Search

This paper investigates whether and how firms receiving benefits through their connections to politicians use accounting discretion to mitigate the costs associated with negative publicity. I utilize a unique setting that captures the change in political costs arising from chairmanship appointments to influential U.S. Senate committees. Firms in the home state of a promoted officeholder often receive preferential treatment, drawing public scrutiny and incentivizing them to avoid reporting extreme earnings through income smoothing to reduce adverse political attention. Employing a difference-in-differences research design, I find evidence that home-state firms smooth their earnings throughout the officeholder's tenure following a senator's promotion to chairman or ranking minority member. Cross-sectional analyses demonstrate that these effects are stronger for firms anticipating higher political costs. Overall, this paper provides evidence of the political cost hypothesis, highlighting the role of political connections in shaping firms' financial reporting strategies. [ABSTRACT FROM AUTHOR]

This paper examines investment responses to emission taxes and the role of tax incidence in passing on tax burdens. Using private firms from Spain and the introduction of an emission tax in 2013 in the Autonomous Community Valenciana, we show that investments decline in response to the emission tax. Importantly, this investment decline does not depend on the level of pollution but on economic factors related to tax incidence. Investments in firms operating in highly competitive markets, firms with low pricing power, and firms with low financial flexibility are the most affected by environmental taxes. We generalize the investment findings using the introduction of carbon taxes in France and Ireland in a stacked difference-in-differences design. Overall, our results indicate that emission taxes affect not only polluters but also other firms and stakeholders such as suppliers, customers, and consumers depending on the relative elasticities of supply and demand. [ABSTRACT FROM AUTHOR]

This article discusses the teaching of social accounting. In the last ten years, the two fields--accounting and economics have been drawn closer together, because professional accountants and professional economists increasingly utilize the same data in their work. The highly technical literature on depreciation policy and inventory valuation is sufficient to indicate that an unequivocal concept of either business income or national income is scarcely possible under current conditions. In other words, an accountant or an economist frequently must outline his own set of definitions, the over-riding consideration being the usefulness of the definitions, with the long-term aim of achieving greater uniformity. In the development of useful accounting principles, the practitioner has not confined himself to transactions made within business enterprise. Generally speaking, practicing and teaching accountants have not devoted enough effort to the bold experiment of correlating their discipline with that of the many-faceted field of modern economics.

Real estate is a simple form of capital; but the same underlying principles of valuation apply to industrial enterprises. As Professor Paton has pointed out, the physical elements of the properties and their intrinsic value are only one, and not the most important, consideration. The cost of replacement value of the properties of an enterprise may be considerable, but the enterprise as a whole possesses value only in proportion to its ability to supply human wants and thus create reasonable and continued profits. Economic factors are no less important. The position of the industry in relation to competing industries and competitive conditions within the industry itself; the possible effect of changes in local taxation or in tariffs, on the costs of raw materials and products; the organization of the industry as to price control and labor relations; any or all of these may have an important bearing on the continued profitableness of the enterprise. Some of the most far-reaching and fundamental conditions relating to an industrial enterprise in our complex modern civilization are human and social in their nature. Every successful business must have a sound reason for its existence and that reason is found ultimately in the satisfaction of human wants.

ABSTRACT: This study examines the testable implications of two hypotheses for why firms undertook debt-equity swaps over the period August 1981-June 1984. The first hypothesis Is that firms used the accounting-based reported earnings gain from the swap to smooth an unexpected and transitory decrease in their earnings per share. The second hypothesis Is that a swap enabled the firm to relax potentially binding sinking-fund constraints in the cheapest feasible manner. Empirically, this study concludes that firms undertook debt-equity swaps for both reasons, but that swapping to smooth earnings was a much stronger motivation than swapping to relax potentially binding sinking-fund constraints. [ABSTRACT FROM AUTHOR]

We study whether firms avoid financial disclosures to preserve their owners' financial privacy. We find that firms named after their owner, for whom firm disclosure would more directly expose owner information, are more opaque. Eponymous owners prefer firm opacity when disclosure exposes sensitive owner information with social stigma, in rural and anticapitalist areas, and in insider-oriented settings with high secrecy and distrust. When firms are forced to disclose, eponymous owners more frequently change their firms' names, and new firms are less frequently named after their founding owners. These findings indicate that owner-level privacy concerns dampen firm-level disclosure incentives. Data Availability: The data used in this study are available from public sources listed in the paper. JEL Classifications: D82; L51; M41. [ABSTRACT FROM AUTHOR]

In this paper, I develop a measure of the difference in the amount of information that investors expect a forthcoming disclosure to contain should it reveal good news versus bad news (the disclosure's "asymmetry"). To do so, I first show that this asymmetry is linked to the skewness of returns that the disclosure creates. I then show that this skewness can be measured using a weighted change in option-implied return skewness leading up to the disclosure's release. The measure's ability to capture investors' prior beliefs regarding asymmetry is advantageous when studying ex ante decisions including contracting and information acquisition choices. I implement it on a sample of large firms' quarterly earnings announcements, finding evidence that investors anticipate cross-sectional but not time-series variation in earnings' asymmetry. [ABSTRACT FROM AUTHOR]

