Faculty & Research

Valeri Nikolaev

Associate Professor of Accounting

Phone :
1-773-834-4116
Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Valeri Nikolaev studies the intersection of financial reporting and corporate finance. His current research focuses on understanding the quality of accounting information and on how contracting needs shape financial reporting. His broad interests include the role of accounting in credit markets, corporate governance, transparency, and earnings management. His dissertation “Debt Covenants and Accounting Conservatism” was published in the Journal of Accounting Research. His other papers include "Capital versus Performance Covenants in Debt Contracts" with Hans Christensen, published in the Journal of Accounting Research; "Deflating Profitability" with Ray Ball, Joseph Gerakos, and Juhani Linnainmaa published in Journal of Financial Economics; "On Estimating Conditional Conservatism" with Ray Ball and S.P. Kothari published in European Accounting Review; and “Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?” with Hans Christensen published in The Review of Accounting Studies.

Nikolaev is on editorial boards of Journal of Accounting Research and European Accounting Review and also serves as an ad hoc reviewer for the Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, Contemporary Accounting Research, Journal of Accounting and Public Policy, and European Accounting Review. He has made presentations across the globe, including at Maastricht University, University of Antwerp, Catholic University of Leuven, Free University of Amsterdam, as well as nationally at Emory University, MIT, Northwestern University, NYU, Stanford University, University of Pennsylvania, UCLA, University of North Carolina, and University of Michigan.

Born in Belarus, Nikolaev lived and studied in the Netherlands and Czech Republic before joining the University of Chicago. He earned his PhD in accounting cum laude in 2007 from the Center for Economic Research at Tilburg University in The Netherlands. His research was supported by grants from the Netherlands Organization for Scientific Research (NWO). He earned his master's degree in economics in 2002 from the Center for Economic Research and Graduate Education at Charles University in Prague. His bachelor's degree in economics with distinction was earned in 1999 from the Minsk’s Institute of Management in Belarus. He is fluent in English and Russian.

 

2016 - 2017 Course Schedule

Number Name Quarter
30000 Financial Accounting 2017 (Spring)
30600 Workshop in Accounting Research 2016 (Fall)
30600 Workshop in Accounting Research 2017 (Winter)
30600 Workshop in Accounting Research 2017 (Spring)

Research Activities

Role of accounting information in contracts; transparency and quality of financial reporting; voluntary disclosure; accounting regulation.

With H. Christensen, “Capital versus Performance Covenants in Debt Contracts,” Journal of Accounting Research 50, 75-116 (2012).

“Debt Covenants and Accounting Conservatism,” Journal of Accounting Research 48, 51-89 (2010).

With L. van Lent, “The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy,” European Accounting Review 14, 677-721 (2005).

For a listing of research publications please visit ’s university library listing page.

REVISION: Scope for Renegotiation in Private Debt Contracts
Date Posted: Nov  01, 2016
I provide new evidence on the renegotiation of financial contracts using a comprehensive sample of over 90,000 debt contract renegotiations. I study whether the demand for monitoring determines the renegotiation intensity, defined as either the renegotiation frequency over a period of time or the time between renegotiations. Theory suggests that frequent debt contract renegotiation trades off the benefits of enhanced monitoring with the costs of suboptimal creditor intervention. Consistent with this tradeoff, I find that proxies for the increased demand for monitoring, such as financing constraints and the audit premium, exhibit a higher renegotiation intensity. In turn, the costs of creditor monitoring, proxied by the presence of growth options and R&D, are associated with a lower renegotiation intensity. I also find that contractual monitoring mechanisms, such as syndicate concentration and control rights, exhibit robust positive associations with renegotiation intensity. The ...

REVISION: Identifying Accounting Quality
Date Posted: Nov  01, 2016
I develop a new approach to understanding accounting accruals. Unlike prior studies, I explicitly address the economic role of accruals in performance measurement. I characterize accounting quality in terms of a new construct, namely, the degree to which accruals facilitate performance measurement. Further, I develop a flexible strategy for identifying accounting quality. The core identifying assumptions derive from institutional properties of both earnings and cash flows: that both are noisy measures of the same economic performance and they converge as the time horizon extends. These assumptions characterize moments of earnings, cash flows, and accruals solved to recover the variance of performance and accounting error in accruals. I implement several model specifications and consider a number of generalizations. My analysis suggests that the variance of the performance component exceeds accounting error and explains a high fraction of accruals’ variance. I conclude that accruals ...

