Graduate Institute of Business Administration
College of Management
Chang Gung University
Theory of Financial Accounting (BAM210 83985)
Instructor: Assistant Professor Chih-Liang Liu
Office: 7nd Management Building
Phone: (03) 211-8800, extensions 5412
Office Hours: By appointment
Time: 13:30-16:00 (Thursday)
Location: (to be assigned)
I. Course Objectives:
The primary objective of the course is to exchange ideas in financial accounting research. I hope
that doing this will help you meet several other objectives, namely,
(1) Improve your ability to formulate viable research topics. The means of doing this are to
examine a number of research areas in financial accounting to see how they developed, to
practice by suggesting lines of research in areas that we discuss, to select areas for
discussion, to prepare literature searches, and to engage in discussions of research.
(2) Improve your understanding of current areas of research in financial accounting.
(3) Improve your ability to discuss, comment upon, and referee the work of others. The
means of doing this are class discussions of papers.
(4) Improve your ability to conduct research in financial accounting. The means of doing this
is to conduct a literature search on a topic, formulate a summary of extant research,
devise testable hypotheses, and design experiments for future research in financial
II. Some Philosophy:
Research questions frequently arise as a result of an in-depth examination of an area of research
that has already received attention in the financial accounting literature. The research questions
take many forms:
(1) investigating previously unanswered questions, perhaps with new data, new techniques, or
(2) corrections of flawed methods,
(3) investigating new phenomena,
(4) new approaches to old problems,
(5) testing implications of theories,
(6) synthesizing previously unconnected research areas,
(7) investigating public policy issues,
(8) improving the measurement of variables, etc.
I believe that by examining how the research has developed in several areas in financial
accounting, you can learn how to identify research questions. I also hope that in the process you
learn how to decide which research questions merit further consideration and which ones should
III. Course Requirements and Grade Determination:
(1) Class Participation:
The course is structured in seminar format. To get us started, I have selected several
subject areas for class discussion. The primary tools of the course are reading, writing,
and discussion of the financial accounting research literature. Students are expected to
thoroughly read the assigned readings before each class and to be prepared to discuss the
readings in detail, so that you can exchange idea. Each student will have the following
Discussion Participants: Everyone is expected to participate fully in the discussion of all
of the assigned readings. Evaluation will be based on your contribution to the discussion
of the readings each day. Your contribution each class should consist of comments and
questions about each paper assigned for that class, including making links to other papers
in the course. Daily participation in discussions will be judged on the basis of quality of
comments, questions and ideas, and not simply on the quantity of comments. There is
much to be gained by rigorously challenging the ideas in the assigned readings and the
ideas that will be put forth in class.
Written Assignments Deliverable: You will be expected to hand in each class a one-
page summary of the assigned articles. Your one-page summary should address the
following five elements for each paper:
i. What is the research question?
ii. Why is it important?
iii. How is the question being addressed?
iv. What are the key findings?
v. How could the study be improved and extended?
Presenter: On certain class days, one student will be assigned to present a discussion and
critique of the paper. Presentations should follow the structure noted above for class
discussion of papers. Each presentation will be evaluated based on how clearly and
concisely it conveys the motivation for the study, the strengths and weaknesses of the
research design, and the implications of the findings. The presenter should be prepared
to respond to students’ and faculty questions about the paper.
Written Assignments Deliverable: The presenter will be expected to distribute a written
summary and critique (a couple of pages) to classmates. These handouts should be
sufficiently complete to be good.
(2) Research Proposal:
By the end of the course you are required to submit and present your own research
proposal. Your research topic should be in financial accounting. To find a topic, take
recent journal issues and inspect the publications. Then, decide a topic that is most
interesting to you and potentially has significant contribution to the literature. Your
proposal should include two parts:
Provide, in detail, previous theoretical and/or empirical studies related to your research
Propose future theoretical and/or empirical research work.
The emphasis in this paper should be on your own suggested future research. Be as
definite as you can. Sketch out or even develop your ideas for a research paper that takes
the literature one step beyond what you have reviewed. It would be better if you can also
provide some preliminary results.
