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My educational background consists of Masters in Public Accounting from McGill University in 1980 and an MBA in 1984 and a PhD in 1987 from the University of Chicago. Before attending graduate school, I held a Chartered Accountant license (the equivalent of a CPA) and worked as an auditor and as a
consultant for Coopers & Lybrand (the “C” in PwC) in Montreal, Canada. I have had the opportunity to visit, teach and do research at Buffalo, Chicago, Duke, HEC Paris, IE Madrid, INSEAD and Michigan. At Indiana University, where I have been on faculty since 1996, I have taught Financial Accounting, Financial Statement Analysis, Detecting Earnings Management at the Masters’ level and a doctoral seminar on empirical research. Details of my teaching are available in my curriculum vitae. I have published 33 articles in leading accounting, economics and finance journals (see vitae). My research interests are in the area of corporate governance, earnings management, fraud detection, and insider trading. I recently served as co-editor at the European Accounting Review for a Special Issue themed “New Directions in Earnings Management and Fraud Research” which was published in 2018. I have also served as keynote speaker at the Inaugural Conference of the U.K. Society of Certified Financial Analysts (July 2015, London, U.K.), and at the 40th Journal of Accounting and Public Policy in June 2022 (university of Maryland, College Park, MD).
One of my research articles describes a screening model that helps auditors, investors, and lenders detect companies most likely to create misleading financial reports. The model has gained acceptance among accounting and investing professionals as model to detect earnings manipulation (for example, its output is featured in Bloomberg’s and in Audit Analytics). The screening model flags many companies before the public discovers the earnings manipulation. This turns out to be somewhat useful in avoiding the losses that invariably accompany such revelations.
I have recently expanded the predictive validity of the M-Score from the individual firm (micro) level to a
macroeconomic level. In a forthcoming 2023 paper in The Accounting Review my co-authors and I show that an economy-wide measure of the M-Score constructed by value-weighting the M-Scores of individual firms improves predictions about future recessions and economic slowdowns. This aggregate M-Score predicts recessions five to eight quarters ahead and is significantly associated with lower future growth in real GDP, real investment, consumption, and industrial production. This extends the impact of the M-Score from predicting individual firm outcomes to economy-wide outcomes.
Kelley School of Business Research Award (Full Professor Level) 2008
The Financial Accounting and Reporting Section of the American Accounting Association 2002 Best Paper Award
MBA Teaching Excellence Award 2002
Finalist Trustee Teaching Award 2001
Alumni Board Award, Best Research Proposal, Indiana University, 2000
Kelley School of Business 2000 Research Award (Associate Professor Level)
Teacher of the Year, Duke University, Fuqua School of Business, 1995
Touche Ross Grant 1986 and 1987
Clarkson Gordon Foundation Special Award 1985
Douglas C. Mellor Memorial Award 1984
Chartered Accountant, Canadian Institute of Chartered Accountants, 1980
Academic Excellence Fellowship, Prefecture de la Marne (France), 1976-1978
Beneish, M. D., and Nichols, D. C. (2023). Identifying Overvalued Equity. Review of Financial Economics, in press.
Beneish, M. D., Farber, D. B., Glendening, M., and Shaw, K. W. (2023). Aggregate Financial Misreporting and the Predictability of U.S. Recessions and GDP Growth. The Accounting Review, 98(5), 1-32. View Full Text
Beneish, M, D., Harvey, C., Tseng, A., and Vorst, P. (2022). Unpatented Innovation and Merger Synergies. Review of Accounting Studies, 27, 706–744.
Beneish, M. D., and Vorst, P. (2022). The Cost of Fraud Prediction Errors. The Accounting Review, 97(6), 91-121.
Beneish, M. D., Marshall, C., and Yang, J. (2017). Explaining CEO Retention in Misreporting Firms. Journal of Financial Economics, 123(3), 512–535.
Beneish, M. D., Miller, B. P., and Yohn, T. L. (2015). Macroeconomic Evidence on the Impact of Mandatory IFRS Adoption on Equity and Debt Markets. Journal of Accounting and Public Policy, 34(1), 1-27.
This study investigates whether mandatory IFRS adoption is associated with increased foreign portfolio investment into the adopting country’s debt and equity markets. Using macroeconomic data and a pre–post design centered in 2005, we find that IFRS adoption has a significantly greater effect on foreign debt than on foreign equity investment flows. This result is consistent with the notion that debt investors are greater consumers of financial statement information. We find that the increase in foreign equity investment around IFRS adoption is limited to countries that had higher governance quality, economic development, and creditor rights prior to adoption. In contrast, the increase in foreign debt investment around IFRS adoption is significant for all adopting countries independent of these characteristics. Finally, we find that the increase in foreign equity investment derives primarily from the U.S., whereas the increase in foreign debt investment derives from the U.S. and other non-adopting countries. The evidence that increases in foreign investment originate from non-adopting countries rather than other adopting countries suggests that the benefits from mandatory IFRS adoption more likely reflect improved financial reporting quality rather than greater financial statement comparability.
