Bharat Sarath | Rutgers, The State University of New Jersey (original) (raw)

Papers by Bharat Sarath

Social Science Research Network, 2004

Social Science Research Network, 2022

Review of Quantitative Finance and Accounting, Nov 6, 2019

Beginning in December 2005, the SEC required registrants to discuss “ the most significant factor... more Beginning in December 2005, the SEC required registrants to discuss “ the most significant factors that make the company risky ” under the Risk Factors item (Item 1A) in annual reports. The objective of this research is to evaluate the informativeness and timeliness of Item 1A in the setting of the banking industry during the financial crisis of 2008, and to investigate the characteristics of banks that moved fastest in communicating information through Item 1A as the crisis developed. We first document that the average number of risks disclosed by the national banks increased significantly from 2008 to 2009 and the tone of Item 1A, based on a standard dictionary (Loughran and McDonald in J Finance 66(1):35–65, 2011), also became more negative over this period. By creating a dictionary of financial crisis related words in press articles using an application of Latent Dirichlet Allocation, we show that the appearance of those words also increased from 2008 to 2009. Overall, the results support a finding that the banking industry failed to disclose business risk on a timely basis in their item 1A disclosures even though the purpose of this item is to allow firms to communicate information about all eventualities including those that may not be realized. The results also provide some information about the characteristics of the banks that had better disclosures in anticipation of crisis. Our finding suggests that the firms that disclosed earlier did a better job in pro-actively managing their operations over the financial crisis period.

Journal of Accounting, Auditing & Finance, Jul 1, 1996

In competitive markets, prices offered by investors play a dual role: they must induce the firm t... more In competitive markets, prices offered by investors play a dual role: they must induce the firm to make truthful disclosures about its expected cash flows and they must also be efficient, i.e., equal the expected future cash flows to the buyer conditional on the disclosed information. We show that these requirements may exert opposing influences resulting in equilibrium disclosures being partial; that is, they might cause firms to reveal some, but not all, of the valuation relevant information possessed by the firm. We then characterize the maximal level of information that can be elicited through efficient prices. We apply our analysis to the study of voluntary disclosures in the context of equity offerings, leases and sale of tax-loss carry-forwards and compare these to the level of currently mandated disclosures under GAAP.

Journal of Accounting, Auditing & Finance, Apr 1, 2011

Backdating stock options, a practice that retroactively adjusts stock option grant dates to lower... more Backdating stock options, a practice that retroactively adjusts stock option grant dates to lower the exercise price, has raised governance, legal, accounting, tax, and auditing concerns. The practice of backdating options generally is believed to be a result of both ineffective corporate governance and management opportunism. Both of these factors have been linked to a higher level of discretionary accruals adjustments. This study examines the accruals-based earnings management patterns for a group of firms that were implicated by the Securities and Exchange Commission (SEC) for backdating stock options with a matched control group of nonimplicated firms for a time period surrounding the enactment of the Sarbanes-Oxley Act (SOX) of 2002. Both the univariate and multivariate analyses show that in the pre-SOX years, the sample of implicated firms managed abnormal accruals at a significantly greater level than the matched group of nonimplicated firms. The differential pattern of accruals management across these two groups becomes insignificant in the post-SOX period. Our result also suggests that the effect of SOX on mitigating the level of accruals management is substantially greater for the implicated companies than for the nonimplicated companies. The difference in the effect of SOX on the two groups of firms persists even after controlling for the differences in their governance and internal control effectiveness. We, therefore, suggest that SOX had effects on management’s reporting choices beyond those resulting from improvements in governance and internal control over financial reporting.

Contemporary Accounting Research, Dec 1, 2005

Social Science Research Network, 2019

This paper examines an aspect of Security Class Action dynamics that has not been previously anal... more This paper examines an aspect of Security Class Action dynamics that has not been previously analyzed using game theory: the effects of fragmentation of interests across the insured defendant and potentially multiple-insurers who are all subject to losses under the class action. Incentive conflicts within the defense coalition not only affects the settlements reached but can result in different level of settlements in cases which are of similar merit (operationalized as facing the same loss function should the case go to trial). Our paper provides an explanation for such outcomes even if the legal system is not subject to any obvious form of inefficiency.

A&A, Sep 1, 1980

Completeness of the sets of trial functions used in the numerical calculation of the eigenvalues ... more Completeness of the sets of trial functions used in the numerical calculation of the eigenvalues and eigenvectors of the g- and p-modes of convectively neutral fluids is explicitly shown. Also, in the case of g-modes, it is proved that the eigenvectors obtained by the Rayleigh-Ritz variational method do converge to the actual eigenvectors.

Asian Review of Accounting, May 8, 2018

Purpose The purpose of this paper is to examine whether the expected rate of return (ERR) managem... more Purpose The purpose of this paper is to examine whether the expected rate of return (ERR) management is related to disclosure of pension asset allocation. FAS 132R(1), which requires firms to disaggregate the detailed categories of pension asset allocation, provides a natural experiment setting for investigating the effect of enhanced transparency on firm behavior. Design/methodology/approach The authors focus on the variation of voluntary disclosure and its effect on ERR management under the two different reporting regimes. The authors measure the variation of voluntary disclosure of the pension asset allocations in the pre-period of FAS 132R(1), by using the self-constructed disclosure score. Findings First, firms create flexibility in their choice of ERR through opaque disclosure of pension asset allocation. Next, firms with poor disclosures are more likely to adjust ERR downward when accounting standards require greater transparency, implying that, for firms with poor disclosures, mandated transparency in pension asset allocation plays a vital role in reducing the ERR management. Research limitations/implications The authors directly illustrate the impact of FAS 132R(1) on ERR management. The authors find that the impact of mandated transparency is not uniform across firms. Next, this study highlights the importance of disclosure in restricting managers’ earnings management motivation. Originality/value The authors hand collect the asset allocations under pre-FAS 132R(1) period from the 10-K pension footnotes for all S&P 500 firms, which allows the authors to identify the disclosure variation amongst the firms. Based on the variation of disclosure, the authors construct the ordinal measure of disclosure scores on which the testing indicator variables are built.