There are four major aspects of the seminar and are weighted as follows in determining
I. Research Proposal .......................................................................... 50%
II. Presentations and discussion of assigned readings........................ 25%
III. Written Assignments .................................................................... 25%
Scott, W. R. 2009. Financial Accounting Theory. Ontario, 5rd, Canada: Prentice-Hall
**: Papers that I will discuss in detail in the class.
*: Papers that students will present and criticize.
A. Information Asymmetry and Demanding of Financial Reporting
** Healy, P. M. and K. G. Palepu, 2001, “Information Asymmetry, Corporate Disclosure, and
the Capital Markets: A Review of Empirical Disclosure Literature,” Journal of Accounting
Economics 31, 405-440.
* Graham, J. R., C. R. Harvey, and S. Rajgopal 2005, “The Economic Implications of
Corporate Financial Reporting,” Journal of Accounting and Economics 40, 3-73.
* Frankel, R. and X. Li, 2004, “Characteristics of a Firm’s Information Environment and the
Information Asymmetry between Insiders and outsiders,” Journal of Accounting and
Economics 37, 229-259.
* Wittenberg-Moerman, R., 2008, “The Role of Information Asymmetry and Financial
Reporting Quality in Debt Trading: Evidence from the Secondary Loan Markets,” Journal of
Accounting and Economics 46, 240-260.
* Dey, A., 2008, “Corporate Governance and Agency Conflicts,” Journal of Accounting
Research 46 (5), 1143-1181.
Jensen, M. and W. Meckling, 1976, “Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure,” Journal of Financial Economics October, 305-360.
Kothari, S. P., 2001, “Capital Market Research in Accounting,” Journal of Accounting and
Economics 31, 105-231.
B. Voluntary Disclosure Incentives: Information Asymmetry
** Bens, D. A. and S. J. Monahan, 2004, “Disclosure Quality and the Excess Value of
Diversification,” Journal of Accounting Research 42, 691-730.
* Brown, S., S. A. Hillegeist, and K. Lo. 2004, “Conference Calls and Information
Asymmetry,” Journal of Accounting and Economics 37, 343-366.
* Rogers, J. L., 2008, “Disclosure Quality and Management Trading Incentives,” Journal of
Accounting Research 46, 1265-1295.
Skinner, D.J., 1994, “Why Firms Voluntarily Disclose Bad News?,” Journal of Accounting
Research 32, 38-60.
Kasznik, R. and B. Lev, 1995, “To Warn or Not to Warn: Management Disclosures in the
Face of an Earnings Surprise,” The Accounting Review January, 113-134.
Frankel, R., M. McNichols, and G. P. Wilson, 1995, “Discretionary Disclosure and External
Financing,” The Accounting Review, 135-150.
Lang, M. and R. Lundholm, 1996, “Corporate Disclosure Policy and Analyst Behavior,” The
Accounting Review 71, 467-492.
Botosan, C., 1997, “Disclosure Level and Cost of Equity Capital,” The Accounting Review
Coller, M. and T. Yohn, 1997, “Management Forecasts and Information Asymmetry: An
Examination of Bid-Ask Spreads,” Journal of Accounting Research 35, 181-192.
Frankel, R., M. Johnson, and D. Skinner, 1999, “An Empirical Examination of Conference
Calls as a Voluntary Disclosure Medium,” Journal of Accounting Research 37, 133-150.
Verrecchia, R. E., 2001, “Essay on Disclosure,” Journal of Accounting and Economics 32,
C. Disclosure Issue:
* Wasley, C. and J. S. Wu, 2006, “Why Do Managers Voluntarily Issue Cash Flow
Forecasts?,” Journal of Accounting Research 44 (2), 389-428.
* Ali, A., T.-Y. Chen, and S. Radhakrishnan, 2007, “Corporate Disclosures by Family Firms,”
Journal of Accounting and Economics 44, 238-286.
