the changing time series properties of earnings cash flows and accruals has financial reporting become more conservative abstract this paper documents changes in the patterns of earnings cash flows and accruals over the last four decades in the absence of a generally accepted definition of conservatism a number of measures of reporting conservatism are identified and examined these measures rely on the accumulation of nonoperating accruals the timeliness of earnings with respect to bad and good news characteristics of the earnings distribution and the market to book ratio the patterns are consistent with an increase in conservative financial reporting over time the findings have implications for accounting standard setting regulation of financial information and financial statement analysis

contracting for software development software contracting is a multi faceted issue that involves legal economic managerial and technological considerations to better understand the economic aspect of software contracting this paper provides a summary review of software development contracts followed by a gametheoretic model developed to incorporate incentive and information issues associated with software contracting in the model an outside contractor is hired to develop a software system over multiple periods due to the uncertainties about costs or technology the developer faces the risk of having to abandon the project at an intermediate phase the user is better informed of the benefit of the system while the developer privately discovers the development costs as the project advances given the limited information the contracting parties make decisions in their own interest leaving each party vulnerable to the other s opportunistic behavior in this setting we construct a viable contract that aligns the incentives of the contracting parties and produces the same equilibrium outcome as in in house development we also relate the implications of the model to the actual contract cases

contracting contingencies and single family house prices this paper investigates the relationship between single family house prices and contingent terms in contracts since contingencies create uncertainty the market should exact a price premium the results indicate that the contracting for property rights affects house prices in the predicted ways

contracting in the shadow of the law economic models of contract typically assume that courts enforce obligations based on verifiable events corresponding to the legal rule of specific performance as a matter of law this is not the case this leaves open the question of optimal contract design given the available remedies used by the courts this article shows that american standard form construction contracts can be viewed as an efficient mechanism for implementing building projects given existing legal rules it is shown that a central feature of these contracts is the inclusion of governance covenants that shape the scope of authority and regulate the ex post bargaining power of parties our model also implies that the legal remedies of mistake impossibility and the doctrine limiting damages for unforeseen events developed in the case of hadley v baxendale are efficient solutions to the problem of implementing complex exchange

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

risk averters that love risk marginal risk aversion in comparison to a reference gamble we propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles we measure marginal risk aversion in two dimensions mean and variance data from a field experiment is used to study marginal risk aversion our results suggest that individuals rely on a reference gamble when assessing marginal risk individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior copyright 2008 oxford university press

a theory of contracts with limited enforcement we present a theory of contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset public enforcement relies on remedies for breach private enforcement comes from severing relationships we first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly whether a long term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller while under complete information the optimal contract would remain stationary non stationarity might arise under asymmetric information enforcement constraints are time dependent and easier to satisfy as time passes indeed a high cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on yet such take the money and run strategy becomes less attractive as time passes and can be prevented with backloaded payments the optimal contract thus goes through two different phases first quantities and prices increase at the inception of the relationship later on the contract looks more stationary the public and private sides of enforcement plays different roles in determining the length of the earlier phase of contracting long run screening distortions encapsulate the quality of enforcement offering de facto a link between the quality of the legal system and contractual performances

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

contracting in strategic situations abstract cooperative games are distinguished from noncooperative games by the ability to form binding pre play agreements the notion of a binding agreement however is ambiguous for two reasons first contracts can be enforced by various provisions for the payment of damages in the event of breach second contracts generally are incomplete not specifying unique actions for each possible state of the world this paper examines the interaction between incompletely specified and enforced pre play contracts and the outcomes that are achieved in 2 player strategic situations comparisons are made among various damage measures for breach of contract

strategic ex ante contracts rent extraction and opportunity costs this article cosiders the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers the seller s optimal strategic ex ante contract more accurately reflects joint opportunity costs of the seller and the contracted buyer and therefore extracts more rent from the entrant moreover this ex ante contract mitigates the seller s ex post rent seeking vis a vis the contracted buyer accordingly it may create more social welfare than the absence of ex ante contracts depending upon the contracted buyer s financial constraint and the distributions of trade surplus implementation of the optimal strategic ex ante contract and policy implications are discussed

