparability with prior literature, we include controls for size (natural logarithm of market value, log(MV)), industry (industry dummies, DIND), time (year dummies, DYR), and differential forecast error for fiscal fourth quarter (fiscal fourth quarter dummy, Q4). As before, we use Dum ¼ 1 to indicate that the firm cancels and reissues stock options (Dum ¼ 0 if the firm reprices), and all explanatory variables are defined over the three quarters prior to the option strike price reset date. Table 8 reports regression results for the reissuers only (Models 1 and 2) and the combined sample of reissuers and repricers (Models 3 and 4). Consistent with prior evidence, we find that AFE is positively and significantly related to size. Analysts tend to be more pessimistic when the firm is larger. More to the point, the coefficient on discretionary accruals is close to zero and not statistically significant. When we interact discretionary accruals with a dummy for reissuers, the sign is negative but, once again, not statistically significant. This is entirely consistent with the notion that analysts do not respond to abnormally low accruals in this simple setting. A negative and significant coefficient for the discretionary accruals variable (so higher discretionary accruals would be associated with more optimism in analysts’ forecasts) would indicate that analysts are credulous over an extended period to accruals management. We do not observe this in the data. Discretionary accruals lack explanatory power and analysts are not misled by

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Table 7 Cross-sectional regression of 6-month buy-and-hold returns (following strike price reset date) on past discretionary accruals for reissuers and repricers

Intercept CUMABNACCR
1 DumCUMABNACCR
1 CUMPREDACCR
1 DumCUMPREDACCR
1 CUMCHGEPS DumCUMCHGEPS

Reissuers only (Models 1–3)

Reissuers and Repricers (Models 4–6)

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

0.181 (0.67) 0.934 (1.22)

0.078 (0.25) 1.228 (1.51)

0.179 (0.66) 0.920 (1.19)


0.314 (
0.41)

0.372 (0.38)


0.318 (
0.41)

0.511** (2.24) 0.155 (0.18) 1.213 (1.07) 0.373 (0.26)
0.190 (
0.13) 0.000 (0.13) 0.017 (1.42)

0.659** (2.45) 0.854 (0.81) 0.642 (0.49) 0.888 (0.55) 0.333 (0.18)

0.509** (2.24) 0.132 (0.16) 1.200 (1.07) 0.367 (0.26)
0.205 (
0.14)

0.665 (0.35)
0.224 (
0.08) 0.768 (1.00)
0.085 (
0.07) 1.37% 1.10 146

0.762 (1.06) 0.415 (0.38) 5.77% 1.57* 179

0.013 (1.31)

CUMAFE

1.074 (0.60)

DumCUMAFE CUMOPCF DumCUMOPCF Adj. R2 F-Statistic No. of obs.

1.263 (1.61)

1.103 (1.21)

1.247 (1.58)

20.76% 3.10*** 129

7.51% 1.59* 110

20.25% 3.17*** 129

0.784 (1.05) 0.417 (0.37) 5.94% 1.53* 178

Notes: The table displays estimated coefficients from an OLS model of 6-month buy-and-hold returns of firms that cancel and reissue employee stock options (reissuers) and firms that reprice the stock options (repricers). The dependent variable, CAR, is the buy-and-hold return computed using the CRSP value weighted index for 6 months after the date the option price is reset. CUMABNACCR
1 and CUMPREDACCR
1 are lagged variables and are calculated as the sum of the discretionary accruals and nondiscretionary accruals for the three quarters prior to the strike price reset. CUM_EARNINGS_SURPRISE and CUMOPCF are the cumulative earnings surprise and (scaled) operating cash flow variables for the two quarters following the strike price reset. Cancel dummy is set to 1 if the firm cancels and reissues the employee stock option, and 0 if the firm reprices the stock option. DIND are industry dummy variables. Estimates for these variables are not reported for brevity, and are available upon request. ***, **, and * denote significance at less than the 1%, 5% and 10%.

earnings management around employee stock option reissues. Of course, once again, measurement error also is a potential explanation for not detecting a relation. 6. Conclusion In this paper, we investigate the extent of analyst and market rationality around the cancellation and subsequent reissue of employee stock options. This event provides a unique experimental setting in which the incentives to manipulate earnings should be

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Table 8 Cross-sectional regression of analyst forecast error on nondiscretionary accruals and discretionary accruals for reissuers and repricers

Intercept ABNACCR DumABNACCR PREDACCR DumPREDACCR log(MV) IND CONTROL Adj. R2 F-Statistic No. of obs.

Reissuers only (Models 1 and 2)

Reissuers and Repricers (Models 3 and 4)

Model 1

Model 2

Model 3

Model 4


0.033*** (
3.40) 0.005 (0.13)


0.030** (
2.29) 0.001 (0.05)


0.004 (
0.09)


0.008 (
0.19)

0.003*** (3.22) No 6.87% 3.47*** 202

0.002* (1.65) Yes 24.10% 4.76*** 202


0.031*** (
3.07) 0.050 (0.55)
0.049 (
0.52)
0.081 (
0.80) 0.072 (0.68) 0.003*** (2.80) No 6.55% 2.62*** 256


0.047*** (
3.45) 0.033 (0.34)
0.029 (
0.29)
0.065 (
0.55) 0.056 (0.46) 0.003*** (2.69) Yes 16.57% 3.03*** 256