* Chen, S., X. Chen, and Q. Cheng, 2008, “Do Family Firms Provide More or Less Voluntary
Disclosure?,” Journal of Accounting Research 46 (3), 499-536.
* Hope, O.-K. and W. B. Thomas, 2008, “Managerial Empire Building and Firm Disclosure,”
Journal of Accounting Research 46 (3), 591-625.
* Bergman, N. K. and S. Roychowdhury, 2008, “Investor Sentiment and Corporate
Disclosure,” Journal of Accounting Research 46 (5), 1057-1083.
* Kothari, S. P., S. Shu, and P. D. Wysocki, 2009, “Do Managers Withhold Bad News,”
Journal of Accounting Research 47 (1), 241-274.
Beaver, W. H., 2002, “Perspectives on Recent Capital Market Research,” The Accounting
Review 77 (2), 453-474.
Guo, R. J., B. Lev, and N. Nhou, 2004, “Competitive Costs of Disclosure by Biotech IPOs,”
Journal of Accounting Research 42, 319-355.
Sidhu, B., T. Smith, R. E. Whaley, and A. Willis, 2008, “Regulation Fair Disclosure and the
Cost of Adverse Selection,” Journal of Accounting Research 46 (3), 697-728.
Shalev, R., 2009, “The Information Content of Business Combination Disclosure Level,” The
Accounting Review 84 (1), 239-270.
* Cheng, Q. and D. B. Farber, 2008, “Earnings Restatements, Changes in CEO Compensation,
and Performance,” The Accounting Review 83, 1217-1250.
* Erickson, M., M. Hanlon, and E. L. Maydew, 2006, “Is There a Link between Executive
Equity Incentives and Accounting Fraud?,” Journal of Accounting Research 44, 113-143.
* Carter, M. E., L. J. Lynch, and I. Tuna, 2007, “The Role of Accounting in the Design of CEO
Equity Compensation,” The Accounting Review 82, 327-357.
* Indjejikian, R. and M. Matejka, 2009, “CFO Fiduciary Responsibilities and Annual Bonus
Incentives,” Journal of Accounting Research 47, 1061-1093.
* Laux, C. and V. Laux, 2009, “Board Committees, CEO Compensation, and Earnings
Management,” The Accounting Review 84, 869-891.
Antle, R. and A. Smith, 1985, “Measuring Executive Compensation: Methods and
Application,” Journal of Accounting Research 23, 296-325.
Jensen, M. C. and J. L. Zimmerman, 1985, “Management Compensation and the Managerial
Labor Market,” Journal of Accounting and Economics 7, 3-9.
Lewellen, W., C. Loderer, and K. Martin, 1987, “Executive Compensation and Executive
Incentive Problems: An Empirical Analysis,” Journal of Accounting and Economics 9, 287-
Sloan, R. G., 1993, “Accounting Earnings and Top Executive Compensation,” Journal of
Accounting and Economics 16, 55-100.
Baber, W. R., S.-H. Kang, and K. R. Kumar, 1998, “Accounting Earnings and Executive
Compensation: The Role of Earnings Persistence,” Journal of Accounting and Economics 25,
Core, J. E., R. W. Holthausen, and D. F. Larcker, 1999, “Corporate Governance, Chief
Executive Officer Compensation, and Firm Performance,” Journal of Financial Economics
Engel, E., R. M. Hayes, and X. Wang, 2003, “CEO Turnover and Properties of Accounting
Information,” Journal of Accounting and Economics 36, 197-226.
Core, J. E., W. R. Guay, and R. E. Verrecchia, 2003, “Price versus Non-Price Performance
Measures in Optimal CEO Compensation Contracts,” The Accounting Review 78, 957-981.
Nagar, V., D. Nandar, and P. Wysocki, 2003, “Discretionary Disclosure and Stock-Based
Incentives,” Journal of Accounting and Economics 34, 283-309.
