Ross L. Watts

Ross L. Watts
Massachusetts Institute of Technology | MIT · MIT Sloan School of Management

Ph.D., Finance, University of Chicago

About

92
Publications
114,940
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30,062
Citations
Citations since 2017
0 Research Items
9012 Citations
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201720182019202020212022202305001,0001,500
201720182019202020212022202305001,0001,500
Additional affiliations
July 2017 - present
Massachusetts Institute of Technology
Position
  • Professor

Publications

Publications (92)
Article
Full-text available
SYNOPSIS This paper explains how and why Anglo-American accounting and auditing, along with corporate governance and capital markets, evolved over many centuries in response to changes in market forces and technology. We first trace the development of practices that were included in U.S. corporate governance (including accounting and auditing) befo...
Article
This paper examines the effect of accounting conservatism on firm-level investment during the 2007–2008 global financial crisis. Using a differences-in-differences design, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis compared to firms with more c...
Article
Keynote: Professor Ross Watts (MIT Sloan School of Management) Understanding practice and institutions: A prerequisite for successful accounting standard-setting.
Article
Full-text available
This paper studies accounting conservatism’s effects on firm value during the 2008 global financial crisis. Using a sample of 2,983 U.S. non-financial firms, we show that firms with more conservative financial reporting experience less negative crisis period stock returns. More conservative firms issue more debt and undertake more investment during...
Article
Full-text available
The FASB and the IASB recently issued a joint discussion paper entitled, Preliminary Views on Revenue Recognition in Contracts with Customers. The boards requested comments on whether their proposed model for revenue recognition would improve the usefulness of the financial statement information for financial decision makers. This paper summarizes...
Article
Full-text available
The Canadian Accounting Standards Board hereafter, AcSB recently is-sued an exposure draft to adopt separate GAAP for private enterprises. This new GAAP is justified as being consistent with the current FASB/IASB conceptual frame-work, but is sensitive to the different cost-benefit considerations facing private entities. We view this proposal as be...
Article
Accounting Standard Board �hereafter, IASB � issued a joint discussion paper titled Preliminary Views on Financial Statement Presentation. The Boards are seeking comments on whether their proposed model for financial statement presentation would improve the usefulness of the financial statement information for financial decision makers. This paper...
Article
The SEC has proposed a strategic plan which sets out its mission, vision, and values, identifies four strategic goals, a set of desired outcomes associated with each strategic goal, and a list of performance measures for assessing the SEC’s effectiveness in attaining its goals. We affirm the need for vigorous enforcement of securities law and offer...
Article
We estimate a firm-year measure of accounting conservatism, examine its empirical properties as a metric, and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism. The results are consistent with the measure, C_Score, capturing variation in conservatism and also predicting asymmetric ea...
Article
The Canadian Accounting Standards Board (AcSB) recently issued an exposure draft to adopt separate GAAP for private enterprises. This new GAAP is justified as being consistent with the current FASB/IASB conceptual framework, but is sensitive to the different cost/benefit considerations facing private entities. We view this proposal as being innovat...
Article
Standard setters and most academics maintain that accounting standards ought to rest on a set of guiding principles stated explicitly in a “conceptual framework.” The FASB and IASB are currently involved in a project to refine conceptual framework documents developed earlier. At this point, it is not clear what their final product will look like; i...
Article
The Canadian Accounting Standards Board (AcSB) issued an exposure draft on a proposal to adopt a separate 'Made in Canada' GAAP for private enterprises. This new GAAP is justified as being consistent with the current FASB/IASB conceptual framework, but as being responsive to the different cost/benefit considerations facing private entities vis-à-vi...
Article
The FASB and the IASB recently issued a joint discussion paper entitled, Preliminary Views on Revenue Recognition in Contracts with Customers. The Boards requested comments on whether their proposed model for revenue recognition would improve the usefulness of the financial statement information for financial decision makers. This paper sets forth...
Article
The Financial Accounting Standards Board's (FASB's) and the International Accounting Standard Board's (IASB's) issued a joint Discussion Paper entitled, Preliminary Views on Financial Statement Presentation. The Boards are seeking comments on whether their proposed model for financial statement presentation would improve the usefulness of the finan...
Article
Full-text available
SFAS 142 requires managers to estimate reporting unit values to determine goodwill write-offs. Those estimates often use unverifiable discounted-future-cash-flows providing managers with more discretion than historically afforded in financial reporting. Ex post, managers can claim their unit value estimates were not realized due to factors outside...
Article
The Securities and Exchange Commission (SEC) issued a call for comment on a proposal to adopt a Roadmap for potential use of international financial reporting standards (IFRS) by U.S. Companies. We comment on five key issues raised by the SEC proposal. First, we propose that the need for a global regulator is overstated. A global regulator is unlik...
Article
Full-text available
SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted managers will, on average, use the fair value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on mana...
Article
The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comments from standard-setters on issues related to financial reporting. The Financial Accounting Standards Board (FASB) recently requested comments on its Preliminary Views on Financial Instruments with Cha...
Article
The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comments from standard-setters on issues related to financial reporting. The Financial Accounting Foundation (FAF) released for public comment on December 18, 2007 with a response period ending on February 1...