In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In addition, we find that compared with Chinese ADR firms, Chinese RM firms have weaker bonding incentives (as measured by CEO turnover-performance sensitivity) and poorer corporate governance. These factors, in turn, contribute to the lower financial reporting quality of Chinese RM firms. Overall, our results suggest that the less scrutinized RM process allows the Chinese firms with weak bonding incentives and poor governance to gain access to U.S. capital markets, resulting in poor financial reporting quality. [ABSTRACT FROM AUTHOR]

We study firms' decisions to withhold loan covenant details by focusing on a unique disclosure-related cost. Prior research documents the prevalence of tight initial covenants that are selectively relaxed in future renegotiations. This uncertainty in renegotiation outcomes can generate a disclosure-related cost because disclosing a snapshot of initial covenants with a high likelihood of violation could lead to harmful outsider reactions (e.g., trade credit cuts) to violations that may be eventually cured. We hypothesize and find that, when firms are likely to face tighter initial covenants and more renegotiations, they are more likely to withhold covenant details, particularly when under pressure from trade creditors. Our inference is robust to controlling for firms' obligation to disclose (i.e., contract materiality) and future performance. Prior research has found that the precise covenant details of many loans are not publicly available. We are the first to offer a systematic explanation related to disclosure costs. [ABSTRACT FROM AUTHOR]

Firms with correlated fundamentals often issue reports sequentially, leading to information spillovers. The theoretical literature has investigated multifirm reporting, but only when firms report simultaneously. We examine the implications of sequential reporting, where firms aim to maximize their market price and can manipulate their reports. The introduction of sequentiality significantly alters the biasing behavior of firms and the resulting informational environment relative to simultaneous reporting. In particular, a lead firm always manipulates more when reports are issued sequentially. Moreover, relative to simultaneous reporting, sequential reporting reduces the overall information available to the market about each firm, resulting in less efficient and less volatile prices. Additionally, we find that stronger correlation in firm fundamentals can amplify the lead firm's incentive for manipulation under sequentiality, in contrast to simultaneous reporting. We offer further results regarding, for example, market response coefficients, and provide a number of empirical implications. [ABSTRACT FROM AUTHOR]

Access to firms' innovation outputs determines the extent of knowledge spillover that poses risk to innovation appropriability. We provide plausibly causal evidence that processing costs of financial disclosures, which inform users of the economic value of innovation, play a key role in firms' management of knowledge spillover. We exploit an exogenous, randomly assigned, and staggered policy shock by the SEC that reduces processing costs of mandatory financial disclosures. In response, firms reduce patenting rates, with the effect concentrated among firms in more competitive industries and with lower costs of capital. Firms also reduce their patent disclosure quality. Our results suggest firms rely more on trade secrecy as their innovation property protection mechanism. Lower processing costs of financial disclosures affect neither innovation inputs nor voluntary disclosure practices. Our results show that firms strategically manage access to their innovation outputs through financial disclosures, patent disclosures, and trade secrecy to curb knowledge spillover. [ABSTRACT FROM AUTHOR]

Using a Supreme Court ruling that rejected the use of "bright-line" rules previously relied upon in evaluating materiality claims, this study examines how heightened materiality uncertainty impacts audit pricing. We expect the heightened uncertainty to make it more difficult for auditors and clients to assess materiality and to reach a consensus on materiality assessment, which increases audit effort and engagement risk, leading to higher audit fees. Consistent with this prediction, we find that after the ruling, audit fees increase significantly for treatment firms in the circuits using bright-line rules in the pre-ruling period, relative to control firms not affected by the ruling. This effect is stronger when auditors have lower quality or lower industry expertise, and when investors have more diverse opinions. We also find that for firms audited by low-expertise auditors, auditor turnover due to auditor-client disagreement on materiality-related issues increases significantly for treatment firms relative to control firms. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: K2; M41; M42. [ABSTRACT FROM AUTHOR]

This study examines whether information revealed by firms' earnings announcements (EAs) forecasts short-run market-wide volatility in equity index prices. Using an exponential generalized autoregressive conditional heteroskedasticity model that includes controls for the information in an array of macroeconomic announcements, we find that EA information aggregated across firms forecasts market volatility at daily and weekly intervals. EA information's forecasting power is greatest when more firms announce earnings on a given day, when EAs convey negative news, and for EA information about core earnings. Out-of-sample tests confirm that forecasts incorporating EA information better predict short-run market volatility than forecasts omitting EA information. We conclude that firm-level EAs are a significant source of systematic, market-wide information relevant for predicting near-term market volatility. Data Availability: All data are publicly available from sources cited in the text. JEL Classifications: E44; G12; M41. [ABSTRACT FROM AUTHOR]

I examine the real effects of a disclosure mandate that, with the aim of enhancing performance reporting, requires a subset of London Stock Exchange (LSE) firms to describe operational and strategic aspects of value creation, such as business operations and strategies, in their annual reports. Using an instrumented difference-in-differences design, I find that compliance with this initiative, evidenced by more disclosures of performance measures and commentaries relating to business operations and strategies, promotes intangible investments. My analysis of external and internal control systems suggests that enhanced performance reporting promotes investments because it attracts long-term investors and reduces CEO pay sensitivity to earnings performance. JEL Classifications: D22; D82; O30; M41. [ABSTRACT FROM AUTHOR]