Beneish, M. D., Lee, C.M.C., and Nichols, D.C. (2015). In Short Supply: Equity Overvaluation and Short Selling. Journal of Accounting and Economics, 60(2-3), 33-57.
Beneish, M. D., Lee, C.M.C., and Nichols, D. C. (2013). Earning Manipulation and Expected Returns. Financial Analysts Journal,69(2), 57-82.
Beneish, M. D., Press, E. G., and Vargus, M. E. (2012). Insider Trading and Earnings Management in Distressed Firms. Contemporary Accounting Research, 29(1), 191-220.
Beneish, M. D., Jansen, I., Lewis, M. F., and Stuart, N. V. (2008). Diversification to Mitigate Expropriation in the Tobacco Industry. The Journal of Financial Economics, 89(1), 136-157.
While it is well-established that diversifying acquisitions by large cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show wealth creation increases in (1) the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms' influence in more political districts), and (2) the liquidity of tobacco firms' assets (converting cash to harder-to-expropriate operating assets). We also predict and find that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.
Beneish, M. D., Billings, M. B., and Hodder, L. (2008). Internal Control Weaknesses and Information Uncertainty. The Accounting Review, 83(3), 665-703.
We analyze a sample of 330 firms making unaudited disclosures required by Section 302 and 383 firms making audited disclosures required by Section 404 of the Sarbanes-Oxley Act. We find that Section 302 disclosures are associated with negative announcement abnormal returns of -1.8 percent, and that firms experience an abnormal increase in equity cost of capital of 68 basis points. We conclude that Section 302 disclosures are informative and point to lower credibility of disclosing firms' financial reporting. In contrast, we find that Section 404 disclosures have no noticeable impact on stock prices or firms' cost of capital. Further, we find that auditor quality attenuates the negative response to Section 302 disclosures and that accelerated filers - larger firms required to file under Section 404 - have significantly less negative returns (-1.10 percent) than non-accelerated filers (-4.22 percent). The findings have implications for the debate about whether to implement a scaled securities regulation system for smaller public companies: material weakness disclosures are more informative for smaller firms that likely have higher pre-disclosure information uncertainty.
Beneish, M. D., and Yohn, T. L. (2008). Information friction and investor home bias: A perspective on the effect of global IFRS adoption on the extent of equity home bias. Journal of Accounting and Public Policy,27(6), 433-443.
This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to under-invest in foreign equities. We consider explanations for the equity home bias described in prior research and discuss research relevant to the informational consequences of global adoption of IFRS. Specifically, we evaluate whether IFRS adoption reduces information processing costs or decreases investor uncertainty about either the quality of financial reporting or the distribution of future cash flows. We predict that the effect of any reduction in information processing costs from the adoption of IFRS is likely to be small relative to the effects of other determinants of home bias such as the strength of investor protection mechanisms in foreign countries, behavioral biases toward familiar equities, and informational advantages related to geographical proximity. We argue that the quality of the information that investors have (or perceive they have) decreases with distance, conclude that global IFRS adoption is unlikely to affect home bias, and propose avenues for future research.
Beneish, M. D., Hopkins, P. E., Jansen, I., and Martin, R. (2005). Do Auditor Resignations Reduce Uncertainty About the Quality of Firms’ Financial Reporting. Journal of Accounting and Public Policy, 24(5), 357-390.
We assess the conditions under which auditor resignations reduce uncertainty about the quality of financial reporting of former and continuing clients of the resigning auditor. Our analysis is based on a sample of 109 auditor resignations in the period 1994-1998. Approximately one-quarter of these resignation announcements are accompanied by disclosure of a disagreement over accounting treatment or over the adequacy of internal controls factors that point toward diminished credibility of former client's financial statements, and are associated with negative abnormal returns for the former client. In contrast, we find no stock market effect for the remaining firms (i.e., three-quarters of our sample) for which the auditor resignations are "unexplained", suggesting that the act of resignation, by itself, is not informative. Further, we find that these unexplained resignations, which likely result from auditor's periodic risk-related reviews of their client portfolios, transfer value-relevant information to another class of investors. In particular, we find that industry matched continuing clients of the auditor that also have poor performance experience positive abnormal returns in the days surrounding media-announced resignations from former clients. This suggests that in an environment where poorly performing, high-risk audit clients are screened contemporaneously, an auditor's unexplained resignation from one client, but not from a similar client in its portfolio, helps reduce uncertainty about the credibility of continuing client's financial reporting.