Boschen, J. F., A. Duru, L. A. Gordon, and K. J. Smith, 2003, “Accounting and Stock Price
Performance in Dynamic CEO Compensation Arrangements,” The Accounting Review 78,
Aboody, D., M. E. Barth, and R. Kasznik, 2004, “Firms’ Voluntary Recognition of Stock-
Based Compensation Expense,” Journal of Accounting Research 42, 123-150.
Cheng, S., 2004, “R&D Expenditures and CEO Compensation,” The Accounting Review 79,
Ortiz-Molina, H., 2007, “Executive Compensation and Capital Structure: The Effects of
Convertible Debt and Straight Debt on CEO Pay,” Journal of Accounting and Economics 43,
Balsam, S. and S. Miharjo, 2007, “The Effect of Equity Compensation on Voluntary
Executive Turnover,” Journal of Accounting and Economics 43, 95-119.
Karuna, C., 2007, “Industry Product Market Competition and Managerial incentives,”
Journal of Accounting and Economics 43, 275-297.
Brown, J. L. and L. K. Krull, 2008, “Stock Options, R&D, and the R&D Tax Credit,” The
Accounting Review 83 (3), 705-734.
E. Earnings Management:
** Cohen, D. A., A. Dey, and T. Z. Lys, 2008, “Real and Accrual-Based Earnings Management
in the Pre- and Post-Sarbanes-Oxley Periods,” The Accounting Review 83 (3), 757-787.
* Jacob, J. and B. N. Jorgensen, 2007, “Earning Management and Accounting Income
Aggregation,” Journal of Accounting and Economics 43, 369-390.
* Raman, K. and H. Shahrur, 2008, “Relationship-Specific Investments Earnings Management:
Evidence on Corporate Suppliers and Customers,” The Accounting Review 83 (4), 1041-
* Roychowdhury, S., 2006, “Earnings Management through Real Activities Manipulation,”
Journal of Accounting and Economics 42, 335-370.
* McNichols, M. F. and S. R. Stubben, 2008, “Does Earnings Management Affect Firms’
Investment Decisions?,” The Accounting Review 83 (6), 1571-1603.
Jones, J. J., 1991, “Earning Management During Import Relief Investigations,” Journal of
Accounting Research 29, 193-228.
Dechow, P. M., R. G. Sloan, and A. P. Sweeney, 1995, “Detecting Earnings Management,”
The Accounting Review 70, 193-225.
Burgstahler, D. and I. Dichev, 1997, “Earning Management to Avoid Earnings Decreases and
Losses,” Journal of Accounting and Economics 24, 99-126.
Healy, P. and J. M. Whalen, 1999, “a Review of the Earnings Management Literature and Its
Implications for Standard Setting,” Accounting Horizons 13, 365-384.
Matsumoto, D., 2002, “Management's Incentives to Avoid Negative Earnings Surprises,” The
Accounting Review 77, 483-514.
Collins, D. and P. Hribar, 2002, “Errors in Estimating Accruals: Implications for Empircal
Research,” Journal of Accounting Research 40, 105-134.
Cheng, Q. and T. D. Warfield, 2005, “Equity Incentives and Earnings Management,” The
Accounting Review 80, 441-476.
Kothari, S. P., A. J. Leone, and C. E. Wasley, 2005, “Performance Matched Discretionary
Accrual Measures,” Journal of Accounting and Economics 39, 163-197.
F. Earnings Management and Other Topics:
* Yu, F., 2008, “Analyst Coverage and Earnings Management,” Journal of Financial
Economics 88 (2), 245-271.
* Cornett, M., A. J. Marcus, and H. Tehranian, 2008, “Corporate Governance and Pay-for-
Performance: The Impact of Earnings Management,” Journal of Financial Economics 87 (2),
Teoh, S. H., I. Welch, and T. J. Wong, 1998, “Earnings Management and the
Underperformance of Seasoned Equity Offerings,” Journal of Financial Economics 50 (1),
Rangan, S., 1998, “Earnings Management and the Performance of Seasoned Equity
Offerings,” Journal of Financial Economics 50 (1), 101-122.
