accounting method choice opportunistic behavior efficient contracting and information perspectives abstract three alternative but not mutually exclusive perspectives on accounting method choice are contrasted the opportunistic behavior efficient contracting and information perspectives much of the empirical work on accounting method choice is based on the opportunistic behavior perspective the malmquist and main and smith papers are attempts to view accounting method choice as a means of improving the monitoring capabilities of contracts which rely on accounting numbers the papers serve as useful vehicles for illustrating the difficulties of delineating a set of maintained assumptions that result in hypotheses about how accounting method choice affects the monitoring characteristics of contracts and distinguishing between hypotheses based on the three perspectives on accounting method choice

the role of knowledge codification in the emergence of consensus under uncertainty empirical analysis and policy implications the aim of the article is to empirically analyse the main factors which allow the emergence of consensus moreover we raise the question of the nature of the codified process involved which seems to be too reducing to promote knowledge flows within the community and therefore to contribute to learning processes and better choices about the future our analysis relies on a prospective investigation based on a delphi type study carried out by beta in 1994

accounting for retail land sales analysis of a mandated change abstract this study assesses the stock market s reaction to a series of events leading up to a mandated change in accounting for retail land sales evidence is found to support the conclusion that the market reacted to some of these events in a manner consistent with the effects of the accounting change on debt annagement contracts a distinctive aspect of the analysis is the efficient use of security returns data to detect market reactions and to derive empirical distributions of test statistics employed the analysis is extended by a model for grouping regression equations known as seemingly unrelated regressions however the gains from this extension are modest

efficient contracting and the choice of accounting method in the oil and gas industry abstract this paper s results are consistent with the choice of accounting method in the oil and gas industry being dominated by measurable characteristics of firms and guided by the principles of efficient contracting the results are inconsistent with an alternative hypothesis opportunistic behavior by managers the efficient contracting explanation is also consistent with the empirical findings from earlier studies e g lilien and pastena 1982 and deakin 1979

on the diversification observability and measurement of estimation risk this paper reexamines how risk return relationships are affected by investor uncertainty about the exact parameters of the joint rate of return distribution we attempt to clarify results relating to three central issues first we address the issue of diversification focusing on an apt factor model framework second we discuss the observability of estimation risk and describe research experimental designs that should encompass the existence of estimation risk and reveal it in the data finally we suggest exploiting contemporaneous return observations on high and low information securities to aid in the measurement of return parameters for low information securities

the impact of sfas no 8 on equity prices of early and late adopting firms abstract this study examines the economic consequences of statement of financial accounting standards no 8 sfas no 8 compared to a matched control group both early adopters and late adopters of sfas no 8 exhibited significantly negative excess returns in the exposure draft release period even after adjusting for a size effect in january weighted least squares and ordinary least squares cross sectional regressions were compared the late adopter regressions weakly support contracting and political cost theories

the magnitudes of financial statement effects and accounting choice the case of the adoption of sfas 87 abstract we examine the accounting choice decision in the context of the timing of adoption of sfas 87 unlike most prior studies we consider interactions between firm characteristics and the magnitudes of the financial statement effects of an accounting decision we expect that including interactions will both enhance the ability to explain accounting choice and facilitate distinction between omitted variables ball and foster 1982 and hypothesized relations results are consistent with these expectations

output price indices for regulated monopoly we construct an output price index for monopoly firms based on the firm s markups over marginal costs computation of the index requires product specific markups over marginal costs or demand elasticities the form of the tornqvist exact output price index number is the same in both regulated and unregulated cases

determinants of intramethod choice in the oil and gas industry abstract procedural flexibility can have a substantial impact on reported costs revenues expenses and balance sheet valuations until 1978 oil and gas companies had considerable flexibility in applying full cost and successful efforts a unique opportunity to measure the income effect of firms procedural choices occurred when the sec specified the exact procedures that must be followed by oil and gas producers when they account for exploratory and development costs under both the full cost and successful efforts methods in complying with the new rules firms were required to adjust retained earnings retroactively to reflect what it would have been if the new procedures had been in effect all along these retained earnings adjustments provide a measure of the income effect of procedural choices this study shows that economic incentives influence the procedural accounting choices which were made by oil and gas producers the same economic incentives also influence the choice of full cost or successful efforts finally the discriminatory ability of firms economci incentives is most powerful when firms reporting strategies are defined in terms of both choice of accounting methods and procedural applications within those methods