We examine the relation between political uncertainty and narrative disclosure complexity in conference calls. Using firm-level political uncertainty, we find that political uncertainty is positively associated with firms' disclosures complexity as measured by the Fog index. Decomposing complexity into two latent components—information and obfuscation—we show that political uncertainty significantly increases the obfuscation but has no impact on the information. Further analysis reveals that complex disclosure is motivated by expected poor future performance amid political uncertainty. We also show that, during periods of heightened political uncertainty, obfuscated disclosure is associated with reduced earnings informativeness, increased dispersion in analyst forecasts, and higher volatility in forecast revisions. These findings are robust to including and excluding sentences containing complex political bigrams when calculating Fog. Further evidence shows that, during periods of political uncertainty, managers tend to use a more ambiguous tone and provide scripted and shorter (longer) responses to analysts' questions (presentations). [ABSTRACT FROM AUTHOR]

Drawing on confidential Internal Revenue Service (IRS) data, we examine whether privately held corporations are more aggressive tax planners than their publicly held peers. Contrary to conventional wisdom, we find no consistent evidence that private firms are more aggressive tax planners. We then examine whether private firms' tax planning differs from that of public firms more generally. We find that private firms engage in more conforming tax planning (planning that also reduces pretax accounting income). However, tests of nonconforming tax planning reveal that private firms generally engage in the same or less planning relative to their public peers. Overall, our findings cast doubt on the belief that private firms are generally more aggressive tax planners than are public firms, but confirm that they engage in more of some forms of general (i.e., conforming) planning. Data Availability: The IRS provided confidential tax information to Michele S. Mullaney pursuant to an Intragovernmental Personnel Act of 1970 (IPA) agreement through the Statistics of Income (SOI) Joint Statistical Research Program (JSRP). JEL Classifications: H25; H26; K34; M41. [ABSTRACT FROM AUTHOR]

We study how vertical integration shapes firms' public disclosures. Theory suggests that firms can use public disclosure to coordinate with supply chain partners and predicts a substitution between vertical integration and public disclosure of future strategic plans, since the internalization of production reduces the need to publicly coordinate. Using data on the extent of vertical integration, we find that firms that become more vertically integrated reduce their public disclosures about their product strategies and that the reduction is most pronounced for vertically integrated firms with greater internalization of production and those with the largest informational and strategic frictions along the supply chain. JEL Classifications: D83; G14; L14; M41. [ABSTRACT FROM AUTHOR]

It is a common practice for firms to conduct performance evaluations of their employees and yet to withhold this information from those employees. This paper argues that firms strategically withhold performance information to retain workers. In particular, if the worker enjoys high outside options and is tempted to quit, then the firm chooses not to reveal his performance information in order to keep him on the job. The firm's equilibrium strategy is to fire if performance is sufficiently low, reveal information if performance is sufficiently high, and withhold information otherwise. The pooling equilibrium is robust under a wide variety of settings, such as general cost functions, ability-contingent outside options, nonlinear contracts, nonverifiable output, and multiple stages of production. [ABSTRACT FROM AUTHOR]

This paper examines whether risk-management strategies (specifically, the use of specialist personnel and higher billing rates) moderate the effect of risk on client acceptance decisions, thereby assisting auditors in bringing prospective client relationships to acceptable risk/return levels. We propose a conceptual model of the client acceptance decision process, and use archival data on one firm's actual client acceptance decisions to test the model. Our results demonstrate the selective use of risk-management strategies in the client acceptance decision, based on the nature of the risks present for each particular client. Specifically, plans to charge a higher billing rate are associated with a reduction in the negative relationship between client acceptance likelihood and both going-concern risk and public trading status, and plans to assign specialist personnel are associated with a reduction in the negative relationship between client acceptance likelihood and both fraud risk and error risk. Therefore, we provide evidence that while risky clients are less likely to be accepted overall, the application of particular risk-management strategies to particular risks increases the likelihood of accepting such clients. [ABSTRACT FROM AUTHOR]

ABSTRACT: The paper provides early evidence on the informativeness of commodity price risk measures required by the Securities and Exchange Commission's new market risk disclosure rules (SEC 1997). I use existing disclosures of oil and gas producers (O&G) to obtain proxies for the tabular and sensitivity analysis disclosures required by the new SEC rules. I find that proxies for the tabular and the sensitivity analysis format are significantly associated with O&G firms' stock return sensitivities to oil and gas price movements. This finding casts doubt on claims that the new market risk disclosures do not reflect firms' risk exposures. The proxies for the tabular format and sensitivity format disclosures are not substitutable explanations of firms' risk exposures. This evidence suggests that disclosures from one disclosure format are not comparable to those from the other reporting format. [ABSTRACT FROM AUTHOR]