earnings quality in uk private firms comparative loss recognition timeliness abstract uk private and public companies face substantially equivalent regulation on auditing accounting standards and taxes we hypothesize that private company financial reporting nevertheless is of lower quality due to different market demand regulation notwithstanding a large uk sample supports this hypothesis quality is operationalized using basu s 1997 time series measure of timely loss recognition and a new accruals based method the result is not affected by controls for size leverage industry membership and auditor size or by allowing endogenous listing choice the result enhances understanding of private companies which are predominant in the economy it also provides insight into the economics of accounting standards

the loan contract mechanism of financial control industry banking the style of banking under which a single bank satisfies all the external financial needs of an industry was recognised by alfred marshall i9i9 as a positive force in the development of new industries today many of marshall s reference industries have reached maturity but their industry banks continue to play an active role not only in financing their production and expansion but also in their management cable i985 prais 198i to understand the economic impact of industry banking this paper explores one aspect of it bank directed industry coordination and control

measuring the effect of risk attitude on marketing behavior despite extensive study researchers continue to search for consistent and reliable measures of risk preferences to explain market behavior we find that a measure combining experiments rooted in expected utility theory and measures derived from surveys explains spot and contractual sales but does not exhibit substantially greater explanatory power than its underlying components survey based measures are generally more significant indicators of marketing choices but experimental measures reveal how risk attitudes vary over a range of probable outcomes which is important in light of increased commodity price volatility given recently identified limitations on the applicability of expected utility theory we suggest that researchers include survey methods to obtain low cost supplemental measures

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

credible commitments contract enforcement problems and banks intermediation as credibility assurance abstract we consider contract enforceability problems in credit transactions and justify a bank as an organizational solution to market breakdown due to unenforceable contracts specifically we explain i why loan commitments exist and ii why banks exist to sell such commitments a loan commitment resolves moral hazard more efficiently than any combination of inside equity and spot credit however the market breaks down if commitment sellers are individuals because their promises to honor contracts are not credible with a large bank a perfect sequential equilibrium is obtained in which credibility is restored

on designing contracts to guarantee enforceability theory and evidence from east west trade this article suggests how the literature on east west trade and the choice of contracts can be integrated into recent work on the theory of the multinational corporation and contract enforceability by using the properties of foreign direct investment as a benchmark it explains why one type of contract tends to prevail over another the explanation rests on the premise that because of the prohibition on fdi contracts are used which most closely replicate the benefits of intra firm trade while providing managerial and risk shifting services to the eastern partner

earnings as an explanatory variable for returns in this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings returns associations the primary model motivating this research relies on the idea that book value owners equity and market value are both stock variables indicating the wealth of the firm s equity holders the related flow variables after adjusting for dividends are respectively earnings divided by price at the beginning of the return period a p 1 and market returns it then follows that earnings divided by beginning of period price should be associated with stock returns although models based on a relation between market value and book value are used occasionally in the accounting research literature see for example landsman 1986 harris and ohlson 1987 and barth

early contract renegotiation an analysis of us labor contracts 1970 1995 this article examines the ex post flexibility of us labor contracts during the 1970 95 period by investigating whether unanticipated changes in inflation increase the likelihood of a contract being renegotiated prior to its expiration we find empirical support for this hypothesis specifically our results indicate that renegotiations are triggered principally by large and infrequent price shocks of either sign when combined with evidence that ex ante contract durations are shorter during episodes of increased inflation uncertainty our results suggest that these contracts are flexible both ex ante and ex post to changes in the evolution of inflation

the design of contracts and remedies for breach in the first part of this article hypothetical contracts providing for all possible uncertain contingencies are considered in the next part contracts providing for only some contingencies are examined and are shown to be advantageous due both to difficulties that could arise in making and enforcing contingent terms and to the presence of implicit substitutes for them in the following major part of the article two of these substitutes for contingent terms are analyzed remedies for breach and the opportunity for renegotiation the existence of both is demonstrated to induce parties to behave approximately as they would under detailed contracts

