Secondary Titles (1)
- Sam Frumer Professorship
Industry Expertise (3)
Areas of Expertise (6)
Financial Statement Fraud
Mergers and Acquisitions
Manager's Trading Incentives
Kelley School of Business Research Award (Full Professor Level) (professional)
Professor Beneish was honored with the Kelley School of Business Research Award in 2008.
The Financial Accounting and Reporting Section of the American Accounting Association (professional)
Professor Beneath won the Best Paper Award in 2002.
MBA Teaching Excellence Award (professional)
Professor Beneish was honored in 2002.
University of Chicago: Booth School of Business: Ph.D., Accounting & Economics 1987
University of Chicago: Booth School of Business: MBA, Accounting, Economics, & Finance 1984
Media Appearances (4)
A love affair with numbers
The PCIJ Blog online
He also introduced the participants to the Beneish Fraud Ratio, which was developed by Indiana University accounting professor Messod Daniel Beneish, Ph.D. Beneish devised analysis ratios for identifying possible financial statement frauds...
Don't Trust The Accountants: Insider Selling A Better Sign Of A Failing Firm
A study reported in the Accounting Review suggests that insider trading may be a better sign a company is failing than the word of its accountants, probably because accountants are susceptible to management pressure when considering whether to issue a dreaded going-concern opinion.
Different Methods for Uncovering Red Flags and Fraud
There is a way to find financial shenanigans: The Beneish M -score.
Messod Beneish, an accounting professor at Indiana University’s Kelley School of Business, outlined a quantitative approach to detecting financial statement manipulation in his 1999 paper “The Detection of Earnings Manipulation.” He based his model on forensic accounting principles, calling it the “probability of manipulation,” or “PROBM” model.
For "sin" companies, diversification may make sense, study finds
IU News Room online
Diversification, long derided as a poor strategy for companies seeking to maximize shareholder return, can actually help firms preserve their assets -- at least those companies threatened by litigation or regulation, according to a new study of tobacco company diversification activity led by Professor Messod Daniel Beneish of Indiana University's Kelley School of Business...
Event Appearances (3)
In Short Supply: Equity Overvaluation and Short Selling
Journal of Accounting and Economics Conference University of Pennsylvania
Are investors fooled by earnings manipulation?
Society of Quantitative Analysts New York, NY
Insider Trading, Earnings Quality and Accrual Mispricing
Atlanta, GA American Accounting Association Annual Meeting
While increases in earnings are common, we identify a setting in which they signal a separating equilibrium. Firms that “defy gravity’ (DG) by reporting increases in earnings despite experiencing a decline in sales from continuing operations, signal their viability as a going- concern, and achieve separation from other firms with decreasing sales. We find that DG signals higher future earnings, cash flows, and one-year-ahead stock returns. More importantly, we find that the DG signal is more credible when more costly to produce: DG firms subsequently perform better when (1) they are ex ante in poorer financial health, (2) the magnitude of the earnings shortfall is larger (they have higher downward cost rigidity), (3) they pass up the opportunity of taking a ‘big bath’ in times of crisis (years where declines in earnings can be blamed on economy-wide shocks), and (4) when they have less flexibility to manage earnings upwards. Finally, because some degree of pooling remains within DG firms, we show that the DG signal is more credible when it is produced contemporaneously with abnormal CEO buying. To our knowledge, this study is the first to provide empirical evidence that earnings increases that are more costly to achieve are more credible signals of future performance.
We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply constraints, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.
This study investigates whether a shock to financial reporting has a differential impact on 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. Further, consistent with research on the effects of IFRS adoption on individual firms, we find that post-adoption increases in foreign equity investment are limited to countries with high (or improving) governance quality. In contrast, we find increases in foreign debt investment flows are not dependent on governance quality. This is consistent with recent research that concludes that negotiated covenants in bond contracts can offset weak investor protection at the country level. 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. This evidence that increases in foreign investment originate from non-adopting countries rather than other adopting countries suggests that the benefits from IFRS adoption more likely reflect improved financial reporting quality rather than greater comparability.
An accounting-based model has strong out-of-sample power not only to detect fraud, but also to predict cross-sectional returns. Firms with a higher probability of manipulation (MSCORE) earn lower returns in every decile portfolio sorted by: Size, Book-to-Market, Momentum, Accruals, and Short-Interest. We show that the predictive power of MSCORE is related to its ability to forecast the persistence of current-year accruals, and is most pronounced among low-accrual (ostensibly high earnings-quality) stocks. Most of the incremental power derives from measures of firms’ predisposition to manipulate, rather than their level of aggressive accounting. Our evidence supports the investment value of careful fundamental analysis, even among public firms.
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.