the use of unsigned earnings quality measures in tests of earnings management this paper examines the implications of using the absolute value of discretionary accruals when testing for earnings management first we analytically develop the mean and variance of the distribution of absolute discretionary accruals and show that the expected value is an increasing function of the variance in the underlying error term from the first stage discretionary accrual estimation model second we highlight several firm characteristics that are related to the error variance in discretionary accrual estimation models using simulations we show that correlation between the earnings management partitioning variable and these firm characteristics leads to an overrejection of the null hypothesis of no earnings management third we provide research design suggestions to help researchers mitigate the potential bias arising from the use of unsigned measures of earnings management using these suggestions we replicate a recent study and demonstrate that the inferences change after controlling for operating volatility

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

on the integration of production and financial hedging decisions in global markets we study the integrated operational and financial hedging decisions faced by a global firm who sells to both home and foreign markets production occurs either at a single facility located in one of the markets or at two facilities one in each market the company has to invest in capacity before the selling season starts when the demand in both markets and the currency exchange rate are uncertain the currency exchange rate risk can be hedged by delaying allocation of the capacity to specific markets until both the currency and demand uncertainties are resolved and or by buying financial option contracts on the currency exchange rate when capacity commitment is made a mean variance utility function is used to model the firm s risk aversion in decision making we derive the joint optimal capacity and financial option decision and analyze the impact of the delayed allocation option and the financial options on capacity commitment and the firm s performance we show that the firm s financial hedging strategy ties closely to and can have both quantitative and qualitative impact on the firm s operational strategy the use or lack of use of financial hedges can go beyond affecting the magnitude of capacity levels by altering global supply chain structural choices such as the desired location and number of production facilities to be employed to meet global demand

the optimal mix of flexible and dedicated manufacturing capacities hedging against demand uncertainty abstract a firm that faces uncertain demands for several product groups needs to decide how much of relatively inexpensive dedicated capacity and how much of more expensive flexible capacity to acquire we model this situation as a two stage decision problem investment and allocation we pay particular attention to the dependence of acquisition policy on existing capacities as most firms facing the problem are not likely to be entirely new we show that if initial capacities are lower than the levels that would be optimal in absence of initial capacities the investment decision is a simple acquire up to optimal levels for each capacity type however if some initial capacity is too high the optimal additions to others depend on its value in a non linear yet intuitive fashion we also pose the issue of choosing the degree of flexibility as the realized product mix will affect the performance of partially flexible machines

discretionary accounting choices and the predictive ability of accruals with respect to future cash flows using a sample of restatement firms and a meet or beat model to classify firms as making discretionary accounting choices for opportunistic meet or beat op mb reasons we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers we find the opposite is true for firms classified as making discretionary accounting choices for non op mb reasons we consider a number of competing explanations for these latter results our findings are most consistent with the informational hypothesis weakly consistent with conservative motivated efficient contracting hypotheses but inconsistent with opportunistic contracting and misapplication errors of gaap explanations

detecting earnings management a new approach this paper provides a new approach to test for accrual based earnings management our approach exploits the inherent property of accrual accounting that any accrual based earnings management in one period must reverse in another period if the researcher has priors concerning the timing of the reversal incorporating these priors can significantly improve the power and specification of tests for earnings management our results indicate that tests incorporating reversals increase test power by around 40 and provide a robust solution for mitigating model misspecification arising from correlated omitted variables

dynamic capacity management with substitution we examine a multiperiod capacity allocation model with upgrading there are multiple product types corresponding to multiple classes of demand and the firm purchases capacity of each product before the first period within each period after demand arrives products are allocated to customers customers who arrive to find that their product has been depleted can be upgraded by at most one level we show that the optimal allocation policy is a simple two step algorithm first use any available capacity to satisfy same class demand and then upgrade customers until capacity reaches a protection limit so that in the second step the higher level capacity is rationed we show that these results hold both when all capacity is salvaged at the end of the last demand period as well as when capacity can be replenished in the latter case an order up to policy is optimal for replenishment although finding the optimal protection limits is computationally intensive we describe bounds for the optimal protection limits that take little effort to compute and can be used to effectively solve large problems using these heuristics we examine numerically the relative value of strictly optimal capacity and dynamic rationing the value of perfect demand information and the impact of demand and economic parameters on the value of optimal substitution

truthfulness in accounting how to discriminate accounting manipulators from non manipulators accountants preparing information are in a position to manipulate the view of economic reality presented in such information to interested parties these manipulations can be regarded as morally reprehensible because they are not fair to users they involve in an unjust exercise of power and they tend to weaken the authority of accounting regulators this paper develops a model for detecting earnings manipulators using financial statements ratios in a sample of spanish listed companies our results provide evidence that accounting data can be extremely useful in detecting manipulators this approach can be used by a large category of users of accounting information among which we can cite stock exchange supervisors or investing professionals

pricing and the news vendor problem a review with extensions in the newsvendor problem a decision maker facing random demand for a perishable product decides how much of it to stock for a single selling period this simple problem with its intuitively appealing solution is a crucial building block of stochastic inventory theory which comprises a vast literature focusing on operational efficiency typically in this literature market parameters such as demand and selling price are exogenous however incorporating these factors into the mode l can provide an excellent vehicle for examining how operational problems interact with marketing issues to influence decision making at the firm level in this paper we examine an extension of the newsvendor problem in which stocking quantity and selling price are set simultaneously we provide a comprehensive review that synthesizes existing results for the single period problem and develop additional results to enrich the existing knowledge base we also review and develop insight into a dynamic inventory extension of this problem and motivate the applicability of such models

