Investment company reporting: Earnings management and valuation implications of closed-end fund restricted security investments

摘要

This dissertation adopts an agency perspective on investment company reporting to examine the use and consequences of accounting discretion of fund managers in reporting fair values of restricted securities held in fund portfolios. Valuation discretion arises due to the absence of exogenously determined market prices for these securities. This study investigates two important investment company reporting issues. First, based on competing earnings management hypotheses, it investigates whether accounting choices of fund managers are driven by incentives to: (1) maximize current period compensation; (2) minimize the long-run probability that the fund manager does not achieve benchmark returns; or (3) smooth fund returns. Second, this study examines the capital markets valuation implications of fund disclosures in order to assess the incremental informativeness to investors of fund restricted security disclosures that are subject to the accounting discretion of fund managers.;In spite of the increasing economic significance of investment companies in capital markets, related accounting issues have been virtually unstudied in academic research. This dissertation utilizes 363 closed-end fund annual reports including details of portfolio information, as a first step in examining financial reporting by investment companies. Closed-end funds provide a sound setting for investigating both earnings management and valuation implications of disclosures.;Empirical results indicate that closed-end fund managers use accounting discretion to decrease fund returns more when fund performance relative to benchmark returns is extreme. The evidence is not consistent with fund managers using accounting discretion to maximize current period compensation or to smooth returns.;Empirical evidence also indicates that the valuation implications of restricted and non-restricted securities are different. Investors appear to regard restricted security disclosures as less reliable and, on average, tend to discount their reported values relative to non-restricted securities.;This dissertation has implications for policy discussions regarding the amount of discretion that fund managers should have in valuing securities in their portfolios. Further, it provides a basis for deliberations on contract design in the agency relationship between the investor and the fund manager, and on the possibility of additional fund disclosures.