Patrick Hopkins

Areas of Expertise

Professional Judgment and Decision Making, Human Information Processing, Financial Accounting, Effects of Accounting and Auditing in Capital Markets, Financial Statement Analysis

Academic Degrees

• Ph.D., Graduate School of Business, University of Texas, 1995
• M.Acc., University of Florida, 1986
• B.S., University of Florida, 1985

Professional Experience

• Professor of Accounting, Kelley School of Business, Indiana University, 1995-present
• Visiting Associate Professor of Accounting, Stanford University, 2002-2003
• Research and Teaching Assistant, University of Texas, 1990-1995
• Lecturer and Undergraduate Academic Advisor, University of Florida, 1986, 1989-1990
• Senior Consultant, Deloitte Haskins and Sells, 1985, 1986-1988
• Instructor, KPMG, 2004-2005

Selected Publications

• Bloomfield, R., F. Hodge, P. Hopkins, & K. Rennekamp (2015), “Does Coordinated Presentation Help Credit Analysts Identify Firm Characteristics?” Contemporary Accounting Research, 32(2): 507-527.

Abstract We present 60 experienced credit analysts with financial information for two firms: one that mainly outsources production and one that does not. We find that analysts are better able to identify firm characteristics that make an outsourcer more creditworthy when those characteristics are presented in the same general section of a financial report; either on the face of the financial statements or in the footnotes. Such coordinated presentation reduces the cognitive load necessary for integrating the related information and forming a meaningful mental model of each firm. Our results suggest that if standard setters are going to require more detailed disclosures, coordinated presentation of related decision-useful information in the same section of a firm’s financial report may benefit users, regardless of whether the information is recognized on the face of the financial statements or disclosed in the notes. Supplemental analysis cautions standard setters, however, to consider whether requiring more detailed disclosures provides an incremental benefit over how firm’s disclose information today.

• Hodder, L. D., and P. H. Hopkins (2014), "Agency Problems, Accounting Slack and Banks’ Response to Proposed Reporting of Loan Fair Values," Accounting, Organizations and Society, 39(1): 117–133.

Abstract We investigate the determinants of bank representatives’ responses to the United States Financial Accounting Standard Board’s 2010 Exposure Draft that proposes fair value measurement for most financial instruments. Over 85 percent of the 2,971 comment letters were received from bank representatives, with most bank-affiliated letters addressing—and opposing—one issue: fair value measurement of loans. The Exposure Draft proposes that companies report both fair value and amortized cost measures for loans; thus, the proposal should result in increased levels of loan-related information and improved financial reporting transparency. We investigate three reasons for bank representatives’ resistance. First, fair value measurement should result in less accounting slack than the current incurred-loss model for loan impairments; therefore, we propose that representatives from banks that historically utilized that slack will resist fair value measurement for loans. Second, we propose that agency problems are an important motivating factor because bank representatives reaping more private benefits from their franchises have less incentive to support increases in financial reporting transparency. Third, we test whether the most common reasons for opposition included in the comment letters are associated with negative letter writing. Our analyses support the first two determinants of bank representatives’ resistance to the Exposure Draft. Specifically, accounting slack and lower demand for accounting transparency are strongly associated with resistance to the standard. However, we find that stated reasons for resistance are not associated with letter writing. Specifically, representatives at firms with difficult to value loans and firms that mostly hold loans to maturity are no more likely to resist the standard than others. The narrow scope of bank representatives’ comments and our empirical findings suggest that bankers’ responses to the Exposure Draft may be more driven by concerns over reduced availability of accounting slack and accompanying de facto regulatory forbearance than by the conceptual arguments they offer. Our results have implications for standard setters, who must navigate special interests as they attempt to promulgate high quality accounting standards, and for users of financial statements who must consider how political forces shape generally accepted accounting principles.

• Evans, M., L.D. Hodder and P.E. Hopkins, (2014), “The Predictive Ability of Fair Values for Future Financial Performance of Commercial Banks and the Relation of Predictive Ability to Banks’ Share Prices,” Contemporary Accounting Research, 31(1): 13-44.