earnings management under price regulation empirical evidence from the spanish electricity industry abstract this paper analyses the effect of price regulation on the accounting policy of spanish electricity companies over the period 1991 2001 as predicted by the political costs hypothesis watts and zimmerman 1986 watts r l zimmerman j l 1986 positive accounting theory prentice hall englewood cliffs nj managers artificially reduce reported earnings when the government establishes tariff increases in this way companies attempt to diminish their political visibility and counteract social outcry arising from the government s decision several abnormal accruals models existent in the literature are used to obtain a proxy for managerial accounting discretion on earnings

joint inventory replenishment and pricing control for systems with uncertain yield and demand we study the joint inventory replenishment and pricing problem for production systems with random demand and yield more specifically we analyze the following single item periodic review model demands in consecutive periods are independent random variables and their distributions are price sensitive the production yield is uncertain so that the quantity received from a replenishment is a random variable whose distribution depends on the production quantity stockouts are fully backlogged our problem is to characterize the optimal dynamic policy that simultaneously determines the production quantity and the price for each period to maximize the total discounted profit we show that the optimal replenishment policy is of a threshold type i e it is optimal to produce if and only if the starting inventory in a period is below a threshold value and that both the optimal production quantity and the optimal price in each period are decreasing in the starting inventory we further study the operational e

the value of operational flexibility in the presence of input and output price uncertainties with oil refining applications refining is indispensable to almost every natural resource based commodity industry it involves a series of complex processes that transform inputs with a wide range of quality characteristics into refined finished products sold to end markets in this paper we take the perspective of a profit maximizing refiner that considers upgrading its existing simple refinery to include intermediate conversion flexibility i e the capability of converting heavy intermediate components to light ones we present a stylized two stage stochastic programming model of a petroleum refinery to investigate the value drivers of conversion flexibility and the impact of input and output market conditions on its economic potential conversion flexibility adds value to refineries by either transforming a nonprofitable situation into a profitable one referred to as purchase benefit or improving profitability of an already profitable situation referred to as unit revenue benefit in a real data calibrated numerical study w

labor unemployment insurance and earnings management abstract we provide new evidence that firms appear to manage long run earnings upward in order to manage rank and file employees perceptions of employment security in particular we exploit exogenous state level changes in unemployment insurance benefits and test for partial unwinding of prior upward earnings management when benefits increase consistent with the hypothesis we find a significant reduction in abnormal accruals increased recognition of special items and write downs and greater likelihood of net income reducing restatements following an increase in state level unemployment benefits a number of cross sectional results are also consistent with the hypothesis

joint pricing and production decisions with yield uncertainty and downconversion abstract we consider a firm who supplies two types of products high end and low end because of the uncertainty in the production process the yield rate of the high end products is uncertain the substandard high end products caused by the yield uncertainty can be transformed into the low end products with a certain cost we characterize the optimal pricing and production decisions and develop an algorithm to compute the optimal solution we also investigate the impact of the yield uncertainty on the firm s performance and explore how stability of market demand emergent fulfillment costs and downconversion cost influence this effect we find that i the profit of the firm deteriorates when the risk of the yield uncertainty is high in the face of yield uncertainty the firm prefers to decrease increase the production quantity of the high end low end products ii when the market demands are quite unstable the emergent fulfillment costs are low or the downconversion cost is high the firm has a low incentive to eliminate the yield uncertainty

co production processes with random yields in the semiconductor industry a wide variety of manufacturing operations can be characterized as co production with substitutable demand that is there are many situations in which the availability of two or more items are related and because of randomness in either supply or demand it can be advantageous to substitute one of these items for another our research was motivated by the semiconductor industry where chips are produced in large batches because of the presence of randomness in the process individual chips in a given batch can perform differently because some customers have stricter specifications than others chips within the same batch can be classified and sold as different products according to their measurable performance we model the production and inventory problem as a stochastic dynamic program in which the objective is to minimize the costs of meeting contractual obligations after developing heuristic methods of solving the problem in practice we validate them against a lower bound on the cost of an optim

the contracting benefits of accounting conservatism to lenders and borrowers abstract this paper examines the ex post and ex ante benefits of accounting conservatism to lenders and borrowers in the debt contracting process i expect conservatism to benefit lenders ex post through the timely signaling of default risk as manifested by accelerated covenant violations and to benefit borrowers ex ante through lower initial interest rates consistent with these predictions i find that more conservative borrowers are more likely to violate debt covenants following a negative price shock and that lenders offer lower interest rates to more conservative borrowers

factors associated with the year end decline in working capital working capital is an important indicator of firm operational efficiency all else being equal lower levels signal greater efficiency managers are thus likely to be motivated to report lower levels of working capital at times of greater external attention we find that working capital levels decrease in the fourth fiscal quarter significantly more than expected conditional on seasonal changes in economic activity the decrease subsequently reverses in the following first fiscal quarter evidence indicates that firms manage down year end working capital through transactions that increase year end operating cash flow and that firms spread this activity over all working capital accounts finally the temporary decrease in year end working capital is correlated with compensation benchmarks and analysts annual cash flow forecasts the temporary drop is also more pronounced for firms with industry dominance this paper was accepted by mary barth accounting