damage measures and incomplete contracts i present a model of two party contracts that allows for incomplete specification of future states and actions i examine various damage measures under the assumption that courts protect only reasonable reliance expenditures so that parties make efficient reliance choices the expectations damage measure is preferred to the alternative damage measures no matter what the contractual terms are

has the information content of quarterly earnings announcements declined in the past three decades this paper examines changes in the information content of earnings over the past three decades using the two metrics from beaver 1968 abnormal trading volume and abnormal return volatility we find no evidence of a decline in the information content of earnings announcements over the past three decades as measured by both abnormal trading volume and return volatility around quarterly earnings announcements if anything our results suggest an increase over time in the informativeness of quarterly earnings announcements variables reflecting changes in firm specific factors account for a portion of the observed increase

the theory of contracts and agency there has been much work recently on the effects of informational asymmetries on allocation and economic welfare these asymmetries render complete contracting infeasible or at least unenforceable and the resulting inefficiency creates incentives for information gathering various kinds of contracts emerge from the interaction of these incentives with the costs of contracting in this survey we shall attempt a brief critical review of the contracts literature point out some open questions and suggest some directions for future research section two discusses how moral hazard problems are solved in simple principal agent models section three considers adverse selection problems the fourth section discusses the form of contracts that arise in response to the above problems in labor markets finally in the last section we consider some recent developments and open questions

limited contract enforcement and strategic renegotiation this paper presents a strategic theory of contract renegotiation in this theory suboptimal contracts are put in place initially to protect one party against undesirable a ctions by another party and are renegotiated once the danger is past the authors develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes so that only a complicated contract or renegotiation will serve unlike most previous accounts of contract renegotiation this theory does not rely on exogenous uncertainty to motivate renegotiation copyright 1988 by american economic association

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

contractual flexibility rent seeking and renegotiation design an empirical analysis of information technology outsourcing contracts this paper examines renegotiation design in contracts for outsourced information technology it services whereas prior literature in information systems has highlighted the likelihood of ex post rent seeking engendered by renegotiation we build upon literature on incomplete contracts to posit that renegotiation can be pareto improving by incorporating contingencies revealed ex post research on contract renegotiation has been hampered by two sets of challenges the lack of appropriate data and empirical challenges in identification we circumvent this problem both by appropriate data collection and by employing an identification strategy to address alternate causal explanations we propose a measure pareto improving amendments to assess renegotiation outcomes that enhance the value from outsourcing by hazard equilibration and by incorporating learning using a unique sample of 141 it outsourcing contracts we examine the role of decision rights delineated ex ante in enabling pareto improving amendments and in resolving the trade off between adaptation and rent seeking we find that flexibility provisions termination for convenience rights and contractual rights whereby vendors are granted rights to reuse know how are associated with pareto improving amendments the results are robust to potential endogeneity of contractual provisions when parties have feasible foresight and to the possibility of adverse selection in the sample we also examine alternate explanations from the literature on contractual breach implications for practitioners and researchers are discussed this paper was accepted by sandra slaughter information systems

opportunism in multilateral vertical contracting nondiscrimination exclusivity and uniformity comment an input supplier selling to competing downstream firms would benefit from publicly committing at the outset to all contracts efficient commitment however would require complete contracts the authors study instead bilateral contracting without commitment regarding others terms each firm then fears that the supplier might opportunistically renegotiate another s contract to increase bilateral profit at the firm s expense the authors show that nondiscrimination clauses generally cannot curb such third party opportunism even with symmetric firms to reassure firms crude forms of commitment may be adopted this could explain the pervasiveness of exclusivity arrangements and the striking uniformity and intertemporal rigidity of franchise contracts copyright 1994 by american economic association

