Baced on a survey of 401 senior financial executives of V.S. companiesand in depth interviews with an additional 22 execu tives, wedocument a willingnm of corpo rate executives to routinely sacrifice shareholder value to inert earnings expectations or to smooth reported earnings. Whereas much previous research has focused on the use of accounting, such as accrual decision., to manage earnings. we pro vide new evidenced the widespread use of rear carom)? management. Real earnings management. which might include defening a valuable project or slashing research and development expenditures, is almost always value decreasing. The survey. administered in the fall of 2003, contained 10 questiorn, most with subsections•and explored in some depth both earnings management and voluntary disclosures. In addition, from theta]]
Mn R. Graham is the U. Richard Maid. Jr., Family Palmer of Fimance in Ore Fuqua School of Buyers at Date University, Durham, North Carolina. Campbell R. Harvey is the Paul Stiehl Professor of international Business in the Fuqua School of Business at Duty Uni mrsily,Ourham, North Carolina. Shim Raigopal is the Herbert Whitten Profestorof Accounting at the linker s/Welt IYashingtors, Seattle.
Author Note:Thisankle Is an augmented version oi ‘The Economic Implications of Corporate Financial Report ing. published in the Journal ifAmnouin g and reemar. tr. 120061. We have added additional interview* with cruel financial offers and presto] results thil are rot con tained in our earlier work.
of 2003 to early 2005. we interviewed 22 thief financial offkers (CFOs). which added depth to our understanding of corporate decision making. We explore which metrics CEOs believe are important lo investors and other outsiders and how thinebeliefs afftct their decisions. Finding a myopic emphasis on quarterly earnings measures, we also explore how the malaise of theexcessive shed term focus (“shorth rmi.n.’1 char we found con be fn•d
Survey Techniques and Sample Characteristics Believing that the most important aspect of survey research Is designing a survey Instrument that asks clear and relevant questions, we took several steps to achieve this design goal. We developed an initial survey Instrument andsolicited feedback from aca demic researchers, CFOs. and marketing research experts to minimize biases induced by the quo. tiortnaire and to maximize the response rate. After extensive beta testing of the survey, we made stw oral changes to the wording of some quesakets The final survey contained 12 questions. and the paper version was five pages long.t We e•mailed the survey to 3,174 members of an organization of financial executives. We also con tacted executives attendingCF0 forums at two uni versifies and administered a paper version of the survey at a conference of financial executives con ducted on 17 and 18 November 2003 in New York City. Our overall response rated 10.4 percent falls close to the rates reported by several recent surveys of financial executives.’ The companies from which we received responses range from small (15.1
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