a theoretical analysis connecting conservative accounting to the cost of capital abstract we connect conservative accounting to the cost of capital by developing an accounting model within an asset pricing framework the model has three distinctive features 1 transaction cycle conformity where the book value equals the value of cash at the beginning and the end of a cash to cash transaction cycle 2 a revenue recognition principle where uncertainty affects the amount of revenues recognized 3 a matching principle where expenses are matched with revenue with a conservative bias due to uncertainty we demonstrate how the growth rate of expected earnings the accruals to cash ratio and the expected earnings yield relate to the expected stock return

eva versus earnings does it matter which is more highly correlated with stock returns dissatisfaction with traditional accounting based performance measures has spawned a number of alternatives of which economic value added eva is currently the most prominent how can we tell which performance measures best capture managerial contributions to value there is currently a heated debate among practitioners about whether the new performance measures have a higher correlation with stock values and their returns than do traditional accounting earnings academic researchers have relied instead on the variance of performance measures to gauge their relative accuracy to formally address the above debate we use a relatively standard principal agent model in which contracts can be based on any two accounting based performance measures plus the stock price rather than model detailed differences between eva and traditional measures such as earnings we focus on the problem that while the variability of each measure is observable its exact information signal content is not the model provides a formal method for researchers to ascertain the relative value of alternative accounting based measures based on two distinct uses of the stock price first as is well known prices provide a noisy measure of managerial value added in our model stock prices also can reveal the signal content of alternative accounting based performance measures we then show how to combine stock prices earnings and eva to produce an optimally weighted compensation scheme we find that the simple correlation between eva or earnings and stock returns is a reasonably reliable guide to its value as an incentive contracting tool that is a firm could reasonably gauge the merits of adding a measure like eva by examining its correlation with the firm s stock price this is not because stock returns are themselves an ideal performance measure rather it is because correlation places appropriate weights on both the signal and noise components of alternative measures we then calibrate the theoretical improvement in incentive contracts from optimally using eva in addition to accounting earnings specifically we empirically estimate the value added of eva by firm and industry these estimates are positive and significant in predicting which firms have actually adopted eva as an internal performance measure

an analysis of the relation between the stewardship and valuation roles of earnings in this paper we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes we explore linkages between weights on earnings in compensation contracts and in stock price formation a distinction between the valuation and incentive contracting roles of earnings in paul 1992 produces the null hypothesis that valuation earnings coefficients vecs and compensation earnings coefficients cecs are unrelated our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971 2000 rejects paul s 1992 hypothesis of no relation we also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation specifically we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings

an egalitarian system breeds generosity the impact of redistribution procedures on pro social behavior in a meritocratic system people are compensated on the basis of their individual ability whereas in an egalitarian system people are equally compensated essentially in the latter system high performers are taxed and subsidize underperformers would differences in income redistribution procedures affect people s pro social behavior in experiments we found that people are more generous toward strangers in an egalitarian treatment than in a meritocratic treatment interestingly being taxed does not reduce the generosity of high performers whereas being subsidized significantly increases the generosity of low performers jel c91 d63 d64 i introduction numerous experimental studies have established that humans exhibit other regarding behavior camerer 2003 that is humans care not only about their own material payoffs but also about fairness reciprocity and other people s well being some explanations for this other regarding behavior have been offered in the literature becker 1974 and andreoni 1989 assert that people are altruistic becker focuses on the notion of pure altruism and argues that caring for others is inherent in human nature andreoni focuses on the notion of impure altruism or warm glow and argues that a person is altruistic because he she receives some private benefit from the altruistic act itself rabin 1993 and levine 1998 point out the importance of the reciprocity based motive where a person s behavior toward another person is driven by the expected intention of the other person fehr and schmidt 1999 and bolton and ockenfels 2000 on the other hand argue that other regarding behavior is driven primarily by the final distribution of payoffs among people in the reference group all these studies share one common thread they focus on factors directly related to allocation decisions such as the intentions behind those decisions the consequences of those decisions on the allocators and the recipients and the expectation of how the recipients will respond to those decisions but the studies are silent on a factor seemingly unrelated to but that could potentially influence allocation decisions namely the procedure by which a money endowment or income is redistributed among allocators in reality this procedure is determined by the prevailing social system governing the way individual effort is rewarded it also differs greatly across societies in this paper we study how this endowment redistribution procedure shapes people s pro social behavior consider two distinct social environments inhabited by people of different abilities the first is characterized by a meritocratic system in which people are compensated on the basis of their individual ability and performance the second is characterized by an egalitarian system in which everybody is compensated equally regardless of his her individual ability the former resembles a pure capitalist system with no taxation and the latter acts like a socialist system with an egalitarian income redistribution essentially in the latter the low performers are subsidized whereas the high performers are taxed a natural question that emerges is whether people s pro social behavior will differ between these two social environments we postulate two factors associated with the endowment redistribution procedure that could potentially influence this pro social behavior the first is the working of serial reciprocity which encourages an individual who benefits from a kind act rendered by somebody to forward the received kind act to a third party in an egalitarian system underperformers are treated nicely by the system which could motivate them to reciprocate by treating other people nicely as well thus being treated nicely may inculcate a pay it forward spirit this notion of serial reciprocity differs from the more common form of reciprocity namely direct reciprocity which refers to recipients of the kind act returning the deed by behaving nicely back toward the person who treated them nicely

on the value relevance of asymmetric financial reporting policies this paper considers an overlapping generations model where investors trade in a firm s stock investment risk is partly determined by the volatility of the stock price at which current investors can sell their shares to the next generation of investors it is shown that asymmetric reporting of good and bad news is value relevant as it affects the allocation of risk among future generations of shareholders