Abstract The conceptual frameworks of International Accounting Standards Board (2010, QC7-QC8) and   Financial Accounting Standards Board (2010b, QC7-QC8) both include predictive value as a fundamental qualitative characteristic of useful financial information.  Because changes in fair value are unpredictable—that is, one period’s fair value gains (losses) cannot predict future periods’ fair value gains (losses)—fair value is criticized as diminishing the predictive ability (and, therefore, the usefulness) of financial information.  We propose that the time-series relationship of fair value gains (losses) is an overly restrictive way to define predictive ability, and completely ignores the forward looking information that is impounded in fair value measures.  Specifically, the fair values of interest-bearing financial instruments capture the opportunity costs and benefits of holding below- and above-market instruments.  Thus, we propose that the relative levels of unrealized holding gains (losses) should predict relative levels of future realized gains (losses) and interest income across firms (hereafter, “cross-sectional predictive ability of fair values for future reported income”). Because of the significance of financial instruments to commercial banks’ balance sheets and the availability of detailed fair value information for these instruments in banks’ regulatory reports, we test our predictions for a sample of commercial banks during 1994-2008.  Consistent with our predictions, we find that accumulated fair value adjustments for interest-bearing securities are positively cross-sectionally associated with future interest income, future total realized investment holding returns, and future investment-security-related cash flows. Additional analyses reveal that the cross-sectional predictive ability of fair values for future reported income is positively related to the measurement precision of reported fair value measurements. Finally, we show that cross-sectional predictive ability of fair values for future reported income is positively associated with the value relevance of reported fair value measurements. Overall, our results suggest that fair values have predictive ability despite the low persistence of fair value changes. Cross-sectional predictive ability of fair values for future reported income is an important dimension of financial-information usefulness that standard setters and researchers may wish to consider in evaluating fair value as a measurement basis.

• Hodge, F., P. E. Hopkins, and D. Wood (2010), “The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts,” Contemporary Accounting Research, Vol. 27, No. 1, Spring, pp. 101-133.

Abstract The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), in their joint Financial Statement Presentation project, are reconsidering the basic format of financial statements. The Boards’ preliminary discussions related to this joint project indicate that they intend to modify the required financial statements to increase the proximity of performance-related information for each reported period. We provide evidence related to this potential change by investigating the effects of financial-statement information proximity on investors’ ability to learn the forecast-relevant time-series properties of reported cash flows and accruals. We also examine the role feedback plays in this relationship. Our experimental results suggest that nonprofessional investors are able to more quickly learn the relation between current period cash flows and accruals and future cash flow realizations when financial statement information is presented in a single statement rather than separated into two statements. In addition, we find that nonprofessional investors exhibit lower levels of absolute forecast errors and less forecast dispersion when financial statement information is unified into a single statement. Finally, we provide evidence that nonprofessional investors who receive extensive outcome feedback on a single page initially learn more quickly and later, after learning has leveled off, accurately forecast more consistently than do investors who receive extensive or limited feedback spread across two pages. Overall, our results provide evidence on the effectiveness of alternate financial statement presentation formats and the potential usefulness of receiving more extensive feedback.

• Hodder, L., P. Hopkins, and D. Wood (2008), “The Effects of Financial Statement and Informational Complexity on Analysts'' Cash Flow Forecasts,” The Accounting Review, Vol. 83, No. 4, July, pp. 915-956.

Abstract We characterize the operating-activities section of the indirect-approach statement of cash flows as backwards because it presents reconciling adjustments in a way that is opposite from the intuitively appealing, future-oriented, Conceptual Framework definitions of assets, liabilities and the accruals process. We propose that the reversed-accruals orientation required in the currently mandated indirect-approach statement of cash flows is unnecessarily complex, causing information-processing problems that result in increased cash-flow forecast error and dispersion. We also predict that the mixed pattern (i.e., +/–, –/+) of operating cash flows and operating accruals reported by most companies impedes investors’ ability to learn the time-series properties of cash flows and accruals. We conduct a carefully controlled experiment and find that (1) cash-flow forecasts have lower forecast error and dispersion when the indirect-approach statement of cash flows starts with operating cash flows and adds changes in accruals to arrive at net income and (2) cash-flow forecasts have lower forecast error and dispersion when the cash flows and accruals are of the same sign (i.e., +/+,–/–); with the sign-based difference attenuated in the forward-oriented statement of cash flows. We also conduct a quasi-experiment to test our mixed-sign versus same-sign hypotheses using archival samples of publicly available I/B/E/S and Value Line cash-flow forecasts. We find that the passively observed samples of cash-flow forecasts exhibit a similar pattern of mixed-sign versus same-sign forecast error as documented in our experiment.