Journal of Accounting Research, 1987

Journal of Accounting Research Vol. 25 Supplement 1987 Printed in USA ... Discussion of Collusion... more Journal of Accounting Research Vol. 25 Supplement 1987 Printed in USA ... Discussion of Collusion and Noncontrollable Cost Allocation ... This paper studies a model involving a risk-neutral principal and two risk-averse agents denoted as I (intermediate) and F (final), respectively. There ...

Journal of International Accounting, Auditing and Taxation, Jun 1, 2022

Review of Pacific Basin Financial Markets and Policies, Apr 20, 2022

Asian Review of Accounting, Feb 1, 2016

Purpose - – Auditing may be viewed as an arrangement for reducing inefficiencies arising from the... more Purpose - – Auditing may be viewed as an arrangement for reducing inefficiencies arising from the fundamental market conflict between a seller who wants as high a price as possible and a buyer who wants to pay as low a price as possible. In more general terms, sellers prefer policies that boost the stock price in the short run whereas buyers would prefer the price to peak when they are ready to sell some time in the future. By framing audited financial reports within this context, the purpose of this paper is to provide some insights regarding both audit institutions and audit regulation. Design/methodology/approach - – This paper relies on conceptual arguments and a simple analytical model. Findings - – The basic findings are that a unique definition of audit quality is not compatible with the economics of a market where there are conflicts across traders as well a possibility that some traders hold superior information to others. Even an identification of quality with accuracy fails in this setting of conflict. The inference is that audit quality should be approached from a multi-dimensional perspective rather than a unique measure. Research limitations/implications - – While the paper points out difficulties in constructing measures of audit quality extant in the literature, it does not provide any clear empirical suggestions for better measures. Originality/value - – The paper brings back into focus issues from information economics that form the bedrock for the study of audited financial statements in equity markets. While the paper is partially a survey and synthesis of some of the latest empirical findings, it describes them within the context of a rational economic market where traders may possess private information. Within such a market, the paper outlines both the conflicts and the benefits inherent to the current institutional arrangements where auditors are paid by incumbent shareholders and overseen by regulators.

Games and Economic Behavior, Oct 1, 1996

We show that in markets with asymmetric information, even if there is full agreement on the choic... more We show that in markets with asymmetric information, even if there is full agreement on the choice of optimal information quality, entrusting the choice of (unverifiable) public information quality to traders who benefit from such information leads to inefficiencies. However, delegation ...

Review of Accounting Studies, Mar 1, 2005

Abstract. We provide a theoretical rationale for the observed audit industry structure where well... more Abstract. We provide a theoretical rationale for the observed audit industry structure where well-capi-talized auditors hold an extremely large market share. Our analysis focuses on the economics of trading in an adverse selection market where audit quality is unobservable. ...

Journal of Accounting, Auditing & Finance, Oct 14, 2020

The regular pattern of quarterly earnings announcements sets up a predictable pattern of informat... more The regular pattern of quarterly earnings announcements sets up a predictable pattern of information asymmetry in the market. Both regulatory restrictions and voluntary corporate restrictions direct trading to low information asymmetry periods. To understand the effect of these restrictions, this study examines insider trading in three different windows: white windows (3–12 trading days after the earnings announcement, periods with low information asymmetry), black windows (all the other days in the quarter, periods with higher information asymmetry), and the blackest windows (the last 10 trading days of the black window, periods with the highest information asymmetry). First, our results show that a large proportion of insider trading in the United States takes place in the black window. Second, we document that trading in the white period exhibits a strong self-selection bias. We also show that the excess returns earned by black period trades vanish if postponed to the next white period following the earnings announcement. Finally, we show that a relatively large proportion of pre-specified trading under SEC-sponsored 10b5-1 plans are filed for black window periods, but the difference across black and white window plans is a matter of frequency of trade rather than the magnitude of profits. Overall, these results suggest that insiders balance the risk and profitability of their trading in white and black windows and that insider trading restriction in high-information asymmetry periods is not effective in practice.

Review of Pacific Basin Financial Markets and Policies, Jun 1, 2019

Social Science Research Network, 2018

We select a small set of recommendations that lie in the upper and lower tail of the empirical di... more We select a small set of recommendations that lie in the upper and lower tail of the empirical distribution of divergences between a recommendation, and the consensus over the window (-30,-1)-days prior to that recommendation. We classify these extremely divergent recommendations as bold, and then subdivide them into informative bold recommendations that lead other analysts (leading-bold) and those that are ignored by other analysts (contrabold) based on the consensus change in the thirty days after the announcement. We focus on the information conveyed to the market by these bold, leading-bold, and contra-bold recommendations through their effects on Cumulative Abnormal Returns (CAR). We find that bold recommendations are not anticipated by market participants (CAR's are negative before a bold buy and positive before a bold sell). The next finding is that the market responds strongly to both leading and contra bold recommendations over the (0, +4) window and that these reactions are stronger than that to non-bold recommendations. In contrast, over the longer (0, +30)-day window, leading-bold recommendations earn additional returns whereas contra-bold ones reverse significantly due to lack of confirmation. The overall pattern is one of rational market reaction both in the short and long windows. We support the rationality of the market reaction by showing that the percentage of leading-bold recommendations exceeds that of contra-bold recommendations, and that these two types of recommendations cannot be separated using observable analyst characteristics such as experience or brokerage size.