ABSTRACT: This paper investigates the incentives and the penalties related to earnings overstatements primarily in firms that are subject to accounting enforcement actions by the Securities and Exchange Commission (SEC). I find (1) that managers in treatment firms are more likely to sell their holdings and exercise stock appreciation rights in the period when earnings are overstated than are managers in control firms, and (2) that the sales occur at inflated prices. I do not find evidence that earnings overstatement in these firms is motivated by concerns about debt covenant violations or the cost of external financing. The evidence suggests that the monitoring of managers' trading behavior can be informative about the likelihood of earnings overstatement. Many economists believe that insider trading is an efficient method of compensating managers for their efforts. These economists argue that reputation losses would preclude managers from making profitable trades before periods of poor corporate performance. Consequently, this paper also investigates the employment and monetary penalties imposed on managers after the earnings overstatement is publicly discovered. This evidence reveals that (1) managers' employment losses subsequent to discovery are similar in firms that do and do not overstate earnings and (2) that the SEC is not likely to impose trading sanctions on managers in firms with earnings overstatement unless the managers sell their own shares as part of a firm security offering. The evidence suggests that neither employment or SEC-imposed monetary losses are effective in preventing the managers in these firms with extreme earnings overstatements from selling their stake in their firms in the face of declining performance. [ABSTRACT FROM AUTHOR]

The performance goal for a unit is commonly created by consolidating the goals of its subunits. This paper shows that if it is difficult (easy) for the subunits to achieve their goals, it is almost always even more difficult (easier) for the unit to whole will almost certainly not meet a goal to cut its costs by a certain percentage if the degree of cost cutting is difficult to achieve at the individual subunit levels. [ABSTRACT FROM AUTHOR]

This paper examines cross-sectional differences in the optimistic behavior of financial analysts. Specifically, we investigate whether the predictive accuracy of past information (e.g., time-series of earnings, past returns, etc.) is associated with the magnitude of the bias in analysts' earnings fore- casts. We posit that there is higher demand for non-public information for firms whose earnings are difficult to accurately predict than for firms whose earnings can be accurately forecasted using public information. Assuming that optimism facilitates access to management's non-public information, we hypothesize that analysts will issue more optimistic forecasts for low predictability firms than for high predictability firms. Our results support this hypothesis. [ABSTRACT FROM AUTHOR]

Institutional investors have strong incentives to search for private predisciosure information about companies in their portfolios because of their fiduciary responsibilities and large resource bases. In addition, large institutional ownership may induce a high level of voluntary disclosure prior to earnings announcements. Greater private information acquisition and greater levels of voluntary disclosures prior to earnings releases suggest that the content of the earnings releases by firms with higher institutional ownership is partially preempted in predisciosure market prices. This paper tests the hypothesis that the market price response to the earnings announcements is smaller for securities with higher institutional holdings. The empirical tests provide evidence that the higher the institutional holdings, the lower the market reaction to earnings releases after controlling for security capitalization and the number of analysts following the firm. [ABSTRACT FROM AUTHOR]

An issue of fundamental importance to accountants concerns the qualities possessed by, or that should be possessed by, accounting information. The usual intuition is that any distortion of accounting numbers relative to the true underlying cash flows of the firm is generally undesirable from the standpoint of investors. Indeed, among the primary qualitative characteristics of accounting information championed by the FASB in their conceptual framework is reliability, which is defined as "the quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation" (emphasis added). Normative statements about the desirable qualities of accounting information are often problematic since such information typically serves multiple purposes. For example, Gjesdal (1981) identifies a decision-making rote and a stewardship role for accounting information and shows that the two needs may not be served equally well. The objective of this paper is to demonstrate that "distorted" accounting information may actually be preferred if the focus is on the stewardship value of accounting information. "Distorted" accounting information is characterized as information signals that are biased relative to the expected value of the firm or that measure the value of the firm with error (white noise). Bias and noise are meant to be representative of the many inadequacies usually attributed to accounting information. Current Generally Accepted Accounting Principles prevent or delay the recognition of certain assets and liabilities and their income statement counterparts, generating what may be thought of as bias. For example, the asymmetric recognition of certain gains and losses, accounting for R&D and advertising expenditures, and the absence of information about customers and suppliers in current financial statements imply that the consequences of certain current managerial activities are not reflected in accounting information. This is bias. Similarly, current Generally Accepted Accounting Standards require numerous estimates generating what may be thought of as noise. For example, subjective assessments such as estimated useful lives of assets, loss contingencies, impairment of asset values, and the allocation of purchase price to individual assets and liabilities in corporate acquisitions are likely to introduce noise into accounting information, even in the absence of bias. A crucial assumption underlying our analysis is that managers allocate effort across many managerial activities, all of which contribute to improving the value of the firm. For example, we can imagine an executive dividing his energies across activities like controlling costs, implementing total quality management initiatives, developing a well-trained workforce, and creating an operating environment where innovation can flourish. While activities such as these have cash flow implications for a firm, we argue that it is difficult, or impossible, to disaggregate the results of operations into individual performance measures that cleanly isolate the effects of the different activities. As a result, compensation contracts in our analysis are based on aggregate performance measures such as accounting income and share price that do not unambiguously distinguish between individual managerial activities. This does not preclude the use of detailed or disaggregated accounting information other than net income as a measure of managerial performance. Rather, it captures the idea that accounting systems cannot realistically measure the economic consequences of all managerial activities in detail. Some aggregation is inevitable, and this imposes a contracting constraint. In our model, limiting the available performance measures to accounting information and share price renders efficient managerial incentives unattainable and creates a potential contracting value for bias and noise. Given that aggregated accounting information and share price are the only available performance measures, we derive conditions under which biased accounting information can be effectively utilized to mitigate the limitations of aggregated measures by better balancing incentives across different managerial activities. In particular, we show that biased accounting information, even if it contains substantial noise, can be better than unbiased accounting information, even if it contains no noise, given that price is also available as a measure of managerial performance. As long as there is a need to provide different incentives for different managerial activities, there is a need for biased accounting information since bias enables the de facto observation of the individual components of output. In addition to examining the role of biased accounting information, our analysis demonstrates the benefits of noisy accounting information. This suggestion seems counterintuitive since noise imposes risk on the manager without generating any benefits. While the usual intuition holds in most settings, it fails to recognize that there may be an equilibrium relation between accounting information and an endogenously determined share price. A reduction in the level of noise in accounting information motivates investors to curtail private information acquisition, which dilutes the information content of price and thus lessens the usefulness of price as a measure of managerial performance. Therefore, the optimal level of noise in accounting information is a tradeoff between the usefulness of price relative to the usefulness of accounting information as measures of managerial performance. It is important to emphasize that, in this paper, the benefit of distorted accounting information (bias or noise) that accrues to shareholders is independent of any managerial motivations to manipulate the disclosure system that characterize the "earnings management" literature (see Schipper 1989). Moreover, by focusing exclusively on the stewardship value of information, we show that bias and noise are desirable because they create a "bigger pie" to be shared by all. However, we do not consider the impact of bias and noise on other aspects of shareholder welfare. Bias and noise in accounting disclosures will also impact investors' risk-sharing opportunities both through the direct effect of the distorted public disclosure and the indirect effect on private information acquisition (see, e.g., Diamond 1985). Any overall equilibrium, of course, would have to consider the interaction of all these forces. The exact nature of these tradeoffs remains an unresolved issue. [ABSTRACT FROM AUTHOR]

