Craig Chapman - Faculty - Kellogg School of Management

Craig Chapman is an Assistant Professor in the Accounting Information and Management department and a Zell Center Faculty Fellow. His primary research interests are related to the bias and accuracy of financial forecasts, risk allocation and the role of real options in large scale projects and the use of real actions to manage earnings – specifically the use of promotions to change the timing of income.

Prior to joining the Kellogg School faculty, he was the General Manager of an electric power generating company in the People’s Republic of China. He also worked on large scale project and structured financings in Europe and Asia with Bank of America, Banque Nationale de Paris and Midland Bank based in London and Hong Kong.

Chapman teaches core financial accounting. He received his DBA in Accounting and Management from Harvard University; his MBA with high distinction (Baker Scholar) from the Harvard Business School; and MA and BA degrees in Mathematics from the University of Oxford.

Areas of Expertise

Financial Accounting
Financial Analysts
Managerial Accounting
Risk Management

Recent Media Coverage

Economist Intelligence Unit: Executive Briefing: Discounted Diapers and Stockpiles of Soup - 12/17/2008

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Education

DBA, 2008, Accounting, Management, Harvard Business School, Harvard University

MBA, 2003, Harvard Business School, Harvard University, George F. Baker Scholar, High Distinction

MA, 1995, Mathematics, Magdalen College, University of Oxford

BA, 1989, Mathematics, Magdalen College, University of Oxford, Honors

Other Professional Experience

Vice President and General Manager, SITHE ENERGIES - INDEPENDENT POWER PRODUCER, 1997-2001

Vice President – Project Finance, BANK OF AMERICA, 1994-1997

Grants and Awards

Zell Center Faculty Fellow, Zell Center, Kellogg School of Management, 2008-2009

Conference Presentations

Kansas University, The Hangover Effects of Real Earnings Management: Patterns of Real Earnings Management and Subsequent Performance, 2/13/2009

The Ohio State University, The Hangover Effects of Real Earnings Management: Patterns of Real Earnings Management and Subsequent Performance, 1/09/2009

American Accounting Association Annual Conference 2008, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 8/06/2008

Columbia University, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 3/21/2008

Yale University, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 3/17/2008

University of North Carolina, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 3/14/2008

Northwestern University, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 3/12/2008

Dartmouth College, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 3/06/2008

New York University, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 2/29/2008

Stanford University, The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods, 2/20/2008

Massachusetts Institute of Technology, An Investigation of Earnings Management through Marketing Actions, 9/12/2007

London Business School Trans-Atlantic Doctoral Consortium, An Investigation of Earnings Management through Marketing Actions, 5/17/2007

American Accounting Association Financial Accounting and Reporting Section (FARS) Midyear Meeting, An Investigation of Earnings Management through Marketing Actions, 1/19/2007

American Accounting Association Financial Accounting and Reporting Section (FARS) Midyear Meeting, Do Buy-Side Analysts Out-Perform the Sell-Side?, 1/28/2006

Research Interests

Real earnings management, analyst forecasts, risk allocation

Articles

Chapman, Craig, Paul Healy and Boris Groysberg. 2008. Buy-Side vs. Sell-Side Analysts’ Earnings Forecasts. Financial Analysts Journal. 64(4): 25-39.

Working Papers

Chapman, Craig. 2009. An investigation of earnings management through marketing actions.

Prior research hypothesizes managers use ‘real actions,’ including the reduction of discretionary expenditures, to manage earnings to meet or beat key benchmarks. This paper examines this hypothesis by testing how different types of marketing expenditures are used to boost earnings for a durable commodity consumer product which can be easily stockpiled by end-consumers as well as who, within the firm, is responsible for these actions.

Combining supermarket scanner data with firm-level financial data, we find evidence that differs from prior literature. Instead of reducing expenditures to boost earnings, soup manufacturers roughly double the frequency of marketing promotions (price discounts, feature advertisements and aisle displays) at the fiscal year-end. Firms also engage in similar behavior following periods of poor financial performance.

Furthermore, our results confirm managers’ stated willingness to sacrifice long-term value in order to smooth earnings (Graham, Harvey and Rajgopal, 2005) and use real actions to boost earnings to meet earnings benchmarks. We estimate that marketing actions can be used to boost quarterly net income by up to 5% depending on the depth and duration of promotion. However, there is a price to pay, with the cost in the following period being approximately 7.5% of quarterly net income.

Finally, a unique aspect of the research setting allows tests of who is responsible for the earnings management. While firms appear unable to increase the frequency of aisle display promotions in the short run, they can reallocate these promotions within their portfolio of brands. Results show firms shifting display promotions away from smaller revenue brands toward larger ones following periods of poor financial performance. This indicates the behavior is determined by parties above brand managers in the firm.

These findings are consistent with firms engaging in real earnings management and suggest the effects on subsequent reporting periods and competitor behavior are greater than previously documented.

Chapman, Craig. 2009. The Effects of Real Earnings Management on the Firm, Its Competitors and Subsequent Reporting Periods.

Prior research hypothesizes that managers use a variety of ‘real actions’ to manage reported earnings to meet or beat certain key benchmarks. Combining two years of new supermarket scanner data for a commodity consumer product with firm-level financial data, I find evidence consistent with the hypothesis of price discounting around the fiscal quarter-end. Firms that just beat prior year quarterly Earnings per Share or Analyst Consensus Earnings Forecasts reduce prices in the final month of the fiscal quarter to do so even when controlling for the effects of a competing hypothesis that firms adjust prices when inventory levels are unusually high.

Also examined are the effects of earnings management related price reductions on subsequent reporting periods and on competitor pricing behavior. I find that price reductions associated with a single earnings management target are persistent over multiple reporting periods and that competitors also reduce prices when a firm has greater incentives to accelerate earnings.

These findings suggest the effects of Real Earnings Management on subsequent reporting periods and competitor behavior are greater than previously thought and make contribute to both the marketing and accounting literature in the following ways:

· analyzing the effect of price discounts on earnings as opposed to the effect on sales volumes and revenues;

· demonstrating evidence that firms manufacturing durable goods reduce prices (an increase in promotional activities) when incentives to boost earnings are stronger;

· offering direct evidence of the actions taken to manage earnings, as opposed to the prior research which uses Abnormal Cash Flow from Operations as a proxy for earnings management actions;

· providing evidence that firms change pricing behavior in response to competitor earnings management incentives;

· showing that price reductions associated with earnings management become persistent and can be repeated as much as twelve months later.

Cases

Chapman, Craig, Sharon M. Bruns, William E. Bruns and Susan Harmeling. 2008. Teaching Note for Merrimack Tractors and Mowers, Inc.: LIFO or FIFO. Boston: Harvard Business Publishing, Case 3219.

Teaching Interests

Financial Accounting, managerial accounting, project finance and large scale investment

Teaching Materials
Accounting For Decision Making (ACCT-430) Summer 2009, Syllabus, Section 71-72 Accounting For Decision Making (ACCT-430) Summer 2009, Syllabus, Section 76

Full-Time / Part-Time MBA

Accounting For Decision Making (ACCT-430-0)

This course counts toward the following majors: Accounting.

This course acquaints students with the process used to construct and understand the financial reports of organizations. The objective is to understand the decisions that must be made in the financial reporting process and to develop the ability to evaluate and use accounting data. Emphasis is placed on understanding the breadth of accounting measurement practices and on being able to make the adjustments necessary for careful analysis. The course highlights the linkages between accounting information and management planning, and decision making and control.

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