fairness in public good provision an investigation of preferences for equality and proportionality a binary public good voting mechanism is designed to test for preferences for income equality and cost benefit proportionality the voting design isolates preferences for equality from those for proportionality and controls for alternative external preferences such as altruism envy and the rawlsian difference principle individuals choose between greater income or fairness in these demand revealing votes treatments vary whether the positions of voters are earned or random whether votes are hypothetical or real and whether they are over gains or losses significant deviations from self interested voting are observed in all treatments testing for equality and in some treatments testing for proportionality

intertemporal cost allocation and managerial investment incentives a theory explaining the use of economic value added as a performance measure this paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures the main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level the income measure created by this allocation rule is usually referred to as residual income or economic value added

intertemporal cost allocation and investment decisions this paper considers the profit maximization problem of a firm that must make sunk investments in long lived assets to produce output it is shown that if per period accounting income is calculated using a simple and natural allocation rule for investment called the relative replacement cost rrc rule under a broad range of plausible circumstances the firm can choose the fully optimal sequence of investments over time simply by choosing a level of investment each period in order to maximize the next period s accounting income furthermore in a model in which shareholders delegate the investment decision to a better informed manager it is shown that if accounting income based on the rrc allocation rule is used as a performance measure for the manager robust incentives are created for the manager to choose the profit maximizing sequence of investments regardless of the manager s own personal discount rate or other aspects of the manager s personal preferences

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

market exit through divestment the effect of accounting bias on competition we analyze the effect of accounting bias on the competition and market structure of an industry in our model firms interim accounting reports on investment projects may contain bias introduced by the mandatory accounting system we find that this bias strictly decreases firms profits when investors do not have an abandonment option but different results emerge when we allow the investors to divest in the interim specifically a conservative accounting regime may increase the likelihood of projects being discontinued inducing some firms to exit from the product market and leaving rivals to capture their market share a conservative regime can thus soften market competition and result in ex ante higher investment payoff higher consumer surplus and higher total social welfare since industries often have common reporting standards we also identify the degrees of industry wide accounting bias that maximize the expected investor payoffs finally we allow for investors to coordinate their divestment

how does residual income affect investment the role of prior performance measures this paper examines whether you get what you pay for in firms that implement residual income ri based compensation specifically this paper explores differences in investment patterns of firms that implement ri based compensation plans conditional on whether the firms switched from earnings or return on investment roi based compensation i find that the pattern of investment for firms switching to ri from earnings based compensation is opposite to that of firms switching from roi based compensation changes in investment within each individual subgroup yield weaker mixed results in addition this paper documents that delivered ri increases in firms that implement ri my paper contributes to the literature on the investment effects of ri by examining the relevance of a set of arguments that have been made in management accounting textbooks since 1965 these arguments are still found in current textbooks and are commonly taught to students in graduate level managerial accounting classes the arguments help us to examine a natural experiment in which we can better specify the conditions under which ri use is expected to be associated with changes in investment

accounting conservatism and managerial incentives there are two sources of agency costs under moral hazard 1 distortions in incentive contracts and 2 implementation of suboptimal decisions in the accounting literature the relation between conservative accounting and agency costs of type 1 has received considerable attention cf watts 2002 however little appears to be known about the effects of accounting conservatism on agency costs of type 2 or trade offs between agency costs of types 1 and 2 the purpose of this study is to examine this void in a principal agent setting in which the principal motivates the agent to expend effort using accounting earnings this study shows that accounting earnings become more useful for reducing agency costs of type 2 when measured conservatively than when measured aggressively combined with the result in kwon et al 2001 that agency costs of type 1 decrease with accounting conservatism this analysis suggests that conservative accounting enhances the incentive value of accounting signals with

a new measure of earnings forecast uncertainty abstract relying on the well established theoretical result that uncertainty has a common and an idiosyncratic component we propose a new measure of earnings forecast uncertainty as the sum of dispersion among analysts and the variance of mean forecast errors estimated by a garch model the new measure is based on both common and private information available to analysts at the time they make their forecasts hence it alleviates some of the limitations of other commonly used proxies for forecast uncertainty in the literature using analysts earnings forecasts we find direct evidence of the new measure s superior performance

splitting up value a critical review of residual income theories this paper deals with the notion of residual income which may be defined as the surplus profit that residues after a capital charge opportunity cost has been covered while the origins of the notion trace back to the 19th century in depth theoretical investigations and widespread real life applications are relatively recent and concern an interdisciplinary field connecting management accounting corporate finance and financial mathematics peasnell 1981 1982 peccati 1987 1989 1991 stewart 1991 ohlson 1995 arnold and davies 2000 young and o byrne 2001 martin petty and rich 2003 this paper presents both a historical outline of its birth and development and an overview of the main recent contributions regarding capital budgeting decisions production and sales decisions implementation of optimal portfolios forecasts of asset prices and calculation of intrinsic values a most recent theory the systemic value added approach also named lost capital paradigm provides a dierent denition of residual income consistent with arbitrage theory en folded in keynes s 1936 notion of user cost and forerun by pressacco and stucchi 1997 the theory has been formally introduced in magni 2000a b c 2001a b 2003 where its properties are thoroughly investigated as well as its relations with the standard theory two different lost capital metrics have been considered for value based management purposes by drukarczyk and schueler 2000 and young and o byrne 2001 this work illustrates the main properties of the two theories and their relations and provides a minimal guide to construction of performance metrics in the two approaches

who wants to redistribute the tunnel effect in 1990s russia abstract support for governmental redistribution tended to be greater for the poor than the rich in a representative sample of russian adults in 1996 however support for redistribution is higher amongst those who expect their welfare to fall and this effect is strongest amongst the currently well off a rising trajectory inhibits demand for redistribution support is also stronger in rural areas amongst those with less schooling those who fear losing their job the elderly and amongst women our results are consistent with albert hirschman s idea of a tunnel effect whereby prospects of mobility in both directions influence demand for governmental redistribution