optimal investment strategies for flexible resources considering pricing and correlated demands we study the optimal resource investment decision faced by a two product price setting firm that operates in a monopolistic setting and employs a postponed pricing scheme the firm has the option to invest in dedicated resources as well as a more expensive flexible resource that can satisfy both products while the resource investment decision is made under demand uncertainty pricing and resource allocation decisions are postponed to the time when demand curves are realized our analysis provides the structure of the firm s optimal resource investment strategy as a function of demand parameters and investment costs and shows that the flexible resource investment decision follows athreshold policy we also show that it can be optimal for the firm to invest in the flexible resource even when demand patterns are perfectly positively correlated the reason for flexible capacity investment in this case is financial rather than risk pooling on the other hand we show that it can be optimal for the firm not to invest in the flexible resource even when demand patterns are perfectly negatively correlated the flexible resource investment decision in this case depends on the profitability of the two products based on our analysis we provide principles on the firm s optimal resource investment decision

resource flexibility with responsive pricing this article studies two types of flexibility used by firms to better respond to uncertain market conditions resource flexibility and responsive pricing we consider a situation in which a single flexible resource can be used to satisfy two distinct demand classes while the resource capacity must be decided based on uncertain demand functions the resource allocation as well as the pricing decision are made based on the realized demand functions we characterize the effects of two key drivers of flexibility demand variability and demand correlation assuming normally distributed demand curve intercepts demand variability creates opportunity costs and with fixed prices decreases the firm s profit we show that with the additional flexibility gained from responsive pricing the firm can maximize the benefits of favorable demand conditions and mitigate the effects of poor demand conditions ultimately profiting from variability positive demand correlation on the other hand remains undesirable under responsive pricing the optimal capacity of the flexible resource is always increasing in both demand variability and demand correlation this contrasts with the scenarios based on fixed prices highlighting the crucial difference that responsive pricing makes in the management of flexible resources we further quantify the value of flexibility for the firm and its customers by considering as a benchmark a firm relying on two dedicated resources the value of flexibility is most significant if the demand levels are highly variable and negatively correlated in such cases the firm benefits from demand variability due to responsive pricing while facing limited demand risk due to resource flexibility finally we endogenize the input price of the flexible resource by considering the pricing decision of the resource supplier

control rights and capital structure an empirical investigation we show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy net debt issuing activity experiences a sharp and persistent decline following debt covenant violations when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit the effect of creditor actions on debt policy is strongest when the borrower s alternative sources of finance are costly in addition despite the less favorable terms offered by existing creditors borrowers rarely switch lenders following a violation a fundamental question in financial economics is how do firms choose their financial policies extant empirical research on this question has focused primarily on the presence of taxes and bankruptcy costs e g scott 1976 information asymmetry e g myers and majluf 1984 and more recently market timing behavior e g baker and wurgler 2002 however beginning with jensen and meckling 1976 a large body of theoretical research examines how incentive conflicts between managers and external investors affect corporate financial policies in particular theoretical research on financial contracting shows that in the presence of incentive conflicts optimal debt contracts will allocate certain rights to creditors after negative performance in order to help firms secure financing ex ante e g aghion and bolton 1992 and dewatripont and tirole

note the newsvendor model with endogenous demand this paper considers a firm s price and inventory policy when it faces uncertain demand that depends on both price and inventory level the authors extend the classic newsvendor model by assuming that expected utility maximizing consumers choose between visiting the firm and consuming an exogenous outside option the outside option represents the utility the consumer forgoes when she chooses to visit the firm before knowing whether or not the product will be available the authors investigate both the case in which the firm s price is exogenous and the case in which price is chosen optimally the paper makes two contributions first the authors show that the firm holds more inventories provides a higher fill rate attracts more customers and earns higher profits when it internalizes the effect of its inventory on demand second the authors show that in the endogenous price case the firm s two dimensional decision problem can be reduced to two sequential single variable optimizations as a result the endogenous price case is as easy to solve as the exogenous price case

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

languages and earnings management abstract we predict that managers of firms in countries where languages do not require speakers to grammatically mark future events perceive future consequences of earnings management to be more imminent and therefore they are less likely to engage in earnings management using data from 38 countries we find that accrual based earnings management and real earnings management are less prevalent where there is weaker time disassociation in the language our study is the first to examine the relation between the grammatical structure of languages and financial reporting characteristics and it extends the literature on the effect of informal institutions on corporate actions

earnings quality research advances challenges and future research abstract this discussion makes several observations regarding the earnings quality research reviewed in dechow ge and schrand 2010 dgs i discuss some of the factors that led to the large growth in the earnings quality literature over the past two decades and note a few of the important contributions from this literature i also present what i view as several major challenges the literature faces as well as some avenues for future research in addition i discuss the difficulties in evaluating such a diverse body of literature and comment on dgs s major conclusions

who benefits from transshipment exogenous vs endogenous wholesale prices this paper studies how transshipments affect manufacturers and retailers considering both exogenous and endogenous wholesale prices for a distribution system where a single manufacturer sells to multiple identical cost retailers we consider both the manufacturer being a price taker and the manufacturer being a price setter in a single period setup under multivariate normal demand distribution in the case of the manufacturer being a price taker we provide several analytical results regarding the effects of key parameters on order quantities and profits in the case of the manufacturer being a price setter we characterize the stackelberg game that arises and provide several insights into how the game dynamics are affected by transshipments specifically we find that risk pooling makes retailers order quantities less sensitive to the wholesale price set by the manufacturer hence in general the manufacturer benefits from retailers transshipments by charging a higher wholesale price while retailers are often worse off the paper captures the effect of demand correlation and the effect of the number of retailers throughout and it illustrates the findings by a numerical example we also provide an interactive web page for numerical experiments