Article
The Securities and Exchange Commission (SEC) recently issued a call for comment on a proposal to accept financial statements prepared in accordance with international financial reporting standards (IFRS) without reconciliation to U.S. GAAP. Accounting researchers have attempted to assess the quality of IFRS using different methods and criteria. Whi...
Article
SFAS 142 requires firms to use fair-value estimates to determine goodwill impairments. Watts (2003) and Ramanna (2007) argue the unverifiable nature of those fair-value estimates gives firms discretion to manage impairments. We test this argument in a sample of firms with market indications of impairment (firms with book goodwill and market-to-book...
Article
In this paper we argue that information asymmetry between firm insiders and outside equity investors generates conservatism in financial statements. Conservatism reduces the manager's incentives and ability to manipulate accounting numbers and so reduces information asymmetry and the deadweight losses that information asymmetry generates. This incr...
Article
Full-text available
An outline for a theory of financial statements is presented. Financial statements are viewed as products of both markets and political processes and the interactions among individuals and groups in these processes. Individuals are assumed to maximize their self-interests. Various hypotheses and data are provided to illustrate the theory. It relies...
Article
This paper was commissioned for the Institute of Chartered Accountants in England and Wales Information for Better Capital Markets Conference held on December 19 & 20, 2005. It evaluates the effect of the market on financial reporting recognizing that financial reporting and accounting are only parts of a general reporting, financing and governance...
Article
Using an accounting conservatism theory that reflects accounting's role in practice, we investigate the relation between two extensively used measures of conservatism: asymmetric timeliness of earnings and the market-to-book ratio (MTB). We predict and observe that when asymmetric timeliness is measured cumulatively over long periods, its relation...
Article
When annual earnings are regressed on annual returns, the returns coefficient is higher when returns are negative. The difference between the coefficients of earnings on positive and negative returns is called asymmetric timeliness of earnings and, in the accounting literature, is used extensively as a conservatism measure. The objective of this pa...
Article
This paper is the first in a two-part series on conservatism in accounting. Part I examines alternative explanations for conservatism in accounting and their implications for accounting regulators. Part II summarizes the empirical evidence on conservatism, its consistency with alternative explanations, and opportunities for future research. The evi...
Article
This paper is Part II in a two-part series on conservatism in accounting. Part I examined alternative explanations for conservatism in accounting and their implications for accounting regulators (SEC and FASB). Part II summarizes the empirical evidence on the existence of conservatism, conservatism's increase over time, and conservatism's alternati...
Article
This paper is the first in a two-part series on conservatism in accounting. Part I examines alternative explanations for conservatism in accounting and their implications for accounting regulators. Part II summarizes the empirical evidence on conservatism, its consistency with alternative explanations, and opportunities for future research. The evi...
Article
Value maximization requires either that knowledge is transferred to those with the right to make decisions, or that decision rights are transferred to those who have the knowledge. A tradeoff of knowledge transfer costs and control costs is required. Characteristics of firms' investment opportunity sets (IOSs) that affect knowledge transfer costs a...
Article
This paper examines conservatism in accounting. Conservatism is defined as the differential verifiability required for recognition of profits versus losses. In its extreme form the definition incorporates the traditional conservatism adage: "anticipate no profit, but anticipate all losses." Despite criticism from many quarters, including standard-s...
Conference Paper
In this paper we critically evaluate the standard-setting inferences that can be drawn from value relevance research studies that are motivated by standard setting. Our evaluation concentrates on the theories of accounting, standard setting and valuation that underlie those inferences. Unless those underlying theories are descriptive of accounting,...
Article
In this paper we critically evaluate the standard-setting inferences that can be drawn from value relevance research studies that are motivated by standard setting. Our evaluation concentrates on the theories of accounting, standard setting and valuation that underlie those inferences. Unless those underlying theories are descriptive of accounting,...
Article
In this paper I propose explanations for conservatism in accounting and empirical tests of those explanations. Conservatism is defined as the degree to which profits are anticipated. The concept is hypothesized to have evolved from accounting's contracting role and to have been reinforced and influenced by regulation and increased legal liability....
Article
We evaluate the literature that, for standard-setting purposes, assesses the usefulness of accounting numbers on their stock market value association. For several reasons we conclude the literature provides little insight for standard setting. First, the association criterion has no theory of accounting or standard setting supporting it. Standard s...
Article
Full-text available
A model of earnings, cash flows and accruals is developed assuming a random walk sales process, variable and fixed costs, and that the only accruals are accounts receivable and payable, and inventory. The model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating...
Article
Considerable research in accounting focuses on the role of accruals in capital market valuation and in contracting. The research shows accruals enable managers to improve on cash flows as a mesure of firm performance. However, since accruals provide managers with a means of managing reportedearnings, previous research also documents evidence of opp...
Article
This paper surveys the positive accounting research literature for a book of readings. It defines the nature and origins of positive research in accounting describes its contribution to practice and investigates reasons for the decline of normative theorizing in accounting. Relatively comprehensive surveys of capital markets research theory of the...