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

job queues and the union status of workers this paper develops a model of the determination of the union status of workers that allows for the possibility of queuing for union jobs the empirical results derived using a sample from the university of michigan panel study of income dynamics are supportive of the queuing hypothesis the no queue model can be rejected using a likelihood ratio test this suggests that a simple probit or logit model for union status is misspecified because it is not based on any consistent behavioral theory an important implication of the model is that because most new entrants to the labor market prefer union jobs but cannot get them and because accrual of nonunion seniority makes workers progressively less likely to desire union jobs the union status of workers is largely determined by their success in being selected from the queue early in their working life

financing and investment efficiency information quality and accounting biases in this paper we investigate the effect of accounting biases on firms financing decisions and the role of accounting biases in endogenous information quality we show that in industries with generally low profit prospects a downward biased accounting system performs better than a neutral accounting system and a more downward bias helps mitigate both investment and financing inefficiency whereas for industries with generally high profit prospects an upward biased accounting system is better than a neutral accounting system and a more upward bias helps improve financing efficiency in addition we find that a more downward biased accounting system motivates good firms to exert more effort to improve the information quality which improves overall efficiency this paper was accepted by mary barth accounting

residual income and value creation an investigation into the lost capital paradigm this paper presents a new way of measuring residual income originally introduced by magni 2000a 2000b 2003 contrary to the standard residual income the capital charge is equal to the capital lost by investors the lost capital may be viewed as a the foregone capital b the capital implicitly infused into the business c the outstanding capital of a shadow project d the claimholders credit relations of the lost capital with book values and market values are studied as well as relations of the lost capital residual income with the classical standard paradigm many appealing properties are derived among which a property of earnings aggregation different concepts and results provided by different authors in such different fields as economic theory management accounting and corporate finance are considered o hanlon and peasnell s 2002 unrecovered capital and excess value created ohlson s 2005 abnormal earnings growth o byrne s 1997 eva improvement miller and modigliani s 1961 investment opportunities approach to valuation keynes s 1936 user cost drukarczyk and schueler s 2000 net economic income fernandez s 2002 created shareholder value anthony s 1975 profit they are all conveniently reinterpreted within the theoretical domain of the lost capital paradigm and conjoined in a unified view the results found make this new theoretical approach a good candidate for firm valuation incentive compensation capital budgeting decision making

a measurement approach to conservatism and earnings management this paper formalizes a two step representation of accounting measurement and uses it to formalize a general rationale for conservatism as a measurement principle a transaction s economic substance manifests itself in characteristics of the transaction and an accounting rule is a mapping from transaction characteristics to an accounting report managers who have stakes in the accounting report are able to influence transaction characteristics such earnings management is ex post rational for managers but ex ante inefficient to safeguard against such ex post opportunism the optimal ex ante accounting rule is conservative in the sense that it requires more verification of the transaction characteristics favorable to managers thus this rationale for conservatism is as general as the managers ability and incentive to inflate transaction characteristics by opening the black box of accounting measurement the two step representation also formalizes some classic accounting concepts such as relevance reliability verifiability verification and accounting motivated transactions

the use of accounting and security price measures of performance in managerial compensation contracts a discussion abstract it is commonly observed that the compensation paid to senior level executives depends on both accounting and security price measures of performance the articles by kim and suh bushman and indjejikian and sloan which i have been invited to discuss examine the issue of how much weight to place on these two measures in the contract the first two papers analyze the role that earnings can play in removing the noise in stock price in a rational expectations pricing model the sloan paper analytically and empirically examines the role that earnings can play in removing macroeconomic factors from stock price

political economy of pension plans impact of institutions gender and culture abstract national pension systems are an important part of financial intermediation and worker welfare in most countries but how and why do they differ internationally controlling for important political economic and social institutions we document that international differences in pension progressivity or how pensions reflect lifetime earnings are negatively related to masculinity uncertainty avoidance individualism long term orientation employment rights average pension levels social trust and economic inequality we also find that pension progressivity is positively related to the economic and societal role of women the extent of catholicism as well as political voice and accountability these results provide important insights for both public policy and mnc managers

good bye lenin or not the effect of communism on people s preferences preferences for redistribution as well as the generosities of welfare states differ significantly across countries in this paper we test whether there exists a feedback process of the economic regime on individual preferences we exploit the experiment of german separation and reunification to establish exogeneity of the economic system from 1945 to 1990 east germans lived under a communist regime with heavy state intervention and extensive redistribution we find that after german reunification east germans are more in favor of redistribution and state intervention than west germans even after controlling for economic incentives this effect is especially strong for older cohorts who lived under communism for a longer time period we further find that east germans preferences converge towards those of west germans we calculate that it will take one to two generations for preferences to converge completely

accounting income stock price and managerial compensation abstract this paper employs an agency model where a manager has a two dimensional action choice to study how the information content of earnings affects the design of compensation contracts based on earnings and price price is modeled as an endogenous variable that reflects all available information including earnings two settings are contrasted in the first earnings and price reflect the same underlying information about firm value while in the second earnings reflect a subset of the information reflected in price it is shown that differences in information content substantially alter the characteristics of compensation contracts based on earnings and price

loss function assumptions in rational expectations tests on financial analysts earnings forecasts abstract prior research concludes that financial analysts do not process public information efficiently in generating their earnings forecasts the ordinary least squares ols regression based tests used in prior studies assume implicitly that analysts face a quadratic loss function in contrast we argue that analysts likely face a linear loss function and hence try to minimize their absolute forecast errors we conduct and compare rational expectations tests using these two alternative loss functions we reproduce most prior findings of forecast inefficiency with ols regressions but find virtually no evidence of forecast inefficiency with least absolute deviation regressions where we explicitly assume a linear loss function

demand for redistribution individuals responses to economic setbacks although economic circumstances have been argued to be a major determining factor of attitudes to redistribution there is little well identied evidence at the individual level utilizing a unique dataset with detailed individual information provides new and convincing evidence on the link between economic circumstances and demand for redistribution in the form of benefits and support the swedishnational election studies are constructed as a rotating survey panel which makes it possible to estimate the causal effect of economic changes the empirical analysis shows that individuals who experience a job loss become considerably more supportive of redistribution yet attitudes to redistribution return to their initiallevel as economic prospects improve suggesting that the effect is only temporary despite the fact that a job loss also changes attitudes to the political parties theprobability to vote for the left wing is not affected