coordinating investment production and subcontracting we value the option of subcontracting to improve financial performance and system coordination by analyzing a competitive stochastic investment game with recourse the manufacturer and subcontractor decide separately on their capacity investment levels then demand uncertainty is resolved and both parties have the option to subcontract when deciding on their production and sales we analyze and present outsourcing conditions for three contract types 1 price only contracts where an ex ante transfer price is set for each unit supplied by the subcontractor 2 incomplete contracts where both parties negotiate over the subcontracting transfer and 3 state dependent price only and incomplete contracts for which we show an equivalence result while subcontracting with these three contract types can coordinate production decisions in the supply system only state dependent contracts can eliminate all decentralization costs and coordinate capacity investment decisions the minimally sufficient price only contract that coordinates our supply chain specifies transfer prices for a small number 6 in our model of contingent scenarios our game theoretic model allows the analysis of the role of transfer prices and of the bargaining power of buyer and supplier we find that sometimes firms may be better off leaving some contract parameters unspecified ex ante and agreeing to negotiate ex post also a price focused strategy for managing subcontractors can backfire because a lower transfer price may decrease the manufacturer s profit finally as with financial options the option value of subcontracting increases as markets are more volatile or more negatively correlated

does religion mitigate earnings management evidence from china using a sample of 11 357 firm year observations from the chinese stock market for the period of 2001 2011 we investigate whether and how religion can mitigate earnings management specifically based on geographic proximity based religion variables we provide strong and robust evidence to show that religion is significantly negatively associated with the extent of earnings management suggesting that religion can serve as a set of social norms to mitigate corporate unethical behavior such as earnings management our findings also reveal that the negative association between religion and earnings management is less pronounced for firms with closer distance to the regulatory centers than for their counterparts implying the substitutive effects between religion and the distance to regulators the proxy for regulatory intensity on mitigating earnings management the above results are robust to different measures of earnings management various religion variables and a variety of sensitivity tests

debt covenant violation and manipulation of accruals abstract this paper examines the abnormal accruals of a sample of 94 firms that reported debt covenant violations in annual reports we expect debt covenant restrictions to influence accounting choices in the year preceding and the year of violation time series and cross sectional models are used to estimate normal accruals in the year prior to violation both models indicate that abnormal total and working capital accruals are significantly positive in the year of violation there is evidence of positive abnormal working capital accruals after controlling for management changes and auditor going concern qualifications

debt covenant violations and managers accounting responses abstract this paper examines accounting changes costs of default and accounting based covenants violated by 130 firms reporting violations in annual reports i find that managers of firms approaching default respond with income increasing accounting changes and that the default costs imposed by lenders and the accounting flexibility available to managers are important determinants of managers accounting responses i also document that private lending agreements are the first violated that net worth and working capital restrictions are the most frequently violated restrictions and that in 52 percent of the cases lenders require concessions from borrowers to resolve default

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

determinants of the corporate decision to capitalize interest abstract until 1974 firms could choose within gaap to capitalize or expense interest costs associated with capital expenditures the predominant practice had been to treat interest as a period expense however in 1974 the securities and exchange commission imposed a moratorium on further adoption of interest capitalization by non regulated firms this study empirically examines economic factors potentially influencing firms decisions to expense or capitalize interest prior to the sec moratorium we hypothesize that the choice may be affected by 1 the existence of management compensation agreements tied to reported earnings 2 debt covenant constraints and 3 the political costs for some firms of reporting higher earnings when compared to the control group our findings are that 1 the frequency of explicit management compensation packages was not greater for the interest capitalization group 2 firms with financial ratios closer to likely debt agreement constraints on dividends interest coverage and leverage tended to elect interest capitalization and 3 other than the largest firms in the politically sensitive petroleum refining industry the larger firms were more likely to capitalize interest

accounting information in financial contracting the incomplete contract theory perspective this paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research we argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved by discussing its rich theoretical implications we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency

exploring the manipulation toolkit the failure of doral financial corporation abstractthe 2015 bankruptcy of doral financial corporation once the best u s bank according to u s banker is the largest since april 2010 the bankruptcy concludes years of management manipulation and efforts to recover sec investigation revealed fraud related to doral s valuation of interest only strips ios we show that doral management s misconduct also includes reckless hiring over investing insiders trading and opportunistic stock splits investigating the full range of doral management s misconduct reveals new tactics that managers use to pool with good firms and aids our understanding of the economic impact of managerial misconduct

measuring the probability of financial covenant violation in private debt contracts we measure the probability that a borrower will violate financial covenants in private debt contracts we analyze hand coded data and specify standard covenant definitions using compustat data that minimize measurement error for all individual dealscan covenants we use these definitions to create a measure of aggregate probability of violation which can be used across all covenants in a loan or among covenant subsets of interest we provide evidence that our aggregate probability measure is superior to alternatives used in prior literature

stocking retail assortments under dynamic consumer substitution we analyze a single period stochastic inventory model newsboy like model in which a sequence of heterogeneous customers dynamically substitute among product variants within a retail assortment when inventory is depleted the customer choice decisions are based on a natural and classical utility maximization criterion faced with such substitution behavior the retailer must choose initial inventory levels for the assortment to maximize expected profits using a sample path analysis we analyze structural properties of the expected profit function we show that under very general assumptions on the demand process total sales of each product are concave in their own inventory levels and possess the so calleddecreasing differences property meaning that the marginal value of an additional unit of the given product is decreasing in the inventory levels of all other products for a continuous relaxation of the problem we then show via counterexamples that the expected profit function is in general not even quasiconcave thus global optimization may be difficult however we propose and analyze a stochastic gradient algorithm for the problem and prove that it converges to a stationary point of the expected profit function under mild conditions finally we apply the algorithm to a set of numerical examples and compare the resulting inventory decisions to those of some simpler naive heuristics the examples show that substitution effects can have a significant impact on an assortment s gross profits the examples also illustrate some systematic distortions in inventory decisions if substitution effects are ignored in particular under substitution one should stock relatively more of popular variants and relatively less of unpopular variants than a traditional newsboy analysis indicates