This paper compares the disclosures firms would seek to make voluntarily with ‘optimal’ mandated disclosures in a single period, multi-firm model, in which there are covariances between firms' cash flows. This comparison is important because, in those circumstances in which the two types of disclosure coincide, it is possible to economize on the process of setting mandatory disclosures. The principal factors which contribute to the existence or absence of a correspondence between mandatory and voluntary disclosures are (1) the nature of the externality associated with a firm's disclosure, (2) the relation between the risk preferences of the shareholders of the firms making the disclosures and outside investors, (3) how much relative weight is placed on existing shareholders and outside investors' preferences in the social welfare function determining the optimal mandatory disclosure policy, and (4) the covariance structure between firms' cash flows. [ABSTRACT FROM AUTHOR]

ABSTRACT: This paper develops an (equilibrium) model of financial markets in which investors have only imperfect information about each other and hence can only make imperfect inferences (of what others know) from price changes. Search for (undisclosed) interim information about firms is time-consuming (costly); moreover, abilities to conduct fruitful search differ among investor groups. Under a "market" solution it is shown that there are clear incentives for search by those with unusual detective abilities and/or large resources. Offsetting this are strong incentives for voluntary disclosure by firms, but it is noted that these need not result in socially desirable disclosure decisions. A natural "cost-benefit" criterion for deciding whether required disclosure would be beneficial is identified which, in may cases, can be applied on the basis of very little information. The economic inefficiencies that may result from the use of "incorrect" criteria in establishing disclosure requirements, such as "full disclosure" or majority rule, are also identified. [ABSTRACT FROM AUTHOR]

We examine firm decisions to provide listings of sell-side analyst coverage on corporate investor relations (IR) websites. These listings are related to three major areas of financial research—voluntary disclosure, investor relations, and analysts. Our hand-collected data permit cross-sectional and time-series analyses. Firms are more likely to have such listings when analysts are more important information intermediaries and when firms are directly involved in managing their IR websites. For firms with listings, the probability of an analyst being included on the listing is increasing in firm awareness of and familiarity with the analyst, how active and favorable the analyst is, and the analyst's reputation. Additional analysis indicates similar results across self-hosting versus third-party hosting IR websites, with a notable exception that self-hosting firms exhibit a stronger preference for analysts who issue more favorable research about the firm. Decisions to add or drop analysts from listings reinforce the main results. Data Availability: Data are available from public sources identified in the text. JEL Classifications: G17; G24; M41. [ABSTRACT FROM AUTHOR]

The article informs that the purpose of this article is threefold. First, to explore some of the uses of the word "control" in the area of management. Second, to attempt to evaluate these uses in the light of their respective contributions to a logical and orderly structure from which one may view the job of management. Third, to assess what significance, if any, a concept of control might have on the field of accounting. In pursuing these ends, the paper will be developed in the following manner. The first section will examine the common classifications of the managerial functions in order to provide a certain amount of necessary background. The second section will present the most frequent concepts of control found in the management literature. The problem of definition will then be discussed and a criterion for the subsequent analysis will be established. The fourth section will provide an analysis of the conjunction of the management functions and the concept of control in the light of the criterion developed in the third section. Finally, some consideration will be given to the relationship between the function of control and accounting. In examining the common definitions of control, one is struck by two points.