• Yen, A., D. E. Hirst, and P. Hopkins (2007), "A content analysis of the comprehensive income exposure draft comment letters," Research in Accounting Regulation, Vol. 19, pp. 55-82.

Abstract This paper reports the results of a content analysis of comment letters submitted to the Financial Accounting Standards Board in response to the Board''s Comprehensive Income Reporting Exposure Draft (FASB, 1996). Although comment letters are an integral component of the FASB''s standard setting process, little is known about their content and the types of arguments made by letter writers. In this study, we categorize and analyze the arguments contained in these comment letters, focusing on how firms attempt to persuade the FASB. Our analysis documents the relative frequency of theoretical, outcome-oriented, and other arguments included in the letters. Despite the FASB''s suggestion that comments focus on theoretical (conceptual framework) aspects of proposed standards, our analysis suggests that many of the arguments in the letters are non-theoretical, or outcome-oriented, focusing on anticipated negative effects for particular firms and industries from the Exposure Draft. Our findings help to provide a better understanding of the comment letter and standard setting process and provide insights into how letter writers believe accounting information is used. The setting of our study is particularly interesting because the changes proposed in the Comprehensive Income Reporting Exposure Draft were strictly presentation-related and did not affect companies'' reported net income or financial condition. Therefore, the contractual motivations related to debt covenants and/or management compensation offered in previous research to explain comment letter writing, are mostly not present in this setting.

• Hodder, L., P. Hopkins, and J. Wahlen (2006), “Risk-Relevance of Fair Value Income Measurement for Commercial Banks.”  The Accounting Review, June_._

Abstract We investigate the risk relevance of the standard deviation of three performance measures: net income, comprehensive income, and a constructed measure of full-fair-value income for a sample of 202 U.S. commercial banks from 1996 to 2004. We find that, for the average sample bank, the volatility of full-fair-value income is more than three times that of comprehensive income and more than five times that of net income. We find that the incremental volatility in full-fair-value income (beyond the volatility of net income and comprehensive income) is positively related to market-model beta, the standard deviation in stock returns, and long-term interest rate beta. Further, we predict and find that the incremental volatility in full-fair-value income (1) negatively moderates the relation between abnormal earnings and banks'' share prices and (2) positively affects the expected return implicit in bank share prices. Our findings suggest full-fair-value income volatility reflects elements of risk that are not captured by volatility in net income or comprehensive income, and relates more closely to capital-market pricing of that risk than either net-income volatility or comprehensive-income volatility.

• Hodge, F., P. Hopkins, and J. Pratt (2006), “The Credibility of Classifying Hybrid Securities as Liabilities or Equity,” Accounting Organizations and Society, October, pp. 623-634.

Abstract In this study we investigate how the level of discretion in the reporting environment and management’s reporting reputation influence the extent to which management’s reporting incentives are important in determining the perceived credibility of management’s classification choices. Consistent with prior research, we show that users view incentive-inconsistent classifications as more credible than incentive-consistent classifications. We extend this finding by showing that the strength of this relationship (i.e., the extent to which users consider the consistency between the classification and management’s reporting incentives) depends on the level of discretion in the reporting environment and management’s reporting reputation. We find that users rely less (more) on the consistency between management’s reporting incentives and the classification in a mandated (discretionary) reporting environment and when managers have a good (poor) reporting reputation. We conclude by discussing the implications of our findings and potential future research.