inventory management under price based and stockout based substitution abstract we examine a stochastic inventory and pricing problem for a firm that sells two vertically differentiated products the demands for the two products are determined by total random market size and the customers net utility from buying the two products which is determined by the products quality attributes the individual quality valuation unknown to the firm and the selling prices in case the preferred product is out of stock customers may be willing to buy a substitute instead if their net utility is non negative therefore we analyze an inventory and pricing model considering price based and stockout based substitution we show that the demand function is not continuous in price by decomposing the profit function into different price regimes we are able to derive closed form expressions for the stockout based substitution rates upward and downward substitution and the optimal inventory levels under exogenous pricing under endogenous pricing we find that the profit function is not necessarily unimodal however we show that a unique solution exists for the integrated price and inventory problem under price based substitution only numerical results reveal that not considering stockout based substitution i leads to lower profit margins for high quality products and ii may cause severe supply demand mismatches throughout the entire assortment finally we show the performance of two approximated pricing policies

revenue management under a general discrete choice model of consumer behavior customer choice behavior such as buy up and buy down is an important phenomenon in a wide range of revenue management contexts yet most revenue management methodologies ignore this phenomenon or at best approximate it in a heuristic way in this paper we provide an exact and quite general analysis of this problem specifically we analyze a single leg reserve management problem in which the buyers choice behavior is modeled explicitly the choice model is very general simply specifying the probability of purchase for each fare product as a function of the set of fare products offered the control problem is to decide which subset of fare products to offer at each point in time we show that the optimal policy for this problem has a quite simple form namely it consists of identifying an ordered family of efficient subsets s 1 s m and at each point in time opening one of these sets s k where the optimal index k is increasing in the remaining capacity x and decreasing in the remaining time that is the more capacity or less time available the further the optimal set is along this sequence we also show that the optimal policy is a nested allocation policy if and only if the sequence of efficient sets is nested that is s 1 s 2 s m moreover we give a characterization of when nesting by fare order is optimal we also develop an estimation procedure for this setting based on the expectation maximization em method that jointly estimates arrival rates and choice model parameters when no purchase outcomes are unobservable numerical results are given to illustrate both the model and estimation procedure

recognizing ethical issues an examination of practicing industry accountants and accounting students it has long been recognized that accountants practicing in business settings have a dual role 1 as employees they are bound to the organization and 2 as professionals they are bound by the profession s code of ethical conduct westra journal of business ethics 5 2 119 128 1986 these two roles highlight the need to recognize and consider both the ethical and economic implications of their decisions practicing industry accountants are commonly involved in a broad range of their firm s business practices and decision making and are increasingly exposed to the commercial aspects of their companies also during their education they were trained on their professional responsibilities however in general this education was not recent and may not have been reinforced by contrast accounting students have been recently and repeatedly exposed to and have knowledge about their professional responsibilities as an accountant but limited if any exposure to the commercial aspects of business consequently our first hypothesis predicts that the ethical sensitivity of practicing industry accountants will be lower than that of accounting students we find limited support for this hypothesis second we also examine company reward structure and predict that ethical sensitivity will be lower for those in a company with a reward structure narrowly focused only on financial goals as compared to those in a company with a broad reward structure e g including rewards for both financial and non financial goals third we predict that the difference in ethical sensitivity levels between those in a company with a narrow reward structure as compared to those in a company with a broad financial reward structure will be higher for practicing industry accountants compared to accounting students results from our study generally support these last two predictions ethical sensitivity is lower for those in a company with a reward structure narrowly focused only on financial goals as compared to those in a company with a broad reward structure suggesting that companies may be able to increase ethical awareness in their organizations by including non financial goals in their reward structures

a theory of corporate scandals why the usa and europe differ a wave of financial irregularity in the usa in 2001 2 culminated in the sarbanes oxley act a worldwide stockmarket bubble burst over this same period with the actual market decline being proportionately more severe in europe yet no corresponding wave of financial scandals involving a similar level of companies occurred in europe given the higher level of public and private enforcement in the usa for securities fraud this contrast seems perplexing this paper submits that different kinds of scandals characterize different systems of corporate governance in particular dispersed ownership systems of governance are prone to the forms of earnings management that erupted in the usa but concentrated ownership systems are much less vulnerable instead the characteristic scandal in such systems is the appropriation of private benefits of control this paper suggests that this difference in the likely source of and motive for financial misconduct has implications both for the utility of gatekeepers as reputational intermediaries and for design of legal controls to protect public shareholders the difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies should directly select their own gatekeepers copyright 2005 oxford university press

supply management in multiproduct firms with fixed proportions technology this paper studies the supply management of a primary input where this input gives rise to multiple products in fixed proportions my objective is twofold first i study fixed proportions technol

the effects of debt covenants and political costs on the choice of accounting methods the case of accounting for r d costs abstract until 1974 firms could capitalize or expense all or part of their research and development r d costs managerial choice between these two alternatives is hypothesized to be affected by the existence of debt covenants which employ accounting numbers relating to leverage interest coverage and ability to pay dividends in addition the use of public versus private debt is hypothesized to affect the accounting choice due to differential renegotiation costs lastly a political cost hypothesis is tested this study uses a multivariate statistical technique the generalized jackknife the results suggest that firms which capitalized r d costs were more highly levered used more public debt were closer to dividend restrictions and were smaller than firms which expensed r d costs

