How to Conduct High-quality Empirical Accounting Research

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How to Conduct High-qualityEmpirical Accounting
Research

• By
• Bin Ke
• Associate Professor, Pennsylvania State
  University
• Visiting Professor, Cheung Kong Graduate School
  of Business

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A brief intro. to my research interests

• Overall goal is to study how firms allocate
  scarce economic resources to maximize shareholder
  value
• Specific research areas
• Earnings management
• Insider trading
• Professional investors (analysts and money
  managers)
• Taxes
• The common theme of my research is to understand
  how (accounting) information is produced,
  disclosed, and used by various decision makers
  inside and outside the firm

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Implicit Assumptions

• You are highly motivated (i.e., willingness to
  work hard)
• You understand why academic research is important
  to you and the society
• You have a systematic framework to guide your
  empirical research

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Writing a paper is analogous to making a car

• Design stage
• Manufacturing stage
• Marketing stage

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The assembly line for a typical paper

• Design stage
• Start with a general motivational question
• Ask a specific question to be tested
• Manufacturing stage
• Conceive a research design
• Sample selection
• Data analysis and interpretation
• Marketing stage
• Write the paper
• Endure the review process
• Bingo! Paper is published!
• The entire cycle typically lasts at least 2 years

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Design Stage
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What is a good question?

• Nobody has done it before
• The research question has an impact
• Academic community
• Practitioners (corporate managers and investors)
• Regulators
• Readers outside China

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Examples of good research

• Watts and Zimmerman (1986)
• Scholes and Wolfson (1992)
• Bernard and Thomas (1990)
• Burgstahler and Dichev (1997)

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Key questions at the design stage

• WWW
• What is your research question?
• Why is it interesting (i.e., who cares)?
• What are your predictions?

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How can you develop interesting questions?

• No easy answers
• A few tips
• Develop your own and systematic view of the world
• Write down your ideas
• Explain your ideas to experienced researchers

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Different views of the world

• Views on capital market efficiency
• Traditional views
• Fama (1970)
• Behavioral finance view
• Shleifer (2000), Barberis and Thaler (2002)
• Views on managerial compensation contracts
• Optimal contracting (compensation contract is a
  response to agency problems)
• Managerial power view (compensation contract
  itself is a manifestation of agency problems)
• Bebchuk and Fried (2004)

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Manufacturing Stage
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Research design issues

• The structural model
• Firm performancef(governance)
• What variables should be in and what variables
  should be out?
• Empirical proxies for theoretical constructs
• Causality vs. association
• Interpretation of your results (i.e., can the
  research design answer intended question?)

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From theoretical constructs to empirical proxies

• Example 1
• What is information asymmetry?
• How to measure it?
• Huddart and Ke (2004)
• Example 2
• What is earnings management?
• How to measure it?
• Jones (1991)
• Burgstahler and Dichev (1997)
• What are the consequences of poorly measured
  constructs?

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How to demonstrate a causal relation?

• Manipulate the causes
• Beatty, Ke and Petroni (2002)
• Ke and Petroni (2004)
• Ke, Petroni and Yu (2005)
• Statistical solutions
• Fixed effects regression
• Ke and Ramalingegowda (2005)
• Two-stage least squares
• Huddart, Ke and Shi (2005)

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From results to interpretation

• Understand your research designs limitations
• What you can say from your results
• What you cannot say from your results
• Disclose your limitations
• Example Francis and Ke (2004)

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Marketing Stage
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How to sell your car?

• Write clearly and logically
• Simplicity is beauty
• Logical arguments
• Satisfy reviewers concerns
• Have some good luck

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Summary

• Good questions
• Clear predictions
• Strong research design
• Robust results