Beneish, M. D., and Vargus, M. E. (2002). Insider Trading, Earnings Quality, and Accrual Mispricing. The Accounting Review, 77(4), 755-791.
The paper provides evidence that the signal contained in insiders' trading behavior is useful in making refined assessments of earnings quality, and informative about the valuation implications of accruals. We find that income-increasing accruals and unexpected accruals have lower (higher) persistence when managers engage in abnormal selling (buying) suggesting that insider trading information is useful in assessing the quality of the non-cash components of earnings. We show that the accrual mispricing phenomenon observed in previous work is largely due to the mispricing of positive accruals. We find that investors price all positive accruals as if they were informative and that a subset of positive accruals is correctly priced. That is, (1) investors correctly price positive accruals that are likely to be informative because concurrently insiders engage in abnormal buying, and (2) investors price all positive accruals the same independently of insider trading. We find that the extent of the mispricing is greater when positive accruals occur concurrently with abnormal selling relative to cases where there is no trading. The extent of the mispricing and the magnitude of the one-year ahead returns (14.7 to 22 percent) to a trading strategy based on positive accruals and abnormal selling suggests that these accruals arise from opportunistic earnings management that is successful in misleading investors. By contrast, the smaller positive accrual mispricing when there is no insider trading is more likely related to either the complexity of the firms' accrual generating process (Thomas and Zhang (2001) or to earnings fixation (Sloan 1996). Our evidence thus suggests that opportunistic earnings management is a partial explanation for the accrual mispricing phenomenon.
Beneish, M. D., and Whaley, R. E. (2002). S&P 500 Replacements. Journal of Portfolio Management,29(1), 51-60.
Standard & Poor's has become increasingly aggressive in deleting stocks from the S&P 500 index. Where once it made replacements in the index only when a particular stock had to be removed due to merger or acquisition, corporate restructuring, and bankruptcy filing, S&P now voluntarily removes a company for a variety of reasons, which may include low market capitalization, low share price, dwindling market share, or simply the need to find a spot for an up-and-comer. There are a variety of impacts on share price and trading volume for stocks added to and deleted from the S&P 500 during the period Jan. 1996 through -Dec. 2001. For additions, abnormal returns and trading volumes are higher than ever. For deletions, share prices are dealt a crippling blow.
Beneish, M. D., Lee, C.M.C., and Tarpley, R. L. (2001). Contextual Fundamental Analysis in the Prediction of Extreme Returns. The Review of Accounting Studies, 6(2-3), 165-189.
This study examines the usefulness of contextual fundamental analysis for the prediction of extreme stock returns. Specifically, we use a two-stage approach to predict firms that are about to experience an extreme (up or down) price movement in the next quarter. In the first stage, we define the context for analysis by identifying extreme performers; in the second stage we develop a context-specific forecasting model to separate winners from losers. We show that extreme performers share many common market-related attributes, and that the incremental forecasting power of accounting variables with respect to future returns increases after controlling for these attributes. Collectively, these results illustrate the usefulness of conducting fundamental analysis in context.
Beneish, M. D. (2001). Earnings Management: A Perspective. Managerial Finance,27(12), 3-17.
The paper provides a perspective on earnings management. I begin by addressing the following questions: What is earnings management? How pervasive is it? How is it measured? Then, I discuss what we, as academics, know about incentives to increase and to decrease earnings. The research presented relates to earnings management incentives stemming from regulation, debt and compensation contracts, insider trading and security issuances. I also discuss issues relating to problems in measuring the extent of earnings management and propose extensions for future work.
Beneish, M. D. (1999). Incentives and Penalties Related to Earnings Overstatements That Violate GAAP. The Accounting Review,74(4), 425-457.
This paper investigates the incentives and the penalties related to earnings overstatements primarily in firms that are subject to accounting enforcement actions by the Securities and Exchange Commission (SEC). I find (1) that managers in treatment firms are more likely to sell their holdings and exercise stock appreciation rights in the period when earnings are overstated than managers in control firms, and (2) that the sales occur at inflated prices. I do not find evidence that earnings overstatement in these firms is motivated by concerns about debt covenant violations or the cost of external financing. The evidence suggests that the monitoring of managers' trading behavior can be informative about the likelihood of earnings overstatement.Many economists believe that insider trading is an efficient method of compensating managers for their efforts. These economists argue that reputation losses would preclude managers from making profitable trades in advance of periods of poor corporate performance. Consequently, this paper also investigates the employment and monetary penalties imposed on managers after the earnings overstatement is publicly discovered. This evidence reveals that (1) managers' employment losses subsequent to discovery are similar in firms that do and do not overstate earnings and (2) that the SEC is not likely to impose trading sanctions on managers in firms with earnings overstatement unless the managers sell their own shares as part of a firm security offering. The evidence suggests that neither employment or SEC imposed monetary losses are effective in preventing the managers in these firms with extreme earnings overstatements from selling their stake in their firms in the face of declining performance.