the strategic perils of delayed differentiation the value of delayed differentiation also known as postponement for a monopolist has been extensively studied in the operations literature we analyze the case of imperfectly competitive markets with demand uncertainty wherein the choice of supply chain configuration i e early or delayed differentiation is endogenous to the competing firms we characterize firms choices in equilibrium and analyze the effects of these choices on quantities sold profits consumer surplus and welfare we demonstrate that purely strategic considerations not previously identified in the literature play a pivotal role in determining the value of delayed differentiation in the face of either entry threats or competition these strategic effects can significantly diminish the value of delayed differentiation in fact under plausible conditions these effects dominate the traditional risk pooling benefits associated with delayed differentiation in which case early differentiation is the dominant strategy for firms even under cost parity with delayed differentiation we extend the main model to study the effects of alternate market structures asymmetric markets and inventory holdback our results in particular that for a broad range of parameter values early differentiation is a dominant strategy even under cost parity with delayed differentiation are robust to these relaxations

managing interacting accounting measures to meet multiple objectives a study of lifo firms abstract using a sample of lifo users we examine the strengths and weaknesses of adopting a simultaneous equations approach to study managers adjustments of interacting accounting measures that meet multiple objectives we focus on the importance of considering differences in the costs and the effectiveness of adjusting accounting measures in addition we examine managers objectives in subsequent years and how adjustments reversals affect those objectives although generally consistent with earlier studies of lifo inventory adjustments our results indicate that modelling interacting accounting measures such as other current accruals and depreciation leads to differing conclusions about the role of taxes

cultural and ethical effects in budgeting systems a comparison of u s and chinese managers this study developed and tested a model of culture s effect on budgeting systems and hypothesized that system variables and reactions to them are influenced by culture specific work related and ethical values most organizational and behavioral views of budgeting fail to acknowledge the ethical components of the problem and have largely ignored the role of culture in shaping organizational and individual values cross cultural differences in reactions to system design variables and in the behaviors motivated or mitigated by those variables has implications for the design and effectiveness of budgeting systems the data largely support our research model demonstrating the hypothesized national cultural differences in system design variables e g participation standards tightness budget emphasis etc which we characterized as the opportunity and incentives to create budgetary slack and the expected relationship between incentives but not opportunity to create slack and slack creation behavior the data demonstrate hypothesized cultural differences in ethical ideology but show ethical ideology related to slack creation behavior only for u s managers a discussion of the results and their implications is included

the effect of owner versus management control on the choice of accounting methods abstract this paper examines the relationship between the ownership control status of firms and the accounting methods they adopt the arguments of watts and zimmerman s positive theory are integrated with those of managerial economists to generate the prediction that management controlled firms are more likely than owner controlled firms to adopt accounting methods which increase reported earnings this prediction is inconsistent with fama s hypothesis that the market for managerial talent will prevent management controlled firms from acting differently than owner controlled firms this paper compares the depreciation methods used by a sample of management and owner controlled firms for financial reporting purposes the comparison considers and controls for the factors of firm size leverage and the depreciation method used for tax reporting purposes the comparison reveals that there is a significant difference in the depreciation methods adopted by management controlled and owner controlled firms for financial reporting purposes

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

ultimate ownership income management and legal and extra legal institutions this study provides evidence of the role of both legal and extra legal institutions in limiting the income management induced by the detachment of control rights from the cash flow rights of ultimate owners the tests use a unique comprehensive data set for firm level control and ownership structures from 9 east asian and 13 western european countries univariate regressions show that income management that is induced by the wedge between control rights and cash flow rights is significantly limited in countries with high statutory protection of minority rights proxied by legal tradition minority rights protection the efficiency of the judicial system or disclosure standards and effective extra legal institutions proxied by the effectiveness of competition laws diffusion of the press and tax compliance furthermore multiple regression results show that a common law tradition and an efficient judicial system subsume the effects of the other legal institutions and that a high rate of tax compliance subsumes the effects of the other extra legal institutions in curbing insider income management it is surprising that a high rate of tax compliance ultimately has a greater effect than legal tradition and the efficiency of the judicial system although this finding is unexpected given prior evidence on the dominant roles of legal institutions in macroeconomic issues and corporate policies it is consistent with the recent argument that effective tax enforcement is like a public good in that it can reduce insiders private control benefits an implication of this finding is that closer attention to extra legal institutions has the potential to enhance our understanding of the institutional reforms needed to limit insider private control benefits

combined pricing and inventory control under uncertainty this paper addresses the simultaneous determination of pricing and inventory replenishment strategies in the face of demand uncertainty more specifically we analyze the following single item periodic review model demands in consecutive periods are independent but their distributions depend on the item s price in accordance with general stochastic demand functions the price charged in any given period can be specified dynamically as a function of the state of the system a replenishment order may be placed at the beginning of some or all of the periods stockouts are fully backlogged we address both finite and infinite horizon models with the objective of maximizing total expected discounted profit or its time average value assuming that prices can either be adjusted arbitrarily upward or downward or that they can only be decreased we characterize the structure of an optimal combined pricing and inventory strategy for all of the above types of models we also develop an efficient value iteration method to compute these optimal strategies finally we report on an extensive numerical study that characterizes various qualitative properties of the optimal strategies and corresponding optimal profit values

