This paper provides evidence, through survey responses and semi-structured interviews with a subset of survey responses, about “knowledge gaps” and accounting weak spots that that exist at startup firms raising capital through Regulation Crowdfunding around the primary components of the financial statements. “Knowledge gaps” are accounting areas where startup companies think they understand the proper accounting and auditors say these firms struggle with accounting for these concepts. Accounting “weak spots” where startup firms and audit firms agree there is difficulty in accounting for certain items and more guidance or clearer standards may be beneficial. Additionally, through survey responses and interviews, this paper provides additional context to what Regulation Crowdfunding firms focus on in their offering and thoughts on their investors. Better understanding the accounting acumen of these startup firms can help inform these firms, their auditors, their investors, and their regulators when evaluating and considering the reported financial condition of these companies.
Conditionally Accepted at Journal of Financial Reporting
Regulation Crowdfunding opened up investment in startup firms to non-accredited investors in 2016 as part of the JOBS Act of 2012. This paper provides descriptive evidence about how these startup firms communicate with these investors on their Regulation Crowdfunding offering page. I find evidence, consistent with prior theory about processing costs and information salience, that a firm’s prior revenues relate strongly to the discussion of financial information on its offering page, despite indication from Reg CF founders that they think financial information is of less importance to these investors than other information about the company. In addition to disclosure of financial information, these offering pages include a number of other elements, including a discussion of how firms intend to use the raised funds, a history of the company, FAQs, and various audio-visual elements. Consistent with founder beliefs that investors place little weight on firm financials, I find no consistent relation between financial disclosure and a firm meeting its offering goal. Offering success appears more closely related to other elements of offering page disclosure that help tell the “story” of the company. The results of this paper can help inform future research in the Equity Crowdfunding space, as well as contribute to the literature on how investors process, firms think about, information and disclosure.
First Round Revise and Resubmit at Contemporary Accounting Research
Accounting research has long claimed that banks time sales of available-for-sale securities to smooth earnings. We find that what the prior literature calls smoothing is more accurately characterized as boosting of low earnings. That is, the “smoothing” behavior is asymmetric, occurring at the low end of the earnings distribution, where banks sell at gains to boost low earnings. Furthermore, the intent behind some of this gain-selling at the low end of the earnings distribution appears to be to manage reported earnings from negative to positive, rather than to create a smooth earnings path. We also find that these gain-selling tendencies are of low frequency. At the high end of the earnings distribution, we find little statistically or economically significant earnings smoothing via realization of securities losses or realization of smaller-than-normal securities gains. Previously unavailable data that separates the net realized gain/loss into its gross components reveals that banks generally are reluctant to sell securities at losses, and when they do realize losses they typically offset the losses with realized gains. Overall, results suggest that when accounting standards insulate earnings from unrealized changes in security fair values, the primary form of earnings management that occurs is occasional gain-selling to boost low earnings or beat the zero-earnings benchmark.
First Round Revise and Resubmit at Journal of Business Finance and Accounting
Subsidiaries of a firm can use their reporting discretion for several goals, such as reporting earnings comparable to other subsidiaries or reporting earnings that are smooth over time. Prior theoretical work on reporting discretion recognizes the tension among these goals (Holmstrom, 1982; Demski and Sappington, 1974), but empirical work has not sufficiently examined it. This study exploits the bank holding company setting to investigate how subsidiaries use reporting discretion to navigate these competing objectives. I find that while subsidiaries use reporting discretion to smooth their own earnings, they also use reporting discretion to herd around the earnings of internal peers. Through a number of cross-sectional analyses, I find that this herding behavior appears consistent with relative performance evaluation motivations. These results provide new insight into prior mixed findings on the reporting choices of bank holding companies.