social mobility and redistributive politics just like economists voters have conflicting views about redistributive taxation because they estimate its incentive costs differently we model rational agents as trying to learn from their dynastic income mobility experience the relative importance of effort and predetermined factors in the generation of income inequality and therefore the magnitude of these incentive costs in the long run left wing dynasties believing less in individual effort and voting for more redistribution coexist with right wing dynasties this allows us to explain why individual mobility experience and not only current income matters for political attiitudes and how persistent differences in perceptions about social mobility can generate persistent differences in redistribution across countries

evaluating the cost of government credit support the oecd context governments throughout the oecd allocate a large share of societies capital and risk through their credit related activities hence accurate cost estimates for credit support programmes are a prerequisite for efficient resource allocation transparency effective management and public oversight i find that oecd governments generally take their cost of capital to be their own borrowing rate rather than using a weighted average cost of capital that includes the cost of risk borne by taxpayers and the general public in their role as equity holders that practice which is institutionalised in government accounting and budgetary rules results in cost estimates for credit support that are significantly downwardly biased relative to a fair value metric that recognises the full cost of risk the size and possible real consequences of those distortions are illustrated with analyses of the european bank for reconstruction and development the european stability mechanism and the tennessee valley authority deborah lucas

individual preferences for political redistribution what drives people s support of governmental reduction of income inequality we employ data from a large international survey in order to evaluate the explanatory power of three competing forces referred to as the homo oeconomicus effect the public values effect and the social rivalry effect the empirical analysis reveals that at the aggregate level all three effects play a significant role in shaping individual preferences for political redistribution attitudes of citizens in formerly socialist countries turn out to differ from those of western citizens in a systematic way 2002 elsevier science b v all rights reserved

a real effects perspective to accounting measurement and disclosure implications and insights for future research accounting measurement and disclosure rules have a significant impact on the real decisions that firms make in this essay we provide an analytical framework to illustrate how such real effects arise using this framework we examine three specific measurement issues that remain controversial 1 how does the measurement of investments affect a firm s investment efficiency 2 how does the measurement and disclosure of a firm s derivative transactions affect a firm s choice of intrinsic risk exposures risk management strategy and the incentive to speculate 3 how could marking to market the asset portfolios of financial institutions generate procyclical real effects we draw upon these real effects studies to generate sharper and novel insights that we believe are useful not only for the development of accounting standards but also for guiding future empirical research

preferences for redistribution a country comparison of fairness judgements this paper seeks to explain within and between country variation in redistributive preferences in terms of self interest concerns and an input based concept of fairness which we examine by looking at the effects of beliefs regarding the causes of income differences results of estimations based on data for 25 countries indicate that both factors are indeed important determinants of redistribution support in line with hypothesised patterns we find that while differences in beliefs on what causes income differences seem to be important for explaining within country variation in redistributive preferences they do little to explain between country differences differences in the effects of holding certain beliefs however are important for explaining between country variation in redistributive preferences suggesting considerable heterogeneity across societies in what is considered as fair

the rewards to meeting or beating earnings expectations abstract this paper finds that firms that meet or beat current analysts earnings expectations mbe enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations further such a premium to mbe although somewhat smaller exists in the cases where mbe is likely to have been achieved through earnings or expectations management the findings also indicate that the premium to mbe is a leading indicator of future performance this premium and its predictive ability are only marginally affected by whether the mbe is genuine or the result of earnings or expectations management

who is afraid of reg fd the behavior and performance of sell side analysts following the sec s fair disclosure rules we examine regulation fd s impact on the accuracy and dispersion of sell side analysts earnings forecasts using a large sample of quarterly forecasts made over a nearly 10 year period surrounding fd s adoption we uncover two main sets of findings first individual and consensus forecasts become less accurate post fd particularly for early forecasts and for smaller companies second forecast dispersion increases post fd this effect is stronger for early forecasts and has increased with the passage of time these results which are quite robust to alternative empirical methodologies suggest that there has been a reduction in both selective guidance and forecast quality post fd

systematic and random search a synthesis this paper synthesizes two models of search in the labor market systematic and random we construct and test a theoretical model in which the searcher is endowed with information on some possibly zero or all individual firms in the labor market as well as the overall wage offer distribution we test the model using a special wave of the 1976 current population survey the major theoretical results of our model are as follows searchers with lower stocks of knowledge about individual firms higher discount rates or having lower coverage by unemployment insurance are more likely to engage in random search activities