an empirical examination of debt covenant restrictions and accounting related debt proxies abstract prior studies of discretionary accounting choices have generally relied on one or more proxy variables to measure closeness to debt covenant restrictions without actually examining the existence or extent of restrictive covenants this study tests the validity of the most commonly used proxy the debt equity ratio by examining its relation to actual debt covenant restrictions for a random sample of u s firms the results indicate that several versions of the debt equity ratio capture the existence and tightness of retained earnings restrictionsand the existence of net tangible asset and working capital restrictions but are unrelated to four other covenant restrictions

optimal production pricing and substitution policies in continuous review production inventory systems abstract we consider the optimal production pricing and substitution policies of a continuous review production inventory system with two products a high end product and a low end product each product has its associated customer stream however the demands for the low end product may be satisfied by the high end product we formulate the problem as a markov decision process and characterize the structure of the optimal control policy which specifies when to produce for each product when to use the high end product as a substitute and how to set the optimal prices we show that a base stock production policy is optimal however the optimal base stock level for each product depends on the inventory level of the other product and it features a monotonic property we also demonstrate that the optimal substitution policy is a rationing policy with the rationing level depending on the total inventory amount we find that the optimal prices can be either decreasing or increasing in the inventory levels depending on the forms of demand functions furthermore we utilize numerical experiments to investigate the impact of different system characteristics on the benefits of using substitution and dynamic pricing finally we investigate when the dynamic pricing strategy and the substitution strategy are complements or substitutes

integrating long term and short term contracting in beef supply chains this paper analyzes the optimal procurement processing and production decisions of a meat processing company hereafter a packer in a beef supply chain the packer processes fed cattle to produce two beef products program premium boxed beef and commodity boxed beef in fixed proportions but with downward substitution of the premium product for the commodity product the packer can source input fed cattle from a contract market where long term contracts are signed in advance of the required delivery time and from a spot market on the spot day contract prices are taken to be of a general window form linear in the spot price but capped by upper and lower limits on realized contract price our analysis provides managerial insights on the interaction of window contract terms with processing options we show that the packer benefits from a low correlation between the spot price and product market uncertainties and this is independent of the form of the window contract although the expected revenues from processing increase in spot price variability the overall impact on profitability depends on the parameters of the window contract using a calibration based on the report by the gipsa grain inspection packers and stockyards administration 2007 gipsa livestock and meat marketing study vol 3 fed cattle and beef industries report u s department of agriculture washington dc this paper elucidates for the first time the value of long term contracting as a complement to spot sourcing in the beef supply chain our comparative statics results provide some rules of thumb for the packer for the strategic management of the procurement portfolio in particular we show that higher variability higher spot price variability product market variability and correlation increases the profits of the packer but decreases the reliance on the contract market relative to the spot market this paper was accepted by yossi aviv operations management

optimal procurement policies under price dependent demand abstract we study a periodic review inventory model where in addition to the procurement quantity price is also a decision variable we develop a model where demand in each period is a random variable having a price and possibly period dependent probability distribution with the expected demand decreasing in price the model includes price limits and fixed ordering costs in addition to unit procurement holding and shortage costs we study the optimal policies which jointly maximize the discounted expected profit over a finite planning horizon we characterize the form of the optimal procurement policy under a general price demand relationship and give a sufficient condition for it to be s n s n type we also discuss some special cases and extensions to the basic model including the infinite horizon problem

effects of wto accession on policy making in sovereign states preliminary lessons from the recent experience of transition countries one of the most remarkable success es of the world trade organization in recent years has been the expansion of wto membership and the continued stream of applications of countries to accede to the wto of the 43 countries that have applied to accede the wto under article xii since january i 1995 approximately one half are countries in the process of trans ition from a planned to a market economy ten of the 14 countries that have already completed their accession process and between 9 and 13 countries depending on whether east asian countries are included or not of the 28 countries negotiating their accession are trans ition countries clearly the wto represents a powerful attraction for countries in transition cit which treat their wto membership as a stamp of approval of their policies and the admission into the international community a feat quite important for crt that have been isolated from world markets for more 50 years

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

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

why new issues and high accrual firms underperform the role of analysts credulity we find that analysts forecast errors are predicted by past accounting accruals adjustments to cash flows to obtain reported earnings among both equity issuers and nonissuers analysts are more optimistic for the subsequent four years for issuers reporting higher issue year accruals the predictive power is greater for discretionary accruals than nondiscretionary accruals and is independent of the presence of an underwriting affiliation predicted forecast errors from accruals significantly explain the long term underperformance of new issuers the predictability of forecast errors among nonissuers suggests that analysts credulity about accruals management more generally contributes to market inefficiency copyright 2002 oxford university press

accounting for interest by real estate developers this paper investigates accounting for interest by australian real estate developers it argues that management s choice of accounting technique is the result of ex ante contracting to prevent management opportunistic behavior rather than a manifestation of opportunistic behavior per se the argument provides a richer description of accounting choice and explains why in australia leverage and the accounting method choice are correlated in the absence of bond covenants the argument also explains why inconsistent with political cost arguments larger firms are more likely to capitalize than expense interest

wto accession the changing competitiveness of foreign financed firms and regional development in guangdong of southern china this paper investigates the changing competitiveness of foreign financed manufacturing firms and its implications for regional development in guangdong province of southern china in the run up to world trade organization wto accession it is argued that transnational corporations tncs and some competitive large scale locally funded firms in guangdong will triumph after wto accession the crowding out process of small and medium sized enterprises smes in guangdong will be accelerated in the near future as they are competing directly with tncs and as their competitive advantages are diminishing due to bureaucratic red tape and the rigorous enforcement of new government policies due to close business linkages with local privately funded firms the competitiveness and vitality of foreign financed enterprises will have profound long term effects on the economic development of guangdong before and after wto accession cet article cherche a etudier l evolution de la competitivite des entreprises ind

