Yale School of Management

Meet the New Faculty: Kalin Kolev, Assistant Professor of Accounting

Posted on: September 25, 2009

"My research is in the field of empirical financial accounting," says Kalin Kolev, assistant professor of accounting.

Kolev joined Yale SOM from the PhD program at New York University’s Stern School of Business where his dissertation focused on fair value accounting.

"There has been a lot of controversy regarding internally generated fair value estimates," says Kolev. "People have expressed the opinion that those are completely unreliable, i.e. if managers say that a particular financial instrument is worth $10 million it can, in fact, be worth only $1 million or even less."

Using disclosure recently mandated by Statement of Financial Account Standards (FAS) 157, which provides a consistent definition of fair value under U.S. Generally Accepted Accounting Principles (GAAP) and mandates expanded fair value measurements disclosure, Kolev evaluated the concern that fair value estimates, also known as mark-to-model, are too unreliable to be used in financial reporting.

"What I found is that the market perceives these internally generated estimates as somewhat unreliable, in the sense that investors discount the values that mangers give them, but by no means do they disregard them completely. They actually pay attention to the management-reported estimates; they react to them, updating the valuation of the company."

Kolev has also studied the misuse of special items. Special items, as defined by Accounting Principles Board (APB) 30, are transitory items that are infrequent or unusual, for example, the M&A fees that are incurred when one company purchases another.

In a paper published in The Accounting Review, Kolev and two co-authors examined the quality of adjustments managers make to GAAP earnings to arrive at the proforma or “street” earnings, frequently reported in the companies’ earnings releases. They examined whether or not the special items and other exclusions comprising the adjustments became more or less transitory after the intervention of the SEC into non-GAAP reporting and a Sarbanes-Oxley regulation requiring the reconciliation between the GAAP and non-GAAP numbers.

Kolev and his co-authors found that the SEC intervention and new regulation improved the quality of the exclusions. "The exclusions became more transitory than in the past. But we also found that the quality of special items declined; they became less transitory. This is interesting because special items are defined under U.S. GAAP, but the additional exclusions are not. So, it appears that investors focused on the additional exclusions but continued to not pay too much attention to the special items and the reporting entities adapted to the new environment."

Kolev is currently working on a follow up study that examines the composition of the special items. "Prior research documents that special items are not fully transitory, so we asked ourselves what drives their low quality? What we found is about one-third of the reported special items pertain to savings for the future, shifting from operating expenses in the current period, or cleaning up the balance sheet."

Kolev is also exploring a recent guidance issued by FASB that changes the way other than temporary impairments of certain financial instruments is reported on a company’s statements. In this case, other than temporary impairment refers to a decrease in the reported value of a financial instrument whose market value has dropped below book value with no expectation to recover.

Like many academics, Kolev says that the financial crisis and other current events have offered numerous intriguing research questions. "When it comes to finance, accounting, and economics, for academics, this is a gift. There are so many interesting things going on."