Professor Pincus’ research interests are primarily in three overlapping areas of external financial reporting: (A) the relation between accounting and stock market variables, including the earnings—stock price relation, regulatory event studies, and market efficiency with respect to accounting information; (B) accounting policy choice, especially with regard to inventory costing; and (C) earnings management (i.e., manipulation of the financial reporting process), with particular focus on the use of “book-tax” differences to detect and gauge the extent of earnings management. While most of his research considers U.S. financial reporting issues, he has several studies that investigate such issues in the international arena.
Three recently published articles (i) study the expected impact of the Sarbanes-Oxley Act of 2002 (“SOX”) on earnings management, (ii) document the prevalence of and firm-specific characteristics that impact the choice between alternative earnings management strategies, and (iii) examine the (mis)pricing of accounting accruals in valuing firms in international markets. The SOX article (i) examines the relation between stock market reactions to events leading to the passage of the Sarbanes-Oxley Act of 2002 and the extent of firms’ earnings management. SOX is the most important legislation dealing with financial reporting since the 1930s, and this research finds evidence consistent with investors anticipating that SOX would constrain earnings management and enhance the quality of financial statement information more, the more that firms previously managed earnings (i.e., the more the quality of their financial statement information had been impaired by earnings management).
The second study (ii) extends earlier research concerned with whether and how managers exploit the generally greater discretion available under U.S. financial accounting standards vis-à-vis income tax rules to manage earnings. Pincus and his co-authors investigate the prevalence of, and firm characteristics that impact the choice between, managing earnings upwards in ways that do or do not have current income tax consequences. More specifically, they analyze companies that restated their earnings for external reporting purposes due to accounting irregularities and find that, in general, earnings management strategies that did not conform book and tax reporting are more prevalent and that firms appear to trade off the net present value of tax benefits against the net expected costs of being detected as an earnings manager.
The results from the third article (iii) indicate that capital market mispricing of accounting accruals (the so-called “accrual anomaly”) is more likely to occur in countries having a common law tradition, allowing more extensive use of accrual accounting, and having more diffuse share ownership. The results of this study also suggest that at the company level within countries, earnings management and barriers to arbitrage best explain the occurrence and persistence of the accrual anomaly.