social limits to redistribution in many countries equality of political rights including the right to vote over taxes and transfers goes along with substantial inequality of economic conditions this observation lies at the root of one fundamental issue in political economy one about the factors that limit the extent of redistribution in democracies the conventional economic wisdom on this issue can roughly be summarized by two arguments firstly redistributive taxation may be limited by various kinds of incentive costs of taxation as e g in james a mirrlees 1971 kevin w s roberts 1977 dennis n epple and thomas romer 1991 and thomas piketty 1995 secondly redistribution may be dampened by the lobbying activity of high income groups and by various imperfections inherent to the political process that determines the tax system as e g in gary s becker 1983 and john e roemer 1995 while both arguments offer illuminating insights into the phenomenon of redistribution they are also based on a very crude description of human behavior one which ignores social motivations of action both in the economic and the political sphere the present paper develops an explanation that takes such motivations into account specifically it shows that limits to redistribution may arise when economic inequality has an informational value for social decisions our approach is based upon the following observation many goods and decisions that heavily affect an individual s quality of life are not allocated or made through markets but through social interactions thomas scitovsky 1976 for instance although people have strong preferences over how they are treated by others and over whom they mate with these things are not the object of market transactions a number of sources of satisfaction like conversation dinners and parties playing with others and being observed and admired are nonmarket goods for which a keen social competition between individuals often develops as shown by harold cole et al 1992 the existence of social rather than market competition for some goods can endogenously generate a concern for relative position in the income distribution when information about relative income is private individuals become interested in the observable consumption differentials between them and their social competitors since consumption differentials are influenced by redistributive taxation the political attitudes of people toward redistribution will be shaped by its expected impact on social competition in some identifiable environments this concern for social success may be the crucial factor that limits the extent of redistribution desired by a majority of voters specifically while the middle class may obtain economic benefits from a large amount of redistributive taxation it may oppose an equalization of living standards since this would harm its social success the fear of losing social status in favor of the poor induces the middle class to enter a political alliance with the rich which supports conservative taxation programs in the sociological literature scholars of voting behavior have often suggested that the need for social recognition plays a crucial role in shaping political attitudes seymour m lipset 1967 pointed out that white collar workers tend to be socially valued similarly as those higher in the system and although their income may be only slightly larger than that of manual workers white collars are much more likely to corneo department of economics university of osnabruck rolandstrasse 8 d 49069 osnabruck germany cesifo munich and cepr london gruner department of economics university of mannheim d 68131 mannheim germany iza bonn and cepr london we would like to thank emmanuelle auriol dieter bos peter funk mike hout olivier jeanne peter jonas georg noldeke thomas piketty regis renault john roemer jens weidmann and three anonymous referees for insightful comments and suggestions we have also benefited from the comments of participants at workshops and conferences in barcelona bonn davis jena maastricht magdeburg mannheim montreal munich rotterdam silvaplana tel aviv tilburg toulouse and warwick at which we presented earlier versions of this work financial support from the deutsche forschungsgemeinschaft sfb 303 at the university of bonn is gratefully acknowledged

conservative accounting and equity valuation abstract this paper examines how conservative accounting affects the relation between accounting data and firm value the analysis shows that conservative accounting can be characterized equivalently in terms of book value earnings or book rate of return furthermore capitalized earnings generally provide a less biased estimate of equity value than book value does in addition firm growth affects the way earnings and book value are combined in valuation a weighted average of book value and capitalized earnings with the weight on earnings being an increasing and convex function of growth yields an asymptotically unbiased estimate of equity value when growth is positive the weight on book value is negative

the timing and value of forecast and recommendation revisions abstract this paper evaluates the information content of analysts one quarter ahead earnings forecast revisions and recommendation revisions at various points in event time relative to earnings announcement dates across three sets of tests we find that the revisions are least informative in the week after earnings announcements and that the information content of revisions generally increases over event time we find a sharp increase in the information content of upward forecast revisions and recommendation upgrades in the week before earnings announcements but we do not find a similar increase for downward revisions or for recommendation downgrades

repeated shocks and preferences for redistribution abstract a society that believes wealth to be determined by random luck rather than by merit demands more redistribution we present evidence of this behavior by exploiting a natural experiment provided by the l aquila earthquake in 2009 which hit a large area of central italy through a series of destructive shakes over eight days matching detailed information on the ground acceleration registered during each shock with survey data about individual opinions on redistribution we show that the average intensity of the shakes is associated with subsequent stronger beliefs that for a society to be fair income inequalities should be leveled by redistribution the shocks however are not all alike we find that only the last three shakes occurred on the fourth and the eighth day of the earthquake have a statistically significant impact overall we find that the timing and repetition of the shocks play a role in informing redistributive preferences

extensive search intensive search and hiring costs new evidence on employer hiring activity this paper presents recent evidence on employer search to fill a position a 1982 employer survey sponsored by the national institute of education and the national center for research in vocational education provides the basis for analyzing employer search and hiring costs the paper examines the effects of such factors as employer size dismissal costs unionization on the job training adjustment costs capital and labor market conditions on intensive employer search extensive employer search and hiring costs intensive employer search is measured by the average number of hours the employer spends recruiting screening and interviewing per applicant extensive search is measured by the number of applicants seen per applicant interviewed and the number interviewed per employment

social mobility and the demand for redistribution the poum hypothesis this paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they or their offspring may make it up the income ladder this prospect of upward mobility poum hypothesis is shown to be fully compatible with rational expectations and fundamentally linked to concavity in the mobility process a steady state majority could even be simultaneously poorer than average in terms of current income and richer than average in terms of expected future incomes a e rst empirical assessment suggests on the other hand that in recent u s data the poum effect is probably dominated by the demand for social insurance in the future everyone will be world famous for e fteen minutes andy warhol 1968

optimal ceo compensation some equivalence results i study optimal managerial contracts in two contracting environments when the investment return is contractible an optimal contract combines a base salary golden parachute and bonus when the return is not contractible two types of optimal contracts are studied a contract with restricted stock and a contract with stock options these three types of contracts are equivalent they implement the same outcome and lead to the same expected payoff for the manager implying that the choice of contractual form is irrelevant in the environment i study i suggest directions of research for the relevance of different contractual forms

the association between outside directors institutional investors and the properties of management earnings forecasts we investigate the relation of the board of directors and institutional ownership with the properties of management earnings forecasts we find that firms with more outside directors and greater institutional ownership are more likely to issue a forecast and are inclined to forecast more frequently in addition these forecasts tend to be more specific accurate and less optimistically biased these results are robust to changes specification granger causality tests and simultaneous equation analyses the results are similar in the pre and post regulation fair disclosure reg fd eras additional analysis suggests that concentrated institutional ownership is negatively associated with forecast properties this association is less negative in the post reg fd environment which is consistent with reg fd reducing the ability of firms to privately communicate information to select audiences