evidence on the effect of bond covenants and management compensation contracts on the choice of accounting techniques the case of the depreciation switch back abstract provisions of bond indenture agreements and management compensation contracts are examined to derive testable implications concerning management s incentives to choose among alternative accounting techniques the hypotheses are subjected to empirical examination by investigating the voluntary change from accelerated to straight line depreciation for financial reporting purposes only the methodology utilized incorporates an expectations model of accounting earnings in an attempt to separate out of the effects of earnings announcements from accounting change announcements which are often concurrent the evidence from both price and non price data is not consistent with the general hypothesis that bond covenants and management compensation contracts are important determinants of the decision to change depreciation techniques five potential explanations for the results are offered

crossovers dividends and the size effect the size effect may have been the result of high stock volatility and low dividend payments suppose an equity market is partitioned into a large stock index and a small stock index and suppose that over a given period of time each of the indexes retains its share of the total market capitalization price volatility will cause some stocks to cross over from one index to the other which will result in higher returns for the small stock index and lower returns for the large stock index dividend payments by large companies could offset the effect of the crossovers but they have historically been insufficient to do so hence the size effect

aggregation of test statistics an evaluation of the evidence on contracting and size hypotheses abstract more powerful tests of a theory of choice of accounting methods and the effect of changes in these choices on equity values are provided the power increase comes from efficiently aggregating results across studies one conclusion is that at least six variables common to more than one study have explanatory power these variables are managerial compensation leverage size risk and constraints on interest coverage and dividends another conclusion is that the posterior probability that the theory taken as a whole has explanatory power is close to one this conclusion includes the effect of variables that only appear in one study

taxes and stock return seasonality evidence from the london stock exchange prior to the introduction of capital gains taxes seasonality is not detected in the returns of firms that traded on the london stock exchange however after the imposition of a capital gains tax the british stock return data exhibit apparent monthly effects in both jan uary and april additional analysis reveals that while the april effect is consistent with the tax loss selling hypothesis the january effect cannot be attributed solely to the introduction of capital gains taxation furthermore the authors efforts indicate that much caution should be exercised when interpreting studies that compare results from non u s data sources with those from u s data copyright 1987 by the university of chicago

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

measuring the nominal value of financial services in the national income accounts measuring the nominal value of financial services in the national income accounts i introduction the treatment of financial services in national income accounting has been a sometimes controversial subject for over thirty years for economies which specializes in financial services such as switzerland and luxembourg the treatment of these services has always been critical to an accurate assessment of their domestic product and foreign trade status with the recent growth in the financial services sector in the united states this controversy and its resolution are again topical in the united states between 1977 and 1985 the commercial banking share of gnp increased by 34 7 percent while its share in national employment increased by 23 3 percent furthermore the internationalization of capital markets has significantly increased the importance of financial services in the u s trade accounts in this paper we examine both current and proposed treatments of financial services in the national income accounts specifically we briefly review the concepts and methods currently used by the united nations u n and the united states u s commerce department to determine the nominal value of financial services with particular emphasis on their treatment of uncharged for services many financial services are provided without an explicit charge these uncharged for financial services can be viewed as implicit payments to depositors for their funds or simply as payments in kind the issue in the national accounting literature is whether the net interest earned by financial firms should be treated as the value of these uncharged for services and whether it should be included in the nominal value of output in the national accounts 1 we then evaluate a variety of possible methods for inferring the nominal value of financial services from existing sources of information these methods are called imputation methods we base our evaluation of alternative imputation methods on their consistency with a microeconomic theory of financial firms grounded in a user cost of money concept developed by donovan 1978 and barnett 1980 and applied to financial firms by hancock 1985 we show that several of these imputation methods are inconsistent with or not closely related to this microeconomic foundation we then derive a general imputation formula within the financial firm framework and demonstrate how the two leading imputation methods those of the u s department of commerce and the u n statistical office are specializations of this formula our framework thus provides a heretofore absent economic rationalization for the imputation methods commonly used we then briefly introduce a conceptual framework for the construction of a financial firm output price index this index yields a measure of real output consistent with the accounting approaches we summarize our points in the concluding section ii current views of interest payments in national accounts the revenues of financial firms consist largely of net interest the difference between interest received primarily from loans and interest paid primarily on deposit accounts and explicit service charges service charges are typically only a minor part of the total revenue received by banks and fall short of covering the non interest cost of operations by implication financial firms provide services for which there is not an explicit charge and the cost of these services must be partly or wholly offset by net interest controversy however exists over how to value the implicit financial services provided because of long held differences about the way in which interest is viewed as a transfer payment between borrowers and lenders or as a payment for services rendered interest as a transfer payment in this view financial firms merely serve as conduits for the interest payment flows between borrowers and lenders depositors