Article
In this paper we compare two matched samples of 117 corporations whose auditors are and are not sued, to provide information on lawsuits. Lawsuits tend to be filed against auditors of client firms that have liquidity problems and poor stock price performance. There is little evidence of poorer accounting performance or accounting manipulation in th...
Article
This paper develops a simple integrated model of firm's earnings cash flows and accruals that generates serial and cross-correlation predictions for those series. The model assumes sales follow Erandom walk costs are either variable or fixed and traditional accounting working capital accruals. We use estimates of each firm's contribution margin tra...
Article
Full-text available
In this paper we analyze the leverage and dividend choices than 6,700 industrial corporations over a 30-year period. Our empirical analysis is designed to provide a basis for assessing the relative importance of the various factors - taxes, contracting costs (particularly, the financial distress costs and the "free cash flow" benefits of debt), and...
Article
Full-text available
Jensen and Meckling (1992) hypothesize that the firm's decentralization decision is determined by a tradeoff of knowledge transfer costs and control (agency) costs. To maximize value, either knowledge must be transferred to those with the right to make decisions or decision rights must be transferred to those who have the knowledge. We identify cha...
Article
Full-text available
This paper summarizes the theory and evidence on accounting choice for capital markets researchers. It also explains why knowledge of that theory and evidence is important to capital markets researchers. Many capital market studies such as those of the relationship between earnings and rates of return assume that accounting choice does not vary wit...
Article
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We examine explanations for corporate financing-, dividend-, and compensation-policy choices. We document robust empirical relations among corporate policy decisions and various firm characteristics. Our evidence suggests contracting theories are more important in explaining cross-sectional variation in observed financial, dividend, and compensatio...
Article
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We investigate how the economic determinants of earnings affect the relation between earnings changes and stock returns. A positive association between earnings changes, risk changes and equilibrium expected return changes is predicted. We find statistically reliable evidence of the predicted positive association, observing risk changes over the pe...
Article
This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown...
Article
This paper studies the association between a firm's stock returns and subsequent top management changes. Consistent with internal monitoring of management, there is an inverse relation between the probability of a management change and a firm's share performance. This relation can result from monitoring by the board, other top managers, or blockhol...
Article
This book reviews the theory and methodology underlying the economics-based empirical literature in accounting. An accounting theory theory is an explanation for observed accounting and auditing practices. Such an explanation is necessary for interpretation of empirical associations between variables. The book discusses the role of theory in empiri...
Article
Full-text available
This paper examines the history of auditing in the U.K. and the U.S. to test whether audits of companies arose as the consequence of governmental regulation or as a voluntary monitoring activity to reduce agency costs and increase firm value. The paper finds that audits existed early in the development of the modern corporation (as early as 1200) a...
Article
Full-text available
The ability of two (non-mutually exclusive) potential explanations for executive compensation plans is examined. One is that the plans reduce the combined tax liability of the corporation and its managers. The other is that the plans encourage the managers to maximize the value of the firm. It is found that the tax effect can explain some of the po...
Article
This paper addresses the questions of why accounting theories are predominantly normative and why no single theory is generally accepted. Accounting theories are analyzed as economic goods, produced in response to the demand for theories. The nature of the demand is examined, first in an unregulated, then in a regulated economy. Government regulati...
Article
Numerous studies observe abnormal returns after the announcement of quarterly earnings. Ball (1978) suggests those returns are not evidence of market inefficiency, but instead are due to deficiencies in the capital asset-pricing model. This paper tests whether abnormal returns are observed when steps are taken to reduce the effect of deficiencies i...
Article
This article provides the beginning of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards that are likely to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs and politica...
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Article
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If managers have incentives to voluntarily disclose good news early and delay bad news disclosure, and quarterly earnings announcements (QEAs) can at least partially counter these incentives, then QEAs should play a greater role in the disclosure of bad news than good news. Using returns to measure news, we find that the proportion of news concentr...
Article
Thesis (Ph. D.)--University of Rochester. William E. Simon Graduate School of Business Administration, 1993. This study investigates the role of accounting accruals. It identifies circumstances under which accruals are predicted to improve earnings' ability to measure firm performance, as reflected in stock returns. The importance of accruals is sh...
Article
Full-text available
This paper develops the hypotheses that 1) auditing arose as a voluntarily supplied service and not because it was legally mandated and 2) auditors, operating in their own self-interest face incentives to be independent of the managers of the firms they audit. The historical evidence from the U.K. and U.S. is consistent with these hypotheses. Volun...
Article
Full-text available
This paper explores the reasons for and the extent of auditor/ client disagreements over proposed accounting standards. The conventional wisdom predicts that auditors and their client-managers' positions will be positively associated because the client coerces their auditor to take similar positions. An alternative hypothesis developed in this pape...

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