REVISION: Contracting on GAAP Changes: Large Sample Evidence
Date Posted: Oct  04, 2016
We explore revealed preferences for including versus excluding the changes to GAAP in credit agreements issued by U.S. publicly traded firms over the period from 1994 to 2012. We document a significant time-trend towards excluding GAAP changes from debt contracts. This trend has a positive association with proxies for the standard setters’ shift in focus towards relevance and international accounting harmonization. Borrowers facing higher uncertainty are more likely to write contracts that include GAAP changes, but this group of firms shows a more pronounced trend towards excluding GAAP changes. The evidence is broadly consistent with GAAP changes playing an efficiency role in debt markets. However, changes in the standard setters’ focus can, in part, explain the reduction in this role over the past two decades.

REVISION: Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective
Date Posted: Jun  10, 2016
This paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers. Its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research. We argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved. By discussing its rich theoretical implications, we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency.

REVISION: Deflating Profitability
Date Posted: Dec  12, 2015
Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013) concludes that it outperforms other measures of profitability such as bottom-line net income, cash flows, and dividends. One potential explanation for the measure’s predictive ability is that its numerator - gross profit - is a “cleaner” measure of economic profitability. An alternative explanation lies in the measure’s deflator. We find that net income equals gross profit in predictive power when they have consistent deflators. Deflating profit by the book value of total assets results in a variable that is the product of profitability and the ratio of the market value of equity to the book value of total assets, which is priced. We then construct an alternative measure of profitability, operating profitability, which better matches current expenses with current revenue. This measure exhibits a far stronger link with expected returns than either net income or gross ...

REVISION: Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns
Date Posted: Sep  21, 2015
Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research uncovers two anomalies: expected returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability subsumes accruals in predicting the cross section of average returns. An investor can increase a strategy's Sharpe ratio more by adding just a cash-based operating profitability factor to the investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.

New: Outside Blockholders’ Monitoring of Management and Debt Financing: An Alternative Perspective.
Date Posted: Jun  17, 2015
Liao (2015) argues that the monitoring by large outside shareholders (blockholders) exacerbates the conflict between debt and equity and in turn affects the choice and structure of debt financing. The study contends that private debt is more immune to the increase in debt-equity conflict. Consistent with this argument, companies with outside blockholders are inclined to issue private debt over public debt. Further, private debt exhibits less price protection but relies on more protective covenants than does public debt. The findings are interesting and intuitive. I evaluate the economic arguments in the paper and discuss some of the challenges that the study faces. My conclusion is that the interpretation of the results is more complex than the one the study presents. I offer a broader framework that can be used to shed light on why the governance structure combines equity blockholders and private debt issuance. I also discuss several questions to be addressed by future research.

New: Disproportional Control Rights and the Governance Role of Debt
Date Posted: Apr  29, 2015
We examine the governance role of debt in the context of US-based dual class ownership structures. We hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders. We document that dual class firms have higher leverage and a greater propensity to issue private debt; they also more frequently use cash sweeps and performance-based covenants. Dual class firms with greater agency conflicts and a greater need to access the capital market appear to rely more extensively on debt. These findings are consistent with controlling insiders bonding against the agency costs associated with dual class ownership. The governance role of debt is further corroborated by the valuation effect of debt for dual class companies. Private debt issuances trigger greater positive market reactions to the inferior dual class stock in relation to both the superior dual class stock and a matched sample of single class firms. Further, leverage ...

New: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Nov  27, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks ("news"), and how it depends on various market, political, and institutional variables. Studies typically assume the Basu [1997] asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure's validity, in the context of a model with accounting income incorporating different types of information with different lags, and with noise. We demonstrate that the asymmetric timeliness coefficient varies with firm characteristics affecting their information environments, such as the length of the firm's operating and investment cycles, and its degree of diversification. We particularly examine one characteristic, the extent to which "unbooked" information (such as revised expectations about rents and growth ...