cross sectional association between abnormal returns and firm specific variables abstract abnormal returns market model prediction errors are the subject of many event studies in accounting and finance literature conditional on the event of interest researchers have recently used cross sectional regressions to examine relations between abnormal returns and firm specific variables this paper demostrates that non constant variences and covariances in market model residuals across firms introduced bias in the estimated slope coefficients of the independent variables i e the expected signs of the estimated slope coefficients can be predicted a priori a method is develope to removed the bias in the estimated slope coefficiets and is found to be effective this method explicitly takes the dependence among abnormal returns across firms into account methods that assume abnormal returns across firms to be independent do not control for such bias

mandated accounting changes and debt covenants the case of oil and gas accounting abstract the relationships among mandated accounting changes bond covenants and security prices has been the focus of several studies these studies have provided mixed evidence on the existence of a bond covenant effect on security prices this paper suggests that inconclusive prior results are a consequence of inappropriately measuring the default risk of debt using an option pricing framework it is shown that the debt to equity alone is not an adequate measure of default risk in particular both the debt to equity ratio and the total risk of the firm are necessary to adequately model the bond covenant effects of an accounting change these theoretical propositions are supported by the empirical analysis of the security market reaction to changes in oil and gas accounting

measuring financial service output and prices in commercial banking despite the importance of commercial banks as a major provider of financial services a bank output price index for financial services has not been developed this paper derives such an index from the economic theory of financial firms and the application of the user cost of money concept the derived index is superlative non parametric and the tornqvist type an empirical application using the federal reserve s functional cost analysis data for banks with deposits over 200 millions dollars shows that these banks experienced an output growth of 7 over the years 1985 88 and financial services prices declined by 2

determinants of corporate pension funding strategy abstract several hypotheses concerning pension funding strategy are tested in a cross sectional regression model on a sample of 255 firms results are consistent with the following explanations 1 finance incentives tax benefits and financial slack for high level funding 2 labor incentives for low level funding and 3 financial statement incentives relating to political costs for high level funding and debt contracting costs for low level funding pension funding strategy appears to be complex involving tradeoffs between funding incentives the nature of these interactions and tradeoffs remains to be clarified through future research

stock price reaction and value relevance of recognition versus disclosure the case of stock based compensation this study examines the equity price reaction to the pronouncements related to accounting for stock based compensation and assesses the value relevance of recognition versus disclosure in financial reporting we document that firms exhibit significant abnormal returns around the issuance of the exposure drafts proposing to require recognition of stock based compensation costs and also around the event reversing that decision to require disclosure only while encouraging recognition we also document that the abnormal returns are most pronounced for high tech high growth and start up firms our results are consistent with the contracting theory and show that disclosure is not a substitute for recognition r 2002 elsevier science b v all rights reserved

evidence of the impact of mandatory changes in accounting principles on corporate loan agreements abstract the theory in this paper predicts that mandatory changes in accounting princples can affect the measurement rules defined in restrictive covenants in firms lending agreements consequently those mandatory changes can have an impact on the value of a firm s equity even if the changes appear to be merely cosmetic this contracting cost theory is tested by examining of both event related and cross sectional abnormal performance of the equity of a sample of firms when the accounting princples board changes accounting princples for business combinations the theory provides at best in incomplete explanation of the observed abnormal performance

origin of predictable behavior further modeling and applications economic theory is founded on the assumption that agents act as if they are able to maximize according to well behaved preferences regardless of how complex their decision problems might be consequently the theory has never investigated the consequences of a genuine gap between an agent s decision making competence and the difficulty of a decision problem called a c d gap in a recent paper 1983 hereafter called the origin paper i outlined a general theory for investigating the latter possibility a major theme was that recurrent pattern in behavior arises because of decision making uncertainty due to a c d gap so that uncertainty becomes the basic source of predictable behavior here i discuss certain theory topics that were only sketched in the origin paper and briefly suggest a few related applications to pursue these objectives i begin with a short restatement of the reliability condition introduced in the origin paper