• Beneish, Messod D., Patrick E. Hopkins, Ivo Ph. Jansen, and Roger Martin (2005), "Do Auditor Resignations Reduce Uncertainty About the Quality of Firms’ Financial Reporting,” Journal of Accounting and Public Policy, Vol. 5, pp. 357-390. 

Abstract We assess the conditions under which auditor resignations reduce uncertainty about the quality of financial reporting of former and continuing clients of the resigning auditor. Our analysis is based on a sample of 109 auditor resignations in the period 1994-1998. Approximately one-quarter of these resignation announcements are accompanied by disclosure of a disagreement over accounting treatment or over the adequacy of internal controls factors that point toward diminished credibility of former client''s financial statements, and are associated with negative abnormal returns for the former client. In contrast, we find no stock market effect for the remaining firms (i.e., three-quarters of our sample) for which the auditor resignations are "unexplained", suggesting that the act of resignation, by itself, is not informative. Further, we find that these unexplained resignations, which likely result from auditor''s periodic risk-related reviews of their client portfolios, transfer value-relevant information to another class of investors. In particular, we find that industry matched continuing clients of the auditor that also have poor performance experience positive abnormal returns in the days surrounding media-announced resignations from former clients. This suggests that in an environment where poorly performing, high-risk audit clients are screened contemporaneously, an auditor''s unexplained resignation from one client, but not from a similar client in its portfolio, helps reduce uncertainty about the credibility of continuing client''s financial reporting.

• Hirst, D. E., P. E. Hopkins, and J. M. Wahlen (2004), “Fair Values, Income Measurement, and Bank Analysts’ Risk and Valuation Judgments,” The Accounting Review, April, pp. 455-474.

Abstract We investigate whether the measurement and reporting of comprehensive income in financial statements systematically affects commercial bank equity analysts'' investment risk assessments and valuation judgments. In an experiment in which 80 buy side analysts specializing in banking and financial institutions participated, we vary whether a bank is exposed to or hedged against interest rate risk across three different comprehensive income accounting regimes - piecemeal fair value accounting with comprehensive income reported in the statement of changes in equity, piecemeal fair value accounting with comprehensive income reported in a separate statement of performance, and full fair value accounting with comprehensive income reported in a separate statement of performance. When fair value changes are measured and reported on a piecemeal basis, we find no investment risk or valuation judgment differences across CI reporting regimes. Although we find that the analysts'' investment risk judgments are influenced by the banks'' risk management strategies, their valuation judgments are not. Only when fair value changes are measured completely and reported transparently (i.e., full fair value accounting) do analysts'' valuation judgments distinguish between banks with different levels of risk. The study contributes to three avenues of literature concerned with financial-reporting transparency, risk, and fair value accounting. First, our ex ante evidence informs accounting standard setters as they evaluate whether to move to full fair value accounting for all financial instruments, and assess the degree to which differences in comprehensive income measurement and reporting affect the information analysts obtain from financial statements. Second, the study adds to the experimental accounting literature that examines comprehensive income reporting format effects and valuation judgments. Third, we add to archival accounting research on the information in comprehensive income by testing market participants'' judgments under different comprehensive income reporting regimes, which cannot be directly investigated with archival data.

• Hopkins, P. E. (2003), "Discussion of ''Do Investors Over-Rely on Old Elements of the Earnings Time Series,''" Contemporary Accounting Research, Spring, pp. 33-46.

Abstract A study by Bloomfield, Libby, and Nelson 2003, Do Investors Overrely on Old Elements of the Earnings Time Series?, proposes a single explanation for the simultaneous existence of 2 seemingly contradictory financial market anomalies: underreaction to recent earnings changes and overreaction to sustained levels of performance. The study provides a clever and intuitively appealing bridge between the 2 anomalies. However, there are concerns about the contribution of the experiment. In particular, there is concern that the experiment is more a complex demonstration that humans are limited in their knowledge of business trivia and are horrible intuitive statisticians than a test of the theory that underweighting of old earnings information can lead to both the over- and underreaction anomalies documented in extant research.

