Selected Publications and Research
Does Enterprise Risk Management Bolster Investor Confidence? Evidence from Options-Based Restatement Contagion, Investment, and Misstatements
Contemporary Accounting Research (forthcoming 2025)
M. Neel, and J. Xu.
Abstract: Using industry restatement contagion as an external negative shock, we study the effectiveness of enterprise risk management (ERM) in mitigating downside risk and enhancing investor confidence. We find that ERM curbs overinvestment and earnings misstatement among firms when other firms in their industry engage in undisclosed misstatements that are subsequently restated. Following the announcements of these industry restatements, peers with ERM experience a smaller increase in implied volatility skewness (IVS). These effects are driven by peers with young CEOs, complex segment structures, low prior earnings performance, and in competitive industries. Overall, our findings highlight ERM’s role in bolstering investor confidence by effectively managing firms’ underlying risks.
link to SAS code
The Upside of Loss Aversion: Evidence from Financial Reporting Loss Avoidance Journal of Business Finance and Accounting (2025) M. Neel.
ABSTRACT: This study provides evidence that managerial loss avoidance is one cause of the zero-earnings discontinuity and that investor loss aversion is a plausible explanation for diversity in the appearance of that discontinuity. de la Rosa and Lambertsen in 2022 theoretically show that when investors are loss averse, the earnings discontinuities proposed by Guttman et al. in 2006 emerge at investor reference points and are an increasing function of loss aversion. In this study, I test these propositions using a sample drawn from 49 countries in which cross-country differences in loss aversion are measurable. Net income distributions exhibit significant discontinuity at zero earnings only among countries ranked high in loss aversion. Multivariate analysis corroborates that the firm-level likelihood of loss avoidance is also an increasing function of loss aversion. Consistent with loss aversion plausibly impacting loss avoidance through a pricing effect, the market penalty for missing the zero-earnings threshold is also an increasing function of loss aversion. Additional analyses test competing theories on whether managers’ loss aversion facilitates loss avoidance through stronger performance or opportunistic reporting. These results suggest that performance (opportunistic reporting) plays a more extensive role in loss avoidance in more loss-averse (less loss-averse) countries.
Country-level Loss Aversion and the Market Response to Earnings News The International Journal of Accounting (2025) M. Neel.
ABSTRACT: I examine whether country-level loss aversion influences the stock price sensitivity to bad earnings news vis-à-vis good earnings news. Using two recently developed country-level measures of loss aversion, I find that the stock price sensitivity to bad earnings news is higher in high loss-aversion countries than in low loss aversion countries. In contrast, the stock price sensitivity to good earnings news is either lower in high loss-aversion countries, or unassociated with loss aversion, depending on the test specification. Thus, there is an intuitive asymmetry in how loss aversion impacts the market response to negative news relative to positive news. This influence of loss aversion is more pronounced in countries with a short-term orientation, which should exacerbate loss aversion, and in countries that Hofstede (2001) characterizes as more restrained. In these countries, investors should be less accustomed to corporate risk-taking. Consistent with the earnings announcement returns, further analysis reveals that a subsequent return drift to extreme bad news (i.e., PEAD) is present among low loss-aversion countries but not high loss-aversion countries, suggesting that loss averse investors more fully incorporate bad earnings news into stock prices. In contrast, the return drift to extreme positive news is detectable regardless of the level of loss aversion. Additional analysis also suggests that the influence of loss aversion on the market response to earnings news does not reflect differences in the informativeness of earnings news for future net income and cash flow performance.
Why Does Operating Profitability Predict Returns? Evidence on Risk Versus Mispricing Explanations Accounting and Finance (2024) A. Ahmed, M. Neel, and I. Safdar.
Abstract: This study develops new evidence on risk versus mispricing explanations of the well-known profitability premium. First, we examine whether exposure to expected downside risk is a plausible explanation. We find that high profitability is associated with both lower ex-ante and ex-post probabilities of future price crashes. Thus, less profitable firms exhibit greater downside risk than highly profitable firms, making a downside risk explanation implausible. Although this fact is overlooked by the market in general, it is anticipated by options traders; we find that put options of low profitability firms are relatively more expensive. Simultaneously, these firms do not exhibit greater probability of jumps, indicating that volatility(risk)-based explanations for the profitability premium are unlikely to be descriptive. Second, we find that the sticky-expectations model of Bouchard et al. (2019) only partially explains the profitability premium. While on average, analysts’ forecast revisions correct in the same direction as recent profitability, the profitability premium still exhibits a strong relationship to the non-sticky component of analysts’ forecast revisions. Third, institutional investors trade profitability-based signals but do so with a delay, likely contributing to the premium. Overall, our evidence favors the explanation that the profitability premium is related to investor mispricing of potential downside risk and provides greater clarity on recent findings in the literature.
Financial Statement Relevance, Representational Faithfulness, and Comparability Review of Quantitative Finance and Accounting (2023) M. Neel, and I. Safdar.