1963 marks the 40th anniversary of the publication of economist John Maurice Clark's Studies in the Economics of Overhead Costs. This paper is a belated review of that important and significant volume. As far as, according to the author, this is the first review of this book by Clark to be given before an accounting audience and none has appeared in an accounting journal. Two of the sister arts, economics and statistics, recognized the accounting significance of this work. Distinguished accountants who were later to become presidents of the American Accounting Association prepared the reviews of it in the journals of their professional organizations. Clark makes the point repeatedly that acquisition of knowledge and technical skills by workmen and researchers is an overhead cost to the firm. He hints that these costs should be capitalized for they give rise to benefits of an enduring sort. Much of this paper has been taken up with criticism of a relatively minor sort of Clark's views and of the difficulty of implementing some of his notions. Such comments should not be allowed to mar the major sentiment the author hopes to express.

The article presents a short-run planning model for a decentralized firm, which includes a linear programming model for the allocation of scarce corporate resources. The decentralization philosophy is well known and its essence lies in the desire by large firms to delegate responsibility decision making on a broad basis throughout the organization. A classical decentralization problem occurs in the planning phase of a decentralized organization. It consists of the question of how to obtain an optimal plan for the firm as a whole while allowing each division to do its own planning. An important limitation to the decomposition technique is that only problems of a certain form can be subjected to the technique. The decentralization model presented has the general form required for the application of the decomposition technique. The "market" values are, in mathematical programming terminology, the dual values on scarce corporate resources. This description essentially applies to all applications of the decomposition methodology to the decentralized decision making problem.

We study a model in which financial reports are used in labor markets to learn about managerial talent. A manager manipulates reports to influence the labor market assessment of his talent. If investors are uncertain about the manager's incentives, manipulation introduces noise into the report and reduces its usefulness for the capital market. We consider price informativeness and expected reporting bias as measures of capital market efficiency and develop novel empirical predictions. We show that higher uncertainty about the manager's contribution to firm value can decrease price informativeness and earnings response coefficients. Intuitively, supplemental disclosures about managerial talent can mitigate the detrimental consequences of uncertain labor market incentives. Perhaps surprisingly, we show that the usefulness of such supplemental disclosures may increase in their susceptibility to manipulation. [ABSTRACT FROM AUTHOR]

Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms' choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto-dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a microfoundation for accounting measurement regulation. JEL Classifications: D02; D61; D83; H11; M40; M41; M48. [ABSTRACT FROM AUTHOR]

This paper introduces a model in which the firm's returns depend on trading volume when the firm defers disclosure, because market makers use volume to draw inferences about better-informed investors' private information on firm value. In addition, we show that a firm's commitment to a policy of timely disclosure of a broader range of outcomes dampens the slope coefficient on volume in a Taylor expansion of the log of the absolute value of returns on volume. The reason for this is that when a firm commits to a policy of timely disclosure of a broader range of outcomes, the deferral of a report indicates that the outcome is extreme. This heightens adverse selection. In turn, this makes informed trade more costly and hence less likely, thereby rendering returns less dependent on trading volume as a source of information about firm value. This result predicts that firms committing to more disclosure should experience a smaller slope coefficient on trading volume. Thus, the slope coefficient offers a potential tool for measuring the economic consequences of shifts in disclosure regimes. [ABSTRACT FROM AUTHOR]

Disclosure theory predicts that the likelihood of voluntary disclosures increases with the noise level in mandatory disclosures. We test this prediction by exploiting a unique setting where firms simultaneously provide two forecasts of the same metric—annual effective tax rates (ETRs). We find that managers are more likely to issue voluntary ETR forecasts when mandatory ETR forecasts contain more noise due to tax complexity, suggesting that managers resort to voluntary disclosure when mandatory disclosure constrains their ability to convey private information. Using analysts' ETR forecast revisions to assess the informativeness of the two ETR forecasts, we find that both forecasts are incrementally informative. In addition, analysts weight voluntary ETR forecasts more heavily, especially when voluntary ETR forecasts are non-GAAP based and when discrete items are present. Overall, we provide evidence on the relation between and the informativeness of voluntary and mandatory disclosures by examining two competing forecasts issued simultaneously. [ABSTRACT FROM AUTHOR]

This paper provides a general version of the accounting-based valuation model that equates the market value of a firm's equity to book value plus the present value of expected abnormal earnings. Prior theoretical work (e.g., Ohlson 1995, Feltham and Ohlson 1995, 1996) assumes investors are risk neutral and interest rates are nonstochastic and flat. Our more general analysis rests on only two assumptions: no arbitrage in financial markets and clean surplus accounting. These assumptions imply a risk-adjusted formula for the present value of expected abnormal earnings. The risk adjustments consist of certainty-equivalent reductions of expected abnormal earnings. A key issue deals with the capital charge component of abnormal earnings. It is measured by applying the (uncertain) riskless spot interest rate to start-of- period book value. Risks do not affect the rate used in the capital charge, and accounting policies do not affect the formula's constructs. An application of the general formula shows how the classic risk-adjusted expected cash flows model derives as a special case. [ABSTRACT FROM AUTHOR]

Recently, a system of audit firm rotation has been implemented for the audits of listed companies conducted in the European Union (EU). In the U.S., in contrast, the regulator decided against such rotation. Whereas proponents argue that rotation would strengthen independence and decrease audit market concentration, opponents stress the importance of auditors' learning effects, which would be eliminated by a change in auditors. In extending the market matching model of Salop (1979), we provide an analysis that integrates these contradictory views. We assume that both auditors' industry expertise and their experience in auditing a client decrease audit costs. We investigate the bidding strategies applied to re-acquire clients that were lost due to rotation, auditors' profit contributions, the equilibrium number of auditors (i.e., audit market concentration), and the economic importance of specific clients. Our findings indicate that the regulators' goals of simultaneously decreasing client importance and audit market concentration are in direct conflict and, therefore, the rotation system might have unintended consequences. Our model, thus, suggests how different institutional parameters give rise to economic forces that can support diverging decisions regarding the implementation of MAR. [ABSTRACT FROM AUTHOR]