depreciation rules and the relation between marginal and historical cost the reported cost of a product frequently contains historical cost com ponents that reflect past investments in productive capacity we examine a setting wherein a firm makes a sequence of overlapping capacity investments earlier research has identified particular accrual accounting depreciation rules with the property that on a per unit basis the historical cost of a product captures precisely its marginal cost relative to this benchmark we investigate and characterize the direction and magnitude of the bias in reported histori cal cost that results from alternative depreciation rules including in particular straight line depreciation in conjunction with partial direct expensing in ad dition we demonstrate that for a reasonable range of parameter specifications the resulting bias is rather small finally we apply our framework to two spe cific settings first in a regulatory context we establish the extent to which the accounting profit margin is indicative of a firm s pricing power in the product market second we model an internal control scenario in which a manager s performance is evaluated using residual income and identify the distortions in investment levels that result from the use of alternative depreciation rules

increasing goal congruence in project evaluation by introducing a strict market depreciation schedule abstract the economic accuracy of accrual based managerial performance measures is most essential for value added investment decisions in decentralised firms contemporary eva literature often lends support to annuity based depreciation schedules for accomplishing congruence between capital budgeting criteria like npv and accounting measures like roi and ri this is incongruent with the principal agent literature aiming at designing managerial incentive contracts we introduce a strict market based depreciation schedule which is shown to be superior to ordinary straight line annuity based or irr based depreciation schedules it gives the right managerial investment incentives also in the case of growth inflation or technological development

internal capital markets and firm level compensation incentives for division managers do multidivisional firms structure compensation contracts for division managers to mitigate incentive problems in their internal capital markets i find evidence that compensation and investment incentives are substitutes firms providing a stronger link to firm performance in incentive compensation for division managers also provide weaker investment incentives through the capital budgeting process specifically as the proportion of incentive pay for division managers that is based on firm performance increases division investment is less responsive to division profitability these findings are generally consistent with a model of influence activities by division managers in interdivisional capital allocation decisions

anniversary article a perspective on asymmetric information incentives and intrafirm resource allocation the paper asymmetric information incentives and intrafirm resource allocation by harris kriebel and raviv was published in the june 1982 issue ofmanagement science in this article written as part of this journal s 50 year anniversary celebration we highlight the significance of the harris et al paper for research in managerial accounting we first formulate and solve a continuous version of the harris et al model to illustrate the key assumptions and findings of their paper we then review several strands of the resource allocation literature in managerial accounting that have taken their inspiration either directly or indirectly from the work of harris et al

biased forecasts or biased earnings the role of reported earnings in explaining apparent bias and over underreaction in analysts earnings forecasts the extensive literature that investigates whether analysts earnings forecasts are biased and or inefficient has produced conflicting evidence and no definitive answers to either question this paper shows how two relatively small but statistically influential asymmetries in the tail and the middle of distributions of analysts forecast errors can exaggerate or obscure evidence consistent with analyst bias and inefficiency leading to inconsistent inferences we identify an empirical link between firms recognition of unexpected accruals and the presence of the two asymmetries in distributions of forecast errors that suggests that firm reporting choices play an important role in determining analysts forecast errors r 2003 elsevier b v all rights reserved

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

dynamics of rate of return regulation under rate of return regulation a firm s product prices are constrained by the requirement that investors not earn more than an allowable return on the firm s assets this paper examines the dynamic properties of the rate of return regulation process when the regulated firm periodically undertakes new capacity investments our analysis identifies prices that correspond to stationary values of the regulation process it is shown that the underlying depreciation rules for property plant and equipment determine whether these stationary prices will be above equal to or below the long run marginal cost of providing the regulated service we provide conditions under which the rate of return regulation process is dynamically stable so that prices indeed converge to their stationary values the overall efficiency of this regulation method is shown to depend on how well the applicable depreciation schedule matches the productivity pattern of the assets in use this paper was accepted by gerard p cachon accounting

social divisions and institutions assessing institutional parameter variation this paper investigates the hypothesis that the association between property rights institutions and income is weaker in countries with high social divisions it argues that social divisions should have a negative effect on perceived institutional inclusiveness which in turn should depress institutional payoffs absent a property rights indicator that captures the perceived inclusiveness of institutions social divisions should then weaken the observed association between property rights institutions and income the empirical results support this hypothesis and highlight the importance of evaluating whether the institutions measure used captures the institutional framework applying to the population at large

assessing empirical research in managerial accounting a value based management perspective this paper applies a value based management framework to critically review empirical research in managerial accounting this framework enables us to place the exceptionally diverse set of managerial accounting studies from the past several decades into an integrated structure our synthesis highlights the many consistent results in prior research identifies remaining gaps and inconsistencies discusses common methodological and econometric problems and suggests fruitful avenues for future managerial accounting research

s p 500 index additions and earnings expectations stock price increases associated with addition to the s p 500 index have been interpreted as evidence that demand curves for stocks slope downward a key premise underlying this interpretation is that index inclusion provides no new information about companies future prospects we examine this premise by analyzing analysts earnings per share eps forecasts around index inclusion and by comparing postinclusion realized earnings to preinclusion forecasts relative to benchmark companies companies newly added to the index experience signi cant increases in eps forecasts and signi cant improvements in realized earnings these results indicate that s p index inclusion is not an information free event studies that examine the prices of common stocks when they become included in the standard poor s s p 500 index have appeared regularly in leading nance journals since 1986 fascination with the eiect of s p index inclusion on stock prices appears to stem from the possibility that inclusion in the index is an information free eventfinformation free in the sense that s p makes no claim that inclusion represents an endorsement of the newly included stock s future prospects 1 indeed s p makes an a rmative claim to the contrary company

conservative accounting choices managers have sufficient discretion under generally accepted accounting principles gaap to adopt more or less conservative financial reporting policies in this paper we develop a signaling model to provide insight into managers decisions to be conservative in their accounting we provide conditions under which the market can use the manager s exercise of discretion to infer her private information about the future prospects of the firm and thus firm value under these conditions we also show that there are meaningful differences between earnings response coefficients for firms whose managers choose a conservative reporting policy and those whose managers do not finally we use our theoretical model to provide intuition for some established empirical results on earnings response coefficients