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

measuring producers risk preferences a global risk attitude construct in applied agricultural economic research various risk attitude elicitation techniques are used here we investigate whether risk attitude measures rooted in the expected utility framework are related to measures rooted in the multi item scale framework using a second order factor analytical model and data obtained from personal computer guided interviews with 373 farmers we investigate whether the common variance among the latent risk attitude measures can be accounted for by a global risk attitude construct we find that the different risk attitude measures are related and that the global risk attitude construct is significantly related to farmers intention to use futures contracts our research suggests that farmers risk attitude is a higher order characteristic that cannot be effectively extracted by a single measure in empiricalstudies deal ing with risk risk attitudes and producers market behavior various risk attitude measures are used two major approaches to quantify directly farmers risk attitudes can be distinguished measures derived from the expected utility framework and measures derived from responses to multi item scales e g antle chavas and holt goodwin and schroeder saha shumway and talpaz smidts the purpose of this research is to test whether risk attitude measures rooted in the expected utility framework are related to the risk attitude scales rooted in the multiitem scale approach and if so whether these risk attitude measures share a common

the right of first offer abstract this paper examines the right of first offer which requires a seller to bargain with the contracted buyer before subsequent buyers arrive the contract also prevents the seller from selling his unique asset to subsequent buyers at a price below what he offers to the contracted buyer the right of first offer makes the seller less aggressive in bargaining with the contracted buyer who is privately informed about his valuation such a contract can reduce inter temporal misallocation in which a subsequent buyer gets the asset when the contracted buyer has higher valuation but it also may cause misallocation in which the contracted buyer gets the asset when subsequent buyers have higher valuations overall whether the right of first offer can increase the joint surplus for the seller and the contracted buyer as well as social welfare depends on the contracted buyer s renegotiation power and the distribution of the buyers valuations this paper also discusses the differences between the right of first offer and the most favored customer clause

the relation between earnings and cash flows abstract a model of earnings cash flows and accruals is developed assuming a random walk sales process variable and fixed costs and that the only accruals are accounts receivable and payable and inventory the model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating cash cycle also the model is used to predict serial and cross correlations of each firm s series the implications and predictions are tested on a 1337 firm sample over 1963 1992 both earnings and cash flow forecast implications and correlation predictions are generally consistent with the data

trade disputes and settlement we develop a model of trade agreements with renegotiation and imperfectly verifiable information in equilibrium trade disputes can occur and can be resolved in a variety of ways governments may settle early or trigger a court ruling and in the latter case they may implement the ruling or reach a post ruling settlement the model yields predictions on how the dispute outcome depends on the contracting environment and how it correlates with the optimal contract form we find support for a key prediction of our model using data on the outcomes of actual trade disputes in the general agreement on tariffs and trade world trade organization

on marginal risk behavior this paper examines marginal risk behavior in a decision theoretic setting that is sufficiently general to accommodate any decision making model representable by a certainty equivalent the analysis shows that risk aversion in its usual sense is a special case of marginal risk aversion associated with mean preserving changes in gambles thus marginal risk behavior and risk behavior are not inherently different rather they manifest similar behavior evaluated at different gambles the paradox of marginal risk loving risk averters arises from mixing definitions of an increase in risk

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

expectation damages divisible contracts and bilateral investment this paper examines the efficiency of expectation damages as a breach remedy in a bilateral trade setting with renegotiation and relationship specific investment by the buyer and the seller as demonstrated by edlin and reichelstein 1996 no contract that specifies only a fixed quantity and a fixed per unit price can induce efficient investment if marginal cost is constant and deterministic we show that this result does not extend to more general payoff functions if both parties face the risk of breaching the first best becomes attainable with a simple price quantity contract

initial evidence on the role of accounting earnings in the bond market we document that 1 the incidence of bond trade increases during the days surrounding earnings announcements 2 there is a bond price reaction to the announcement of earnings and 3 there is a positive association between annual bond returns and both annual changes in earnings and annual analysts forecast errors all of these effects are larger when earnings convey bad news or when the underlying bond is more risky taken together our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market

minimum bill contracts theory and policy this paper examines the efficiency implications of minimum bill cont racts and concludes that minimum bill provisions promote rather than impede efficient adaptation to changing circumstances in particular minimum bills provide a simple mechanism by which parties faced wit h uncertain demand and rising marginal cost can approximate joint pro fit maximizing payment schedules in transaction specific relationship s governed by long term contracts the paper also questions the merit of proposals for legislative or regulatory intervention to reduce mi nimum bill obligations in natural gas contracts and considers the ap propriate legal status of these provisions in the event of contractua l failure copyright 1988 by blackwell publishing ltd