This paper explores the determinants of the valuation allowance for deferred tax assets under SFAS No.109. We find that, consistent with SFAS No. 109, the allowance is larger for firms with relatively more deferred tax assets and smaller for firms with higher levels of expected future taxable income. The most important explanatory variable for the valuation allowance is the level of firms' tax credit and tax loss carryforwards, consistent with these items being more difficult to realize. We find little evidence that managers use the valuation allowance for earnings management purposes, although these tests may not be very powerful. [ABSTRACT FROM AUTHOR]

Previous research suggests that certain benefits may derive from the method used to account for business combinations and may affect how bidding firms structure and classify corporate acquisitions. This paper investigates whether benefits derived from accounting method are reflected in bid premia for target firms. Three estimates of bid premia are examined in 95 stock-for-stock acquisitions, 59 accounted for as poolings, and 36 accounted for as purchases. Sampling restrictions, covariance analysis, and a nonparametric matched pair comparison control for potentially confounding variables identified from prior research on bid premia determinants. The results show an association between acquisition accounting method and bid premia for target firms. [ABSTRACT FROM AUTHOR]

ABSTRACT: This paper investigates the effect that qualified audit reports have on the timeliness of Australian annual reports. The experiment in this study compares the reporting behavior of companies which receive audit qualifications with a random sample of companies which receive no such qualification and with the reporting behavior of the same companies in the years preceding the qualification. The results indicate that the incidence of a qualified audit report delays the release of the preliminary profit report (required by the Australian Associated Stock Exchanges) and the final annual accounts (required by the Uniform Companies Act, 1961). It also appears that the more serious the qualification, the greater is the delay. Possible reasons for these results are considered, and it is argued that the most likely explanations are an increase in both the time taken to complete the year-end audit and that spent in auditor-client negotiations. [ABSTRACT FROM AUTHOR]

ABSTRACT: Dramatic changes have occurred in recent years in the corporate financial reporting environment. The volume and complexity of pronouncements by the various policymaking bodies have noticeably altered the character of and demands made upon financial accounting. Yet, there appears to be a general absence of any widely adopted innovation in the financial accounting curriculum. This paper examines one of the more commonly witnessed curricula for financial accounting and attempts to assess it in the context of its contribution to the intellectual and ethical development of the student. The paper goes on to propose an alternative curriculum, a restructuring of the pedagogy of financial accounting. [ABSTRACT FROM AUTHOR]

Direct costing has become one of the most prominent current issues in the continuing discussion that surrounds the evolution of accounting theory and practice. Hence, it is appropriate at this time to review some of the arguments for and against the concept and to attempt to identify the principal issues in the controversy. The purpose of the author in this article is to examine these issues critically and dispassionately. This presentation is in the nature of an interim report, with primary attention focused upon the development and present status of direct costing but with some consideration of the prospects for the future also. Author's objective is to crystallize issues. It is possible that, given the present status of the accountant's art, they are irresolvable. The discussion in this paper will be confined to the implications of direct costing in external reports. There are two reasons for this. First, as indicated, it is in external reporting that the real controversy lies today. Second, the basic criterion guiding the selection of internal reporting practices is utility to management.

Motivating employees to work for the goals of the firm has long been one of management's most important and vexing problems. The search for methods that motivate effectively, that induce the employee to work harder for the firm's goals, led to experimentation with a wide diversity of devices. In recent years, several writers emphasized that the firm's accounting system has a direct influence on the motivation of managers. This paper (a) surveys the available findings of research done in the behavioral sciences and organization theory as they bear on motivation and (b) critically examines the accounting system and reports in the light of such findings. Decentralization contributes to effective motivation. The firm's accounting system facilitates decentralization and hence has an indirect but important impact on motivation. The direct use of accounting reports, such as budgets, for motivation can result in reduced performance, if the budget is imposed on the department manager. The accounting system facilitates decentralization, which is conducive to effective motivation. Furthermore, the careful use of accounting reports can directly contribute toward effective motivation by expressing goals and by supplying knowledge of performance.

The article highlights that the nature of the income report has never been set forth clearly by accountants but there seems to be an assumption that its basic nature is that of a report on certain of the activities of a business entity. In accordance with this view, the detailed presentation in the income statement of the expenses of the firm may be considered a procedure, which reveals the activities of the firm and to some degree, provides a basis for estimating the efficiency with which they were performed. However, this apparent endeavor of accountants to reveal activity has failed to provide for an itemization of those activities represented by the income of the firm. As a result, an investor, attempting to evaluate the activities of a firm by a study of income reports, might gather some information by an examination of the expenses of the firm but would remain largely uninformed as to how and in what manner the income was provided. It is the purpose of this paper to examine means and methods by which the nature of the source of the reported income of a firm may be revealed, as well as to review the nature of some of the expense items.