Erickson, M. and S.-W. Wang, 1999, “Earnings Management by Acquiring Firms in Stock
for Stock Mergers,” Journal of Accounting and Economics 27, 149-176.
Barton, J., 2001, “Does the Use of Financial Derivatives Affect Earnings Management
Decisions?,” The Accounting Review 76 (1),1-26.
Klein, A., 2002, “Audit Committee, Board of Director Characteristics, and Earnings
Management,” Journal of Accounting and Economics 33, 375-400.
Leuz, C., D. Nanda, and P. D. Wysocki, 2003, “Earnings Management and Investor
Protection: An International Comparison,” Journal of Financial Economics 69 (3), 505-527.
Fischer, P. E. and P. C. Stocken, 2004, “Effect of Investor Speculation on Earnings
Management,” Journal of Accounting Research 42, 843-869.
DuCharme, L., P. H. Malatesta, and S. E. Sefcik, 2004, “Earnings Management, Stock
Issues, and Shareholder Lawsuits,” Journal of Financial Economics 71 (1), 27-49.
Louis, H., 2004, “Earnings Management and the Market Performance of Acquiring Firms,”
Journal of Financial Economics 74 (1), 121-148.
Marquardt, C. and C. Wiedman, 2005, “Earnings Management through Transaction
Structuring: Contingent Convertible Debt and Diluted Earnings Per Share,” Journal of
Accounting Research 43, 205-243.
Hribar, P., N. T. Jenkins, and W. B. Johnson, 2006, “Stock Repurchases as An Earnings
Management Device,” Journal of Accounting and Economics 41, 3-27.
Bergstresser, D. and T. Philippon, 2006, “CEO Incentives and Earning Management,”
Journal of Financial Economics 80 (3), 511-529.
Ayers, B. C., J. Jiang, and P. E. Yeung, 2006, “Discretionary Accruals and Earnings
Management: An Analysis of Pseudo Earnings Targets,” The Accounting Review 81 (3), 671-
Hunton, J. E., R. Libby, and C. L. Mazza, 2006, “Financial Reporting Transparency and
Earnings Management,” The Accounting Review 81 (1), 135-157.
Fan, Q. 2007, “Earnings Management and Ownership Retention for Initial Public offering
Firms: Theory and Evidence,” The Accounting Review 82 (1), 27-64.
Jo, H. and Y. Kim, 2007, “Disclosure Frequency and Earnings Management,” Journal of
Financial Economics 84 (2), 561-590.
Zhao, Y. and K. H. Chen, 2008, “Staggered Boards and Earnings Management,” The
Accounting Review 83 (5), 1347-1381.
Daniel, N. D., D. J. Denis, and N. Lalitha, 2008, “Do Firms Manage Earnings to Meet
Dividend Thresholds?,” Journal of Accounting and Economics 45, 2-26.
G. Earnings Quality:
** Francis, J., R. LaFond, P. M. Olsson, and K. Schipper, 2004, “Costs of Equity and Earnings
Attributes,” The Accounting Review 79 (4), 967-1010.
* Biddle, G. C. and G. Hilary, 2006, “Accounting Quality and Firm-level Capital Investment,”
The Accounting Review 81 (5), 963-982.
* Hribar, P. and D. C. Nichols, 2007, “The Use of Unsigned Earnings Quality Measures in
Tests of Earnings Management,” Journal of Accounting Research 45 (5), 1017-1053.
* Bharath, S. T., J. Sunder, and S. V. Sunder, 2008, “Accounting Quality and Debt
Contracting,” The Accounting Review 83 (1), 1-28.
* Lo, K., 2008, “Earnings Management and Earnings Quality,” Journal of Accounting and
Economics 45, 350-357.
Beneish, M. D. and M. E. Vargus, 2002, “Insider Trading, Earnings Quality, and Accrual
Mispricing,” The Accounting Review 77 (4), 755-791.