Beneish, M. D. (1999). The Detection of Earnings Manipulation. Financial Analysts Journal,55(5), 24-36.
A profile of sample earnings manipulators, their distinguishing characteristics, and a suggested model for detecting manipulation are presented. The model's variables are designed to capture either the financial statement distortions that can result from manipulation or preconditions that might prompt companies to engage in such activity. The results suggest a systematic relationship between the probability of manipulation and some financial statement variables. The evidence is consistent with the usefulness of accounting data in detecting manipulation and assessing the reliability of reported earnings.
Beneish, M. D. (1998). Discussion of Are Accruals during Initial Public Offerings Opportunistic? Review of Accounting Studies, 3(1-2), 175-208.
Beneish, M. D. (1997). Detecting GAAP Violation: Implications for Assessing Earnings Management Among Firms with Extreme Financial Performance. Journal of Accounting and Public Policy,16(3), 271-309.
A paper presents a model to detect earnings management among firms experiencing extreme financial performance and compares the model's performance to that of discretionary accrual models. The analysis found that the model provides timely assessments of the likelihood of manipulation, and that the model-based trading strategies earn significant abnormal returns. The paper also presents evidence suggesting that the specification of discretionary accrual models could be enhanced by adding lagged total accruals and a measure of past price performance as explanators. The evidence arises from studying actual instances of earnings management. Its implications are in line with the Guay et al. (1996) conjecture that accrual models which take into account managers' incentives, and recognize that discretionary accruals reverse, have a better chance of identifying discretionary accruals. The results have implications for researchers investigating managers' accrual decisions in contexts such as security offerings and financial distress, where extreme performance limits the usefulness of accrual models.
Beneish, M. D., and Whaley, R. E. (1996). An Anatomy of the S&P Game: The Effect of Changing the Rules. Journal of Finance, 51(5), 1909-1930.
A study analyzes the effects of changes in S&P 500 index composition from January 1986 through June 1994, a period during which Standard and Poor's began its practice of preannouncing changes 5 days beforehand. The new announcement practice has given rise to the "S&P game" and has altered the way stock prices react. The study finds that prices increase abnormally from the close on the announcement day to the close on the effective day. The overall increase is greater than under the old announcement policy, although part of the increase reverses after the stock is included in the index.
Beneish, M. D., and Press, E. G. (1995). Interrelation Among Events of Default. Contemporary Accounting Research,12(1), 57-84.
This paper contrasts technical default, debt service default and bankruptcy, and establishes that the valuation effects of their announcements are significant and increasingly severe. We show the events are interrelated. That is, technical default increases the likelihood of future debt service default and bankruptcy, and bankruptcy is more likely following debt service default. Further, we show that technical default is a timely warning of further distress insofar as adverse stock price effects of debt service default are mitigated if preceded by technical default. We also evaluate explanations of how debt service default and bankruptcy occur without firms first reporting technical default. We find that it is not because debt covenants are written with too much slack. While disclosure rules allow discretion in reporting technical default, our evidence suggests that non-reporting of covenant defaults occurs only in cases where the potential default is immaterial. We conclude that covenants do not always provide warnings of future difficulties.
Beneish, M. D., and Press, E. G. (1995). The Resolution of Technical Default. The Accounting Review,70(2), 337-353.
Beneish, M. D., and Gardner, J. C. (1995). Information Costs and Liquidity Effects in the Dow Jones Industrial Average Listing Changes. Journal of Financial and Quantitative Analysis, 30(1), 135-157.
Beneish, M. D., and Moore, M. J. (1994). Nonprice Competition, Cost Shocks, and Profitability in the Airline Industry. Research in Transportation Economics, 3, 67-93.
Beneish, M. D., and Press, E. (1993). Costs of Technical Violation of Accounting-Based Debt Covenants. The Accounting Review, 68, 233-257.
Beneish, M. D., and Chatov, R. (1993). Corporate Codes of Conduct: Economic Determinants and Legal Implications for Auditors. Journal of Accounting and Public Policy,12(1), 3-35.
Beneish, M. D. (1991). The Effect of Regulatory Changes in the Airline Industry on Shareholders' Wealth. Journal of Law and Economics, 34(2), 395-430. Reprinted in Privatization and Globalization: The Changing Role of the State in Business, Edited by S.R. Mudambi, Northampton, MA: Edward Edgar Publishing, 2003.
Beneish, M. D. (1991). Stock Prices and the Dissemination of Analysts' Recommendations. Journal of Business, 64(3), 393-416.