Under the title "Toward Uniform Inventory Pricing," the American Management Association has recently published the report on a panel session which formed a part of the Association's Financial Management Conference in New York City in November 1951. The leading Article therein is a paper read by Mr. H. T. McAnlyon "How Uniformity in Inventory Pricing can be Accomplished." The main object of the said paper is a proposed amendment to the laws to "remove the last obstacle to the immediate adoption of LIFO and to the establishment of substantiated uniformity in inventory valuations, preventing further inflation of profits if prices continue to rise." That "last obstacle" to an immediate and general adoption of LIFO is seen in the provision of the present Internal Revenue Code which requires that once a company goes on LIFO, the beginning cost values assigned to the inventory remain a floor for all future income determination. Present law does not admit a write-down of inventory values to cost if prices go below those applied in a company's LIFO inventory. In other words, if the companies adopting LIFO were permitted to adjust their cost basis to the lower price level which may prevail at the end of a year when prices have declined, most now hesitant would adopt LIFO, uniformity of inventory pricing would be reached, and the overstatement of profits generally avoided.

According to an old adage, competition is the life of trade. Exchange of ideas provides a surplus to improvement of educational processes. It is hoped that material dealing with the broader aspects of accounting education may be forthcoming for use in this department. Opinions might be exchanged on a variety of matters in connection with educational policy, curriculum alterations, course content, and the like. There are very few people who would favor a highly specialized education in accountancy to the exclusion of all general subjects. In some cases necessity rather than choice produces that unfortunate result. Public accountants, as customers of the colleges supplying graduates, are mud like other customers. They know what they like. They are not sure just why they hesitate to make suggestions for improvement. Manufacturers often try to learn to serve better by stirring customers to analyze the basis of their choices. Accounting teachers could do likewise. One of the advantages of work in a foreign language is the enforced contact with the mechanics of language structure. In addition, in many courses frequent papers and reports are expected which give further practice in the use of language.

The article focuses on the asset approach to elementary accounting. The paper is an attempt at an evaluation of this method in contrast to the usual modes of development in the early stage of presenting an introduction to accounting. The asset approach was planned, at first, to meet the more general needs of the student in the liberal-arts college. It is of equal merit for the business-administration student and for the student interested in accounting as a profession. Needless to say, the use of this departure from the usual approaches has made teachers conscious of weaknesses in the plan that had been followed and has convinced them of certain very definite gains accomplished. Accountants in public practice are recognizing the significance of the economic characteristics of assets in their influence on costs and are adjusting their procedures to the demands of such an emphasis. The natural starting point for the asset approach is not a condensed balance sheet stated in the form of a mathematical equation, but a study of the assets used by business enterprises in the conduct of their affairs.

The authors of "Tentative Statement of Accounting Principles" have accomplished something for which the accounting profession, teachers and practitioners alike, should be grateful. They have described carefully and concisely what accountants do and their "statement" indicates the nature of current "good accounting practice." They have not attempted to prepare a text for those who have no knowledge of fundamentals, for such texts exist in ample number. As was to be expected, the results of this effort did not meet with universal approval. Accounting, as author A.C. Littleton declares, is "...relative and progressive. The phenomena which form its subject matter are constantly changing. Older methods become less effective under altered conditions: earlier ideas become irrelevant in the face of new problems." Professional accord seldom occurs in such fields of knowledge. Fortunately much of the recorded disharmony is more apparent than real: Disagreements frequently arise when conclusions are stated without reference to premises. The evolution of accounting practice sometimes, in fact usually, proceeds more rapidly than the statement of postulates. It is therefore intended, in this paper, to indicate how some of the grounds for discord will disappear when the premises of an accounting and a theory of business enterprise are made explicit, and to suggest that some of the work by the committee for revision should be concerned with a statement of premises and a theory.

Two opposing hypotheses attempt to explain the effects of inflation upon business enterprise. The first maintains that business profits by inflation due to the rise in prices which it engenders. The second affirms that inflation is a grave danger to business, gutting enterprises of their working capital. The first of these two hypotheses has recently been attacked by a number of German and French accounting theorists who have attempted to demonstrate that the standard accounting calculation of profits does not give accurate results during periods of rapidly changing prices. The second hypothesis is indeed most seductive, but, unfortunately, it has never been verified by a positive study of the facts. The object of this study is to investigate quantitatively the extent to which the one or the other of these theories found application in the French inflation of 1919-1926 and to discover the net effects of inflation upon the financial position of French enterprises. Several factors such as reconstruction, tariffs, improved industrial techniques, have all played an important part in these changes.

The paperboard group manufactures a heavy kraft and chipboard called liners, which form the outer and inner surface of combined board in the container industry; also a chipboard used in containers and a manila and cupboard with a special surface finish for folding boxes. The container group uses the liners and chip by passing even layers together to make and heavier board called solid fiberboard, or by Inserting a corrugated or fluted straw sheet between two liners there is made a corrugated board. The folding box group accepts the board as made by the mills, and without combining It, print and cut into finished product. The term container is used to designate a box or outer package made of paper fiber, and while limited In gross dimensions may be of any size or shape. The container group has the largest membership of our three divisions and represents about seventy five percent of the output of the country. This totaled in 1924 1,260,000 tons. It is with this group that the accounting work has been done and principally in connection with the corrugated branch.