Dechow, P. M. and I. D. Dichev, 2002, “The Quality of Accruals and Earnings: The Role of
Accrual Estimation Errors,” The Accounting Review 77, 35-59.
Schipper, K. and L. Vincent, 2003, “Earnings Quality,” Accounting Horizons (Supplement),
Richardson, S. A., R. G. Sloan, M. T. Soliman, and I. Tuna, 2005, “Accrual Reliability,
Earnings Persistence and Stock Prices,” Journal of Accounting and Economics 39, 437-485.
Francis, J., R. LaFond, P. M. Olsson, and K. Schipper, 2005, “The Market Pricing of
Accruals Quality,” Journal of Accounting and Economics 39, 295-327.
Ball, R. and L. Shivakumar, 2005, “Earnings Quality in UK private Firms: Comparative Loss
Recognition Timeliness,” Journal of Accounting and Economics 39, 83-128.
Francis, J., P. M. Olsson, and K. Schipper, 2006, “Earnings Quality,” Foundations and
Trends in Accounting 1 (4), 259-340.
Ball, R. and L. Shivakumar, 2008, “Earnings Quality at Initial Public Offerings,” Journal of
Accounting and Economics 45, 324-349.
Frankel, R. and L. Litov, 2009, “Earnings Persistence,” Journal of Accounting and
Economics 47, 182-190.
Dichev, I. D. and V. W. Tang, 2009, “Earnings Volatility and Earning Predictability,”
Journal of Accounting and Economics 47, 160-181.
Gul, F. A., S. Fung, and B. Jaggi, 2009, “Earnings Quality: Some Evidence on the Role of
Auditor Tenured and Auditors’ Industry Expertise,” Journal of Accounting and Economics
H. Other Topics:
* Riedl, E. J., 2004, “An Examination of Long-Lived Asset Impairments,” The Accounting
Review 79 (3), 823-852.
* Doyle, J., W. Ge, and S. McVay, 2007, “Accruals Quality and Internal Control over Financial
Reporting,” The Accounting Review 82 (5), 1141-1170.
* Barth, M. E., 2008, “Global Financial Reporting: Implications for U.S. Academics,” The
Accounting Review 83 (5), 1159-1179.
* Piotroski, J. D. and S. Srinivasan, 2008, “Regulation and Bonding: The Sarbanes-Oxley Act
and the Flow of International Liatings,” Journal of Accounting Research 46 (2), 383-425.
* Zhang, H., 2009, “Effect of Derivative Accounting Rules on Corporate Risk-Management
Behavior,” Journal of Accounting and Economics 47, 244-264.
Farber, D, 2005, “Restoring trust after fraud: Does corporate governance matter?,” The
Accounting Review 80 (2), 539-561.
Beatty, A. and J. Weber, 2006, “Accounting Discretion in Fair Value Estimates: An
Examination of SFAS 142 Goodwill Impairments,” Journal of Accounting Research 44 (2),
Ashbaugh-Skaife, H., D. Collins, and W. Kinney, 2007, “The discovery and consequences of
internal control deficiencies prior to SOX-mandated audits,” Journal of Accounting and
Economics 44, 166-192.
Doyle, J., W. Ge, and S. McVay, 2007, “Determinants of weaknesses in internal control over
financial reporting,” Journal of Accounting and Economics 44, 193-223.
Ashbaugh-Skaife, H., D. Collins, W. Kinney, and R. LaFond, 2008, “The Effect of SOX
Internal Control Deficiencies and Their Remediation on Accrual Quality,” The Accounting
Review 83 (1), 217-250.
Hoitash, U., R. Hoitash, and J. C. Bedard, 2009, “Corporate Governance and Internal Control
over Financial Reporting: A Comparison of Regulatory Regimes,” The Accounting Review 84
I. Methodological papers:
Francis, J. R. and C. S. Lennox, 2008, “Selection Models in Accounting Research,” Working
Larcker, D. F. and T. O. Rusticus, 2008, “On the Use of Instrumental Variables in
Accounting Research,” Working paper.