New: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Aug  02, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the ...

REVISION: Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Date Posted: Jun  07, 2013
The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is ...

REVISION: Does Fair Value Accounting for Non-Financial Assets Pass the Market Test?
Date Posted: Feb  27, 2013
The choice between fair value and historical cost accounting is the subject of long-standing controversy among accounting academics and regulators. Nevertheless, the market-based evidence on this subject is very limited. We study the choice of fair value versus historical cost accounting for non-financial assets in a setting where market forces rather than regulators determine the outcome. In general, we find a very limited use of fair value accounting. However, the observed variation is ...

REVISION: Econometrics of the Basu Asymmetric Timeliness Coefficient and Accounting Conservatism
Date Posted: Jan  10, 2013
A substantial literature investigates conditional conservatism, defined as asymmetric accounting recognition of economic shocks (“news”), and how it depends on various market, political and institutional variables. Studies typically assume the Basu (1997) asymmetric timeliness coefficient (the incremental slope on negative returns in a piecewise-linear regression of accounting income on stock returns) is a valid conditional conservatism measure. We analyze the measure’s validity, in the ...

REVISION: On Estimating Conditional Conservatism
Date Posted: Dec  03, 2012
The concept of conditional conservatism has provided new insight into financial reporting and has stimulated considerable research since Basu (1997) developed it. While the concept encapsulated in the adage “anticipate no profits but anticipate all losses” is reasonably clear, estimating it is the subject of some discussion, notably by Dietrich et al. (2007), Givoly et al. (2007), and Ball, Kothari and Nikolaev (2011). Recently, Patatoukas and Thomas (2011) report important evidence of ...

REVISION: The Endogeneity Bias in the Relation between Cost-of-Debt Capital and Corporate Disclosure Policy
Date Posted: Jan  09, 2012
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm ...

REVISION: Capital Versus Performance Covenants in Debt Contracts
Date Posted: Sep  26, 2011
Building on contracting theory, we argue that financial covenants control the conflicts of interest between lenders and borrowers via two different mechanisms. Capital covenants control agency problems by aligning debtholder-shareholder interests. Performance covenants serve as tripwires that limit agency problems via the transfer of control to lenders in states where the value of their claim is at risk. Companies trade off these mechanisms. Capital covenants impose costly restrictions on ...

REVISION: Debt Covenants and Accounting Conservatism
Date Posted: Aug  29, 2010
Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision-making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers’ abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if ...

New: Disproportional Control Rights and the Bonding Role of Debt
Date Posted: Dec  04, 2009
We examine how firms’ capital structure choices vary with the presence of dual-class ownership and the degree of disproportional control associated with it. We document that, compared to a propensity-matched sample of single-class firms, dual-class firms have higher leverage, greater propensity to issue private debt, more long-term debt, and greater reliance on financial covenants. Within our dual-class sample, the use of debt financing increases with the degree of disproportional control via ...

REVISION: Agency Theory of Overvalued Equity as an Explanation for the Accrual Anomaly
Date Posted: Aug  18, 2006
We show that the agency theory of overvalued equity (see Jensen, 2005, and others) rather than investors' fixation on accruals explains the accrual anomaly, i.e., abnormal returns to an accrual trading strategy (see Sloan, 1996). Under the agency theory of overvalued equity, managers of overvalued firms are likely to manage their firms' accruals upwards to prolong the overvaluation. Overvaluation, however, cannot be sustained indefinitely and we expect price reversals for high accrual firms ...

The Endogeneity Bias in the Relation Between Cost-of-Debt Capital and Corporate disclosure Policy
Date Posted: Jun  02, 2005
The purpose of this paper is twofold. First, we provide a discussion of the problems associated with endogeneity in empirical accounting research. We emphasize problems arising when endogeneity is caused by (1) unobservable firm specific factors and (2) omitted variables and discuss the merits and drawbacks of using panel data techniques to address these causes. Second, we investigate the magnitude of endogeneity bias in Ordinary Least Squares regressions of cost-of-debt capital on firm ...