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

preferences for redistribution in the land of opportunities this paper explores how individual preferences for redistribution depend on future income prospects in addition to estimating the impact of individuals socioeconomic background and of their subjective perceptions of future mobility we employ panel data to construct dobjectivet measures of expected gains and losses from redistribution for different categories of individuals we find that such measures have considerable explanatory power and perform better than dgeneral mobilityt indexes we also find that preferences for redistribution respond to individual beliefs on what determines one s position in the social ladder ceteris paribus people who believe that the american society offers equal opportunities are more averse to redistribution d 2004 published by elsevier b v

does basel ii affect the market valuation of discretionary loan loss provisions we use a sample of banks from 24 european countries to investigate whether the adoption of the basel ii capital accord in 2008 affects the market valuation of discretionary loan loss provisions dllps although basel ii lowers the incentives of internal ratings based irb banks to recognize income increasing dllps in an opportunistic manner it has no such impact on the remaining banks which adopt the standardized methodology we use this setup in a difference in difference did design where standardized banks act as a control group our evidence supports the three hypotheses that for irb relative to standardized banks basel ii is associated with i less income increasing dllps and ii less income smoothing via dllps which enhances the informational content of dllps about future loan losses and leads to iii higher market valuation of dllps our findings are timely and have policy implications for future regulatory developments in the banking industry

incentive efficiency of compensation based on accounting and market performance abstract this paper analyzes how earnings and price are used in executive compensation contracts risk averse shareholders collectively design a contract and individually trade in the stock market in the optimal linear contract the use of earnings and price depends critically on incentive efficiency i e how precisely the measures convey the true outcome the relative weight of price to earnings exaggerates the true relative importance of price because price impounds traders overall information while its informational value lies in the incremental information it provides the use of price allows shareholders to share trading risks with managers

predicting forecast errors through joint observation of earnings and revenue forecasts abstract we propose a simple method to infer the forecast error associated with quarterly estimates of earnings and revenue before the firm announces realized earnings and revenue the method uses estimates of the profit margin implied by an analyst s forecasts of both earnings and revenue to identify forecasts that are likely to be optimistic or pessimistic the ability to anticipate forecast error permits a trading strategy that exploits the average market reaction following positive and negative earnings and revenue surprises

dynamic effects of information disclosure on investment efficiency this paper studies how information disclosure affects investment efficiency and investor welfare in a dynamic setting in which a firm makes sequential investments to adjust its capital stock over time we show that the effects of accounting disclosures on investment efficiency and investor welfare crucially depend on whether such disclosures convey information about the firm s future capital stock i e balance sheet or about its future operating cash flows i e earnings specifically investment efficiency and investor welfare unambiguously increase in the precision of disclosures that convey information about the future capital stock since such disclosures mitigate the current owners incentives to underinvest in contrast when accounting reports provide information about future cash flows the firm can have incentives to either under or overinvest depending on the precision of accounting reports and the expected growth in demand for such disclosures investment efficiency and investor welfare are maximized by an intermediate level of precision the two types of accounting disclosures act as substitutes in that the precision of capital stock disclosures that maximizes investment efficiency and investor welfare decreases as cash flow disclosures become more informative and vice versa

accounting treatment of inherent versus incentive uncertainties and the capital structure of the firm this paper studies the accounting treatment of uncertainty and how it affects a firm s capital structure we distinguish two sources of uncertainty that raise reliability concerns inherent uncertainty and incentive uncertainty by inherent uncertainty we refer to uncertainty about the quality of raw information regarding future cash flows by incentive uncertainty we refer to uncertainty about the quality of accounting numbers conveying the raw information we explore features of accounting that can effectively deal with these two types of uncertainties in order to aid in the debt equity decision of the firm to handle inherent uncertainty preferable accounting involves flexible revenue expense recognition rules that recognize more profit when the uncertainty level is low to deal with incentive uncertainty a stringent revenue expense recognition rule may be desirable to fend off management s opportunistic reporting behavior inflexible accounting rules cause a firm s financing choices to deviate from what would hold with complete information given any accounting rule an information environment with a lower higher uncertainty regarding future cash inflows leads to higher lower expected debt financing this is because assessed default risk is increasing in the uncertainty of future cash inflows holding the uncertainty of the outflows constant

multistage capital budgeting for shared investments this paper studies the performance of delegated decision making schemes in a two stage multidivision capital budgeting problem for a shared investment with an inherent abandonment option applying both robust goal congruence and sequential adverse selection frameworks we show that the optimal capital budgeting mechanism entails a capital charge rate above the firm s cost of capital in the first stage but below the cost of capital in the second stage further the first stage asset cost sharing rule depends only on the relative divisional growth profiles and equal cost sharing can be optimal even when the divisions receive significantly different benefits from the shared investment project in the presence of an adverse selection problem all agency costs are incorporated into the second stage budgeting mechanism leaving the first stage capital charge rate and asset sharing rule unaffected even though the agency problem induces capital rationing at both stages this paper was accepted by mary barth ac

conflicts of interest and analyst behavior evidence from recent changes in regulation regulation fd made analysts less dependent on insider information and diminished analysts motives to inflate their forecasts the global research analyst settlement had an even bigger impact on analyst behavior the mean forecast bias declined significantly whereas the median forecast bias essentially disappeared these results are similar for all analysts

the role of selective job search in uk unemployment selective search where unemployed job losers confine their job seeking efforts to matches in the pre separation sector has attracted consid erable attention as a possible source of high and persistent unemployment however this idea is questionable those opting for selection may do so because this strategy is more effective at gener ating an acceptable offer using uk microdata i find evidence in support of the latter view selective searchers cannot account for the persistence of high unemployment since the early 1980s

