Research by accounting professors Patricia Dechow and Richard Sloan that helped fuel an explosion of governance-accounting studies and subsequent reform has been recognized for its significant and enduring impact on the discipline.
Dechow and Sloan have received the American Accounting Association's inaugural Distinguished Contribution to Accounting Literature Award for their research paper, Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC. The paper's findings demonstrate that firms most frequently manipulate earnings to lower the short-run cost of raising new financing and that weak governance structures facilitate such behavior. Co-author Amy Hutton, professor of accounting, Boston College, is also a recipient.
"We are delighted to receive this recognition of our work from our colleagues, more so because our findings were controversial at the time of publication and we initially faced an uphill battle in gaining broader acceptance of our conclusions," says Sloan.
The study focused on firms facing alleged violations of Generally Accepted Accounting Principles (GAAP) in accounting enforcement actions taken by the SEC. Dechow, Sloan, and co-author Amy 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 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, "It also anticipated the causes and consequences of subsequent accounting crises such as Enron and WorldCom." The authors recently updated the database used for this research and plan to make it available to researchers and practitioners through Haas' Center for Financial Reporting and Management (CFRM).
Significant and Enduring Impact
"Professors Dechow and Sloan paved the way for a new emphasis in the accounting literature," says Dean Rich Lyons. "They are a great example of why questioning the status quo – one of the school's defining principles – is so important to innovative research."
Dechow and Sloan were assistant professors of accounting at the Wharton School when they authored the paper. Dechow is currently the Donald H. and Ruth F. Seiler Professor in Public Accounting. 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. Sloan is the L. H. Penney Professor of Accounting. His research focuses on the role of accounting information in investment.
The American Accounting Association (AAA) created the Distinguished Contribution to Accounting Literature Award to recognize accounting research of exceptional merit that has significantly impacted the discipline over a period of at least 10 years. In awarding the inaugural prize to Dechow and Sloan, the AAA determined that their research demonstrates a major contribution to accounting education and practices.