• Hopkins, P. E., R. Houston, and M. Peters (2000), “Purchase, Pooling and Equity Analysts’ Valuation Judgments,” The Accounting Review, July, pp. 257-281.

Abstract We investigate whether analysts'' common-stock valuation judgments are predictably affected by (1) different methods of accounting for business combinations and (2) the number of years that elapse after the business combinations occur. Numerous articles in the business press suggest that companies go to great lengths to avoid amortization of the purchase-method acquisition premium, either by structuring acquisitions to qualify for pooling treatment or aggressively allocating the acquisition premium to "in-process" research and development (IPRD) and immediately expensing it. Firms'' reluctance to capitalize and amortize the acquisition premium often is based on their managers'' belief that amortizing the acquisition premium impairs firm value, especially in years subsequent to the transaction. However, research to date neither refutes nor defends this belief.We report the results of an experiment in which 113 buy-side equity analysts participated. Consistent with our expectations, analysts'' post-combination valuation judgments are lower when a parent company records and amortizes an acquisition premium in a purchase-method business combination and equivalently higher when the company either immediately expenses the entire purchase-method acquisition premium as IPRD or records the business combination using the pooling-of-interests method. In addition, in the case where the parent company records and amortizes an acquisition premium in a purchase-method business combination, analysts'' stock-price judgments are significantly lower if the business combination occurred three years ago as compared to one year ago. We also test the FASB''s proposal to report separate sub-totals (and related EPS figures) for pre-goodwill-amortization operating income, after-tax goodwill amortization, and net income. Our results suggest that the Board''s proposed goodwill-reporting format mitigates the valuation difference between combinations that occurred one-year ago versus three-years ago. We discuss the implications of this study for users of financial accounting information and for accounting standard setters.

• Hirst, D. E. and P. E. Hopkins (1998), “Comprehensive Income Reporting and Analysts’ Valuation Judgments,” Journal of Accounting Research, Supplement, pp. 47-75.

Abstract We investigate whether clear disclosure of comprehensive income (CI) facilitates detection of earnings management by buy-side financial analysts and predictably affects their security price judgments. Because analysts and investors often must sort through voluminous footnotes and non-financial information to locate CI components and other value-relevant items, the Association for Investment Management and Research has recommended changes in the reporting of these items. In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income in response to this demand.The efficient markets hypothesis suggests that this reformatting of the financial statements should not affect analysts'' judgments. However, psychology research predicts that information will not be used unless it is both available and readily processable (i.e., clear). Therefore, we argue that analysts'' valuation judgments will be affected by the clarity of CI disclosure.The results of an experiment, in which 96 analysts participated, suggest that clear income statement (IS) disclosure of CI-as originally proposed in the FASB''s CI Exposure Draft-enhances the transparency of a company''s earnings management activities and reduces analysts'' valuation judgments to the same level observed for a firm that does not manage its earnings. In contrast, we find that disclosure of CI in the statement of changes shareholders'' equity-as allowed by SFAS No. 130 and likely to be adopted by a majority of US companies-is not as effective as IS disclosure in revealing earnings management. We discuss the implications of this study for users of financial accounting information and for accounting standard setters.

• Hopkins, P. E. (1996), “The Effect of Financial Statement Classification of Hybrid Financial Instruments On Financial Analysts’ Stock Price Judgments,” Journal of Accounting Research, Supplement, pp. 33-50.

Abstract Whether the balance sheet classification of financial instruments that include attributes of both debt and equity affects the stock price judgments of buy-side financial analysts is investigated. Firms announcing an offering of additional common equity securities experience a decline in the market value of their outstanding common stock. In contrast, firms financing with straight debt generally do not experience a decline in common stock market value. The results of an experiment in which buy-side financial analysts estimate the price of a company''s publicly traded common stock immediately after the announcement of a new offering of mandatory redeemable preferred stock are reported. The results indicate that differential accounting classification affects the stock price judgments of financial analysts. The previously documented valuation effects of financing with straight debt and additional common equity securities were replicated in a laboratory setting. The observed differences between conditions appear to be caused by analysts using their prior knowledge of the valuation difference between straight debt and additional common equity financing.