social preferences self interest and the demand for redistribution preferences for redistribution may be influenced by values and beliefs about distributive justice as well as by self interest people may prefer more redistribution to the poor if they believe that poverty is caused by circumstances beyond individual control therefore beliefs about the causes of income may affect demand for redistribution alternatively the effect of these beliefs on redistributive preferences may be spurious if they are correlated with income and self interest is not properly controlled for they may also measure incentive cost concerns using social survey data i find that self interest cannot explain the effect of these beliefs on redistributive preferences 2001 elsevier science b v all rights reserved

managerial optimism and earnings smoothing abstract this paper empirically examines how ceo optimism affects earnings smoothing and earnings surprises the main finding is that optimistic managers smooth earnings more than rational managers and are associated with smaller in absolute value earnings surprises a possible theoretical explanation is offered for these results based on a combination of the torpedo effect the innate behavior of optimists and the risk of litigation prosecution for over reporting earnings

a temporal analysis of earnings surprises profits versus losses i show that median earnings surprise has shifted rightward from small negative miss analyst estimates by a small amount to zero meet analyst estimates exactly to small positive beat analyst estimates by a small amount during the 16 years 1984 to 1999 i show that a rightward temporal shift in median surprise from negative to positive describes earnings but neither profits nor losses median profit surprise shifts within the positive quadrant from zero to one cent per share median loss surprise shifts within the negative quadrant from extreme negative about 33 cents per share to zero i show that the median surprise for profits exceeds that for losses in every year i document significant positive temporal trends in both meet and beat analyst estimates for both profits and losses but i find a greater frequency of profits that either meet or beat analyst estimates in every year i find a significant positive temporal trend in positive profits that are a little bit of good news and a significant negative temporal trend in managers who report losses that are an extreme amount of bad news my results are robust to the four internal validity threats i consider namely temporal changes in 1 analyst forecast accuracy 2 the mix of earnings of one sign preceded by earnings of another sign four quarters ago 3 the timeliness of the most recent analyst forecast and 4 the i b e s definition of actual earnings i find that managers of growth firms are relatively more likely than managers of value firms to report good news profits i show that when they do report positive profit surprises managers of growth firms are more likely to report a little bit of good news in every year

retracted relationship incentives and the optimistic pessimistic pattern in analysts forecasts we examine whether analysts incentives to maintain good relationships with management contribute to the optimistic pessimistic within period time trend in analysts forecasts in our experiments 81 experienced sell side analysts from two brokerage firms predict earnings based on historical information and management guidance analysts forecasts exhibit an optimistic pessimistic pattern across the two timing conditions early and late in the quarter and the effect is significantly stronger when the analysts have a good relationship with management than when their only incentive is to be accurate debriefing results indicate that analysts are aware of this pattern of forecasts and believe that this benefits their future relationships with management and with brokerage clients the analysts most frequently cite favored conference call participation and information access when describing benefits from maintaining good relationships with management our results suggest the following the optimistic pessimistic pattern in forecasts is in part a conscious response to relationship incentives information access is perceived to be a major benefit of management relationships and recent regulatory changes may have lessened but have not eliminated this conflict of interest source

did analyst forecast accuracy and dispersion improve after 2002 following the increase in regulation this article examines the accuracy and dispersion of analyst earnings forecasts from october 1993 to september 2013 the authors found an improvement in these forecast properties in the short run following various regulations in the early 2000s over the extended period however forecast accuracy significantly declined and dispersion significantly increased the results are robust to various sensitivity tests and indicate that these regulations did not collectively improve the information environment despite the reduction in analyst conflicts of interest the problem seems to be largely due to the quality of financial reports

have financial statements lost their relevance the authors explore the concern that financial statements no longer have the same relevance to investors that they had in the past they test for value relevance by measuring the total return that could have been earned from prior knowledge of financial statement information and by examining the explanatory power of accounting information on market values and annual market adjusted returns both analyses are applied to a broad sample of exchange listed and nasdaq firms for the 1952 94 period the authors find mixed evidence on value relevance of financial statement reporting during the test period

accrual accounting informational sufficiency and equity valuation this paper studies accrual accounting and equity valuation in the context of a firm that makes repeated and overlapping investments in productive capacity the analysis identifies a particular accrual accounting depreciation rule that is termed replacement cost accounting because the book value of existing capacity assets is set equal to the value that such assets would have if a competitive market were to exist for used assets it is shown that replacement cost accounting aggregates past investment decisions of the firm without a loss of value relevant information the intrinsic value of the firm can then be expressed as a function of current accounting data and certain parameters of the firm s operating environment further it is shown that replacement cost accounting is essentially the only accounting rule with this informational sufficiency property

residual income based compensation plans for controlling investment decisions under sequential private information earlier literature has pointed to the effectiveness of residual income type measures based on particular accrual accounting rules such as the relative benefit allocation rule these performance metrics have been shown to generate desirable managerial incentives when investment decisions are delegated this paper further attests to the robustness of these measures by extending the result to a sequential adverse selection model with an inherent real option an option to abandon in other words as long as the residual income measures are judiciously constructed neither private information nor the requirement to selectively exercise an option derails their use in this setting

equilibrium wage distributions the observation that different firms charge different prices for what appears to be the same commodity or pay different wages for what appears to be equivalent labour has long been explained in economics by a reference to imperfect information this paper is concerned with characterising market equilibrium with imperfect information we do not present a general theory rather we develop in some detail an example of importance in its own right imperfect information in the labour market several properties of our example in particular the existence of equilibria with price wage dispersion unemployment excess supply of labour positive profits multiple equilibria and the nonoptimality or some of all of the equilibria are of more general validity other results may not be this paper is concerned with two kinds of imperfect information a individuals may not know the wage paid in any particular firm or whether there is a vacancy in any particular firm until they apply for a job 1 b there are several characteristics besides the wage rate associated with a job which are important to the individual some like the normal length of a work week become known when the individual applies for the job information about other characteristics e g personalities of colleagues is acquired only gradually there is one important difference between the two kinds of imperfect in