abandoning the transactions based accounting model weighing the evidence abstract i develop a benchmark for evaluating whether fair values disclosed by banks differ from investors estimates of the market value of financial assets and liabilities using this benchmark i conclude that the hypothesis that disclosed fair values closely approximate investors estimates should be rejected i present evidence suggesting that the procedure used in establishing fair values results in an understatement of the value of financial assets an an overstatement of liabilities i also conclude that the reaction of bank stocks to the adoption of sfas 105 107 and 115 is more consistent with regulatory concerns and not with potential adverse effects of those statements for contracting

debt covenants and accounting choice abstract in this issue duke and hunt and press and weintrop show that leverage is significantly related to the existence of and closeness to accounting based debt covenants alternative rationales for this relation are presented the theory requires more rigorous specification to define closeness to covenants and determine which measure of leverage produces a more appropriate proxy for closeness to covenants then healy and palepu investigate a sample of firms close to their dividend restriction and find in general they are no more likely than other firms to change accounting methods their sample selection criteria reduces the generalizability of their results

the economics of rumours this paper studies a class of information transmission processes which we call rumours the distinctive features of these processes are that the information transmission takes place in such a way that the recipient does not quite know whether or not to believe the information and that the probability that someone receives the information depends on how many people already have it specifically we study an example in which there is an investment project with returns only known to a few people these people have a cost of undertaking the project and this cost is private information the only information the other agents receive is that someone else has invested they are not told whether that person actually knew the returns or whether he too was just acting on the basis of his observation of others they use their optimal bayesian decision rule to decide whether to invest we show that for a wide class of alternative specifications this decision rule has the property that a positive fraction of those who observe the rumour will not invest in this sense a rumour cannot mislead everybody counter intuitive comparative statics results are obtained for example more information and higher productivity may reduce welfare while changing the speed with which the rumour spreads has no welfare effect

the aggregate and distributional effects of the tax reform act of 1986 on firm valuation the authors examine the aggregate and distributional effects of the tax reform act of 1986 on equity values of publicly traded corporations the results show that the effect of the act on the aggregate equity value of corporations was consistent with the present value of the projected added tax collection from the corporate sector the cross sectional variation in the magnitude and direction of the stock price response to the tax reform act of 1986 was a function of both the direct and indirect consequences of the act on the firms future cash flows copyright 1991 by university of chicago press

cost of capital to the hospital sector this paper provides estimates of the cost of equity and debt capital to for profit and non profit hospitals in the u s for the years 1972 83 the cost of equity is estimated using alternatively the capital asset pricing model and arbitrage pricing theory we find that the cost of equity capital using either model substantially exceeded anticipated inflation the cost of debt capital was much lower accounting for the corporate tax shield on debt and capital paybacks by cost based insurers lowered the net cost of capital to hospitals

an investigation of capital market reactions to pronouncements on fair value accounting this paper examines the impact of twenty three pronouncements related to fair value accounting fva rules on equity prices of financial institutions the results document that announcements that signal an increased decreased probability of issuance of fva standards produce negative positive abnormal stock price reactions for sample banks further the magnitude of the stock price reactions is negatively related to a bank s primary capital ratio and positively related to the ratio of the book value of the investment portfolio to total assets and the ratio of the difference between the market and book value of the investment portfolio to total assets

an empirical analysis of the economic implications of fair value accounting for investment securities abstract this paper analyzes security returns of bank holding companies and insurance companies during periods surrounding the adoption of sfas 115 we find bank share prices were negatively affected by the examined events but find little share price reaction for insurance companies our evidence suggests banks were adversely affected by the standard because of problems with the standard s market value accounting approach cross sectional analysis of event period returns shows that banks that more frequently traded their investments with longer maturing investments and that are more fully hedged against interest rate changes were the most negatively impacted by the standard

the economic determinants of the market reaction to proposed mandatory accounting changes in the oil and gas industry a cross sectional analysis abstract this paper examines the economic reasons for the observed negative abnormal common stock performance of firms whose reported earnings and stockholders equity were negatively affected by the proposed elimination of full cost accounting in the oil and gas industry four explanations of the market effects of this mandatory accounting change are examined 1 naive investor theory 2 modified naive investor theory 3 contracting cost theory and 4 estimation risk theory these hypotheses are developed in detail and used to generate variables for a cross sectional model which explains observed return behavior the effect of the accounting change on total stockholder s equity the existence of financial contracts denominated in terms of accounting numbers and to a lesser extent firm size are shown to be important explanatory variables the importance of these variables is consistent with both the contracting cost and estimation risk theories