Abstract: One approach to achieving comparable financial statements is to adhere to identical (or converged) standards, methods, models, and estimates. However, adherence to identical standards, methods, models, and estimates is impractical and contrary to current trends in standard setting. As an alternative, the FASB has proposed that satisfying the fundamental characteristics of relevance and representational faithfulness should result in higher comparability. Under this assumption, a focus on increasing the quality of the financial information that is generated by firms would be an effective means of improving comparability in financial reporting. We inquire whether this proposition is reflected in the practices of U.S. firms. Our analysis corroborates the intuition of the FASB and the notion that distinct characteristics of financial information influence accounting comparability. Our results also suggest that accounting principles can enhance comparability by encouraging high-quality valuations across diverse asset and liability classes on balance sheets and high-quality estimates of operating performance in income statements.
Accounting Information and Left-tail Risk Review of Quantitative Finance and Accounting (2022) O. Babatunde, M. Neel, and I. Safdar.
Abstract: Several recent studies attribute stock price crashes to firms withholding bad news from financial disclosures before a stock price crash. Contrary to this notion, we find evidence of a robust link between information in a firm’s financial disclosures and potential left-tail risk. We document that sophisticated equity options traders incorporate information derived from financial statements about left-tail risk into prices of out-of-the-money put options on a firm’s equity, implying that a firm’s financial disclosures contain significant information relevant to pricing expected crash risk. However, we find that stock market investors at large appear to overlook this link and fail to incorporate information in financial disclosures about left-tail risk into stock prices in a timely fashion, potentially contributing to the severity of the eventual crash. These findings highlight the role of potential errors by investors in processing accounting information pertinent to left-tail risk
Accounting Comparability and Relative Performance Evaluation in CEO Compensation Review of Accounting Studies (2018) G. Lobo, M. Neel, and A. Rhodes.
Abstract: We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.
Accounting Comparability and Economic Outcomes of Mandatory IFRS Adoption Contemporary Accounting Research (2017) M. Neel
Abstract: This study examines the associations between four economic outcomes of the 2005 mandatory adoption of International Financial Reporting Standards (IFRS) and concurrent changes in two important accounting constructs, accounting comparability and reporting quality. My primary purpose is to evaluate the relative importance of cross‐country accounting comparability and firm‐specific reporting quality in explaining previously documented increases in Tobin's Q, stock liquidity, analyst forecast accuracy, and analyst forecast agreement following IFRS adoption. Given that improvements in both comparability and reporting quality are primary stated objectives of the International Accounting Standards Board (IASB), it is important to understand their relative roles in shaping the information environment of financial statement users following IFRS adoption. Using 1,861 first‐time adopters in 23 countries, I find that firms with a larger improvement in comparability have larger increases in Q, liquidity, forecast accuracy, and forecast agreement following adoption, relative to other adopters. In contrast, improvements in reporting quality around adoption appear to have only a second‐order effect that is generally limited to Q effects among those adopters with concurrent improvements in comparability. These results are robust to alternative design and variable specifications. Finally, I continue to find these results for samples restricted to countries with weaker pre‐adoption institutional environments and countries that did not initiate proactive financial statement reviews, indicating that strong institutions and regulatory improvements are not driving the results. Overall, my results suggest that improvements in cross‐country accounting comparability played an important role in the previously documented economic benefits that accrued to 2005 mandatory IFRS adopters.
Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence Contemporary Accounting Research (2013) A. Ahmed, M. Neel, and D. Wang.
Abstract: This study examines the associations between four economic outcomes of the 2005 mandatory adoption of International Financial Reporting Standards (IFRS) and concurrent changes in two important accounting constructs, accounting comparability and reporting quality. My primary purpose is to evaluate the relative importance of cross‐country accounting comparability and firm‐specific reporting quality in explaining previously documented increases in Tobin's Q, stock liquidity, analyst forecast accuracy, and analyst forecast agreement following IFRS adoption. Given that improvements in both comparability and reporting quality are primary stated objectives of the International Accounting Standards Board (IASB), it is important to understand their relative roles in shaping the information environment of financial statement users following IFRS adoption. Using 1,861 first‐time adopters in 23 countries, I find that firms with a larger improvement in comparability have larger increases in Q, liquidity, forecast accuracy, and forecast agreement following adoption, relative to other adopters. In contrast, improvements in reporting quality around adoption appear to have only a second‐order effect that is generally limited to Q effects among those adopters with concurrent improvements in comparability. These results are robust to alternative design and variable specifications. Finally, I continue to find these results for samples restricted to countries with weaker pre‐adoption institutional environments and countries that did not initiate proactive financial statement reviews, indicating that strong institutions and regulatory improvements are not driving the results. Overall, my results suggest that improvements in cross‐country accounting comparability played an important role in the previously documented economic benefits that accrued to 2005 mandatory IFRS adopters.