Notes: The table displays estimated coefficients from an OLS model of analyst forecast errors of firms that cancel and reissue employee stock options (reissuers) and firms that reprice the stock options (repricers). The dependent variable, AFE, is the analyst forecast error and is computed as: [(actual EPS
consensus EPS estimate)/prior period stock price]. Consensus EPS estimates are computed for the quarter immediately following the date the strike price is reset for both the samples and are obtained from IBES’ detailed estimates tape. We require that analysts have information on that quarter’s reported accruals in constructing the consensus EPS forecast for the quarter immediately following the date the strike price is reset. AFE is winsorized at 710%. ABNACCR, the discretionary accruals, and PREDACCR, the estimated nondiscretionary accruals are calculated as described in Table 4. DIND, DYR and Q4 are industry, year and fiscal fourth quarter dummy variables respectively. The reference date (t ¼ 0) is the repricing date for the sample of repricers, and the reissue date for the sample of firms that cancel their stock options and reissue them after six months and one day. Cancel dummy is set to 1 if the firm cancels and reissues the employee stock option, and 0 if the firm reprices the stock option. Estimates for these variables are not reported and are available upon request. log(MV) is the natural logarithm of the firm’s market value. ***, **, and * denote significance at less than the 1%, 5% and 10% levels using White T, two-tailed tests.

absolutely transparent to market participants. There is an obvious incentive to manage the stock price downward over a well-defined period in advance of the reissue date because managers prefer options with lower strike prices. Moreover, investors and analysts, because the cancellation and reissue is announced at least 6 months ahead of the option strike price reset date, should be able to anticipate such managerial attempts to manage earnings and stock price. Using methods employed in the prior literature, we investigate whether managers still attempt to manage earnings in this simple environment, whether these attempts at manipulation have the desired effect on stock price, and the role of analyst credulity in the process. Based on a sample of 159 reissues, we find strong evidence of abnormally low discretionary accruals leading up to the option reissue date. Thus, even in a setting where investors are aware of the incentives to manipulate stock price, it appears that managers still attempt to manage accruals to their own benefit.

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Our analysis suggests that the market does not respond to the abnormally low discretionary accruals. Discretionary accruals between the announcement date and reissue date have little power to explain stock price performance over the 9 months prior to the reset date, the 6 months following the reset date, and the narrow window containing earnings (and accruals) announcements. Moreover, discretionary accruals have no power to explain subsequent analyst forecast errors. Thus, in contrast to the evidence from earlier studies, where the incentives to manipulate are not necessarily foreseeable, in our setting, in which earnings management can be anticipated, neither analysts nor investors are misled by manipulation of accruals. Overall, our findings stand in sharp contrast to evidence in other studies, such as Teoh et al. (1998a, b) and Teoh and Wong (2002), suggesting that investors and analysts are ‘‘naive’’ in that they are unable to recognize and very slow to unravel accounting deceptions. One possibility suggested by our findings is that investors and analysts are reasonably sophisticated but incentives and accounting manipulation around these particular corporate events are not particularly transparent. In this sense, the more transparent cancellation and reissue setting we investigate is well within the bounds of rationality of investors and provides evidence on the extent of investor and analyst gullibility. A more aggressive interpretation of our findings is that it shows that investors and analysts do see through accounting deceptions and, thus, something else is driving the results in the earlier studies. We leave further investigation of these alternative interpretations to future study. References Aboody, D., Kasznik, R., 2000. CEO stock option awards and the timing of corporate voluntary disclosures. Journal of Accounting and Economics 29, 73–100. Acharya, V., John, K., Sundaram, R., 2000. On the optimality of resetting executive stock options. Journal of Financial Economics 57, 65–101. Beaver, W., McNichols, M., 1998. The characteristics and valuation of loss reserves of property casualty insurers. Review of Accounting Studies 3 (1-2), 73–95. Beaver, W., Eger, C., Ryan, S., Wolfson, M., 1989. Financial reporting, supplemental disclosures and bank share prices. Journal of Accounting Research (Autumn), 157–178. Bergstresser, D., Philippon, T., 2006. CEO incentives and earnings management. Journal of Financial Economics, in press. Brenner, M., Sundaram, R., Yermack, D., 2000. Altering the terms of executive stock options. Journal of Financial Economics 57, 103–128. Callaghan, S., Saly, P., Subramaniam, C., 2004. The timing of option repricing. Journal of Finance 59, 1651–1676. Carter, M., Lynch, L., 2001. An examination of executive stock option repricing. Journal of Financial Economics 61, 207–225. Carter, M., Lynch, L., 2003. The consequences of the FASB’s 1998 proposal on accounting for stock option repricing. Journal of Accounting and Economics 35, 51–72. Chance, D., Kumar, R., Todd, R., 2000. The repricing of executive stock options. Journal of Financial Economics 57, 129–154. Chidambaran, N.K., Prabhala, N., 2003a. Executive stock option repricing, internal governance mechanisms, and management turnover. Journal of Financial Economics 69, 153–189. Chidambaran, N.K., Prabhala, N., 2003b. Executive stock option repricing: Creating a mountain out of a molehill? Working paper, University of Maryland. Coles, J., Daniel, N., Naveen, L., 2003. Option repricing and incentive alignment. Working paper, Georgia State University. Collins, D., Hribar, P., 2000. Earnings-based and accrual-based market anomalies: one effect or two? Journal of Accounting and Economics 29, 101–123.

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