does it pay to change your company s name a stock market perspective a company s name is commonly considered to be an integral part of its image just like the quality of its products or the quality of its technical services changing a company s name is a major policy decision contemplated by many firms and actually implemented by some each year this paper attempts to examine albeit indirectly whether a name change can improve the profit performance of a firm and what type of firm is more likely to succeed in doing so we use the event study methodology developed in finance to examine the above questions with respect to 58 corporations that changed their names in 1981 1985 our findings are that for most of the firms name changes are associated with improved performance and that the greatest improvement tends to occur in firms that produce industrial goods and whose performance prior to the change was relatively poor evidence that industrial good producers are also heavy users of corporate advertising lends further credence to this finding our findings do not support however the contention that the new name per se will enhance demand for the firm s products rather it seems that the act of a name change serves as a signal that other measures to improve performance such as changes in product offerings and organizational changes will be seriously and successfully undertaken the rationale behind why such a signal is sent and why it is believed is discussed

accounting discretion in fair value estimates an examination of sfas 142 goodwill impairments this study examines statement of financial accounting standards 142 adoption decisions focusing on the trade off between recording certain current goodwill impairment charges below the line and uncertain future impairment charges included in income from continuing operations we examine several potentially important economic incentives that firms face when making this accounting choice we find evidence suggesting that firms equity market concerns affect their preference for above the line vs below the line accounting treatment and firms debt contracting bonus turnover and exchange delisting incentives affect their decisions to accelerate or delay expense recognition our study contributes to the accounting choice literature by examining managers use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross sectional hypotheses of the determinants of firms preferences for immediate below the line versus delayed above the line expense recognition

the sec reversal of fasb statement no 19 an investigation of information effects it has become popular in recent years to assess the economic consequences of new financial reporting standards and disclosure requirements as reflected in stock price behavior while the motivation for such studies seems to be generally accepted there are serious problems both in designing studies to assess the capital market reaction to new accounting rules and in subsequently interpreting the results for policymaking the difficulties are largely due to the lack of tight models of how new financial accounting standards board fasb standards and securities and exchange commission sec releases should impact investor decisions within the context of efficient markets this generally leads the researchers to test for average abnormal stock returns upon the announcement of a new accounting rule across a sample of firms subject to the rule this empirical approach is exposed to two major dangers first the intrusion of confounding events can easily lead to rejection of the null hypothesis of no price response due to both the very general nature of the alternate hypothesis of average abnormal returns and the single event date

market reactions to accounting regulations in the savings and loan industry abstract this paper addresses whether events leading to three regulatory accounting principles issued by the federal home loan bank board affected the market value of savings and loan associations s ls the market reaction to these regulations is predicted to be positive since they effectively eased minimum regulatory net worth requirements a significant market reaction is observed for the regulation that allowed s ls to increase regulatory net worth by permitting appraised equity capital however results are inconsistent with the alternative hypothesis associated with the regulations permitting deferral of loan losses and net worth certificates

the importance of accounting changes in debt contracts the cost of flexibility in covenant calculations abstract in this paper we examine how the exclusion of voluntary and mandatory accounting changes from the calculation of covenant compliance affects the interest rate charged on the loan after controlling for self selection bias and other factors known to affect loan spreads we find that the rate charged is 84 basis points lower when voluntary accounting changes are excluded and 71 basis points lower when mandatory accounting changes are excluded our results suggest that borrowers are willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations and to avoid duplicate record keeping costs

impact on equity prices of pronouncements related to nonpension postretirement benefits abstract this study examines the impact on equity prices of nine pronouncements related to the proposed accounting for nonpension postretirement benefits compared to a control group the experiment firms exhibit significant negative abnormal returns around the issuance of the exposure draft on nonpension postretirement benefits the negative abnormal returns are most pronounced for firms with few retirees relative to current employees firms with high debt ratios small firms and firms currently reporting these benefits on the pay as you go basis these results are consistent with the contracting cost hypotheses

the impact of cash flow volatility on discretionary investment and the costs of debt and equity financing abstract we show that higher cash flow volatility is associated with lower average levels of investment in capital expenditures r d and advertising this association suggests that firms do not use external capital markets to fully cover cash flow shortfalls but rather permanently forgo investment cash flow volatility also is associated with higher costs of accessing external capital moreover these higher costs as measured by some proxies imply a greater sensitivity of investment to cash flow volatility thus cash flow volatility not only increases the likelihood that a firm will need to access capital markets it also increases the costs of doing so