Haas Professors Patricia Dechow and Richard Sloan have been honored with a new national accounting award for a research article that helped fuel an explosion of governance-accounting studies.
The American Accounting Association is recognizing Dechow, Sloan, and co-author Amy Hutton of Boston College for their 1996 paper “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC,” published in Contemporary Accounting Research.
The award recognizes unique research from the past 5 to 15 years that has made a significant contribution to the accounting field.
The trio demonstrated that firms most frequently manipulate earnings to lower the short-run cost of raising new financing and that weak governance structures facilitate such behavior. Their paper has received more than 1,000 Google Scholar citations.
"Although their paper was initially controversial because it challenged existing thinking, Professors Dechow and Sloan paved the way for a new emphasis in the accounting literature," Dean Rich Lyons says. "They are a great example of why questioning the status quo – one of the school's defining principles – is so important to innovative research."
The study focused on firms facing alleged violations of Generally Accepted Accounting Principles in accounting enforcement actions taken by the Securities and Exchange Commission. Dechow, Sloan, and Hutton identified links between corporate governance characteristics (such as lack of board independence and excessive managerial power) and accounting manipulations.
The award’s nominating committee wrote that the paper, "documented a fundamentally important linkage – arguably weak corporate governance characteristics are associated with bad accounting outcomes."
"In other words, when it comes to quality accounting, corporate governance is important," the committee added.
The award recognizes the enduring impact of Dechow and Sloan’s work. The paper has received over 1,000 citations on Google Scholar. Furthermore, resulting regulatory reforms were consistent with the study’s findings. For example, listed companies were required to have a majority of independent directors on their boards and audit committees comprised solely of independent directors.
“It was controversial at the time it was written in that it challenged existing academic thinking such as the efficient markets hypothesis and the hypothesis that then existing governance structures were optimal,” says Dechow, chair of the Haas Accounting Group. “It also anticipated the causes and consequences of subsequent accounting crises such as Enron and WorldCom."
"We recently updated the database used for this research and we plan to make it available to researchers and practitioners through Haas’ Center for Financial Reporting and Management," Dechow added.
The authors will be presented the award at the American Accounting Association's annual conference in August in San Francisco.
Dechow is the Donald H. and Ruth F. Seiler Professor in Public Accounting. She previously held faculty positions at Wharton and the University of Michigan's Ross School of Business. Her research focuses on accounting accruals, the quality and reliability of earnings, the use of earnings information in predicting stock returns, and the effect of analysts' forecasts on investors’ perceptions of firm value. Dechow's work has been widely published in numerous accounting journals.
Sloan is the L. H. Penney Professor of Accounting. He was previously managing director and head of equity research at Barclays Global Investors from 2006 to 2008. His research focuses on the role of accounting information in investment decisions and is published in leading accounting, finance, and economics journals. He has received numerous awards for his research on earnings quality, including the AAA’s Notable Contributions Award in 2001 and 2009.
Article updated June 11, 2010.