pricing and operational recourse in coproduction systems coproduction systems in which multiple products are produced simultaneously in a single production run are prevalent in many industries such systems typically produce a random quantity of vertically differentiated products this product hierarchy enables the firm to fill demand for a lower quality product by converting a higher quality product in addition to the challenges presented by random yields and multiple products coproduction systems often serve multiple customer classes that differ in their product valuations furthermore the sizes of these classes are uncertain employing a utility maximizing customer model we investigate the production pricing downconversion and allocation decisions in a two class stochastic demand stochastic yield coproduction system for the single class case we establish that downconversion will not occur if prices are set optimally in contrast we show that downconversion can be optimal in the two class case even if prices are set optimally we consider the benefit of postponing certain operational decisions e g the pricing or allocation rule decisions until after uncertainties are resolved we use the term recourse to denote actions taken after uncertainties have been resolved we find that recourse pricing benefits the firm much more than either downconversion or recourse allocation do implying that recourse demand management is more valuable than recourse supply management special cases of our model include the single class and two class random yield newsvendor models

optimal investment in product flexible manufacturing capacity this paper presents a model and an analysis of the cost flexibility tradeoffs involved in investing in product flexible manufacturing capacity flexible capacity provides a firm with the ability to respond to a wide variety of future demand outcomes but at the expense of the increased cost of acquiring flexible manufacturing capacity as compared with dedicated or nonflexible capacity we formulate the product flexible manufacturing capacity investment decision as a two stage stochastic program in the first stage the firm must make its investment decision in manufacturing capacity before the resolution of uncertainty in product demand in the second stage after demand for products are known the firm implements its production decisions constrained by the first stage investments the main contributions of this paper are threefold first we develop a model of the firm s flexible manufacturing investment decision that conceptually captures some of the key characteristics of this complex decision probl

inventory competition under dynamic consumer choice we analyze a model of inventory competition among n firms that provide competing substitutable goods each firm chooses initial inventory levels for their good in a single period newsboy like inventory model customers choose dynamically based on current availability so the inventory levels at one firm affect the demand of all competingfirms this creates a strategic interaction amongthe firms inventory decisions our work extends earlier work on variations of this problem by karjalainen 1992 lippman and mccardle 1997 and parlar 1988 specifically we model demand in a more realistic way as a stochastic sequence of heterogeneous consumers who choose dynamically from amongthe available goods or choose not to purchase based on a utility maximization criterion we also use a sample path analysis so minimal assumptions are imposed on this demand process we characterize the nash equilibrium of the resulting stocking game and prove it is unique in the symmetric case we show there is a bias toward overstocking caused by competition specifically reducing the quantity stocked at any equilibrium of the game increases total system profits and at any joint optimal set of stocking levels each firm has an individual incentive to increase its own stock for the symmetric case we show that as the number of competing firms increases the overstockingbecomes so severe that total system and individual firm profits approach zero finally we propose a stochastic gradient algorithm for computing equilibria and provide several numerical examples

the effect of ethical orientation and professional commitment on earnings management behavior the purpose of this study is twofold the first objective is to examine the impact of an individual s ethical ideology and level of professional commitment on the earnings management decision the second objective is to observe whether the presence of a personal benefit affects an individual s ethical orientation or professional commitment within the context of an opportunity to manage earnings using a sample of 375 undergraduate business majors our results suggest a significant relationship between an individual s ethical orientation and decision making further participants with higher levels of professional commitment seem to be less likely to engage in earnings management behavior and less likely to behave opportunistically these results have the potential to add to our understanding of certain behaviors in entry level personnel and should be of interest to managers practitioners academicians and researchers

on the relationship between inventory costs and variety benefits in retailassortments consider a category of product variants distinguished by some attribute such as color or flavor a retailer must construct an assortment for the category i e select a subset variants to stock and determine purchase quantities for each offered variant we analyze this problem using a multinomial logit model to describe the consumer choice process and a newsboy model to represent the retailer s inventory cost we show that the optimal assortment has a simple structure and provide insights on how various factors affect the optimal level of assortment variety we also develop a formal definition of the level of fashion in a category using the theory of majorization and examine its implications for category profits

coordinating inventory control and pricing strategies with random demand and fixed ordering cost the finite horizon case we analyze a finite horizon single product periodic review model in which pricing and production inventory decisions are made simultaneously demands in different periods are random variables that are independent of each other and their distributions depend on the product price pricing and ordering decisions are made at the beginning of each period and all shortages are backlogged ordering cost includes both a fixed cost and a variable cost proportional to the amount ordered the objective is to find an inventory policy and a pricing strategy maximizing expected profit over the finite horizon we show that when the demand model is additive the profit to go functions arek concave and hence an s s p policy is optimal in such a policy the period inventory is managed based on the classical s s policy and price is determined based on the inventory position at the beginning of each period for more general demand functions i e multiplicative plus additive functions we demonstrate that the profit to go function is not necessarilyk concave and an s s p policy is not necessarily optimal we introduce a new concept the symmetrick concave functions and apply it to provide a characterization of the optimal policy

an income strategy approach to the positive theory of accounting standard setting choice abstract this paper is designed to provide additional evidence on the positive theory of accounting policy choice by combining individual accounting principles into firm income strategies these strategies were the dependent variable in a probit analysis where the independent variables were size management compensation industry concentration ratio systematic risk capital intensity and the total debt to total asset ratio the results indicate that four of these factors size management compensation concentration ratio and the total debt to total asset ratio have a significant association with the choice of a firm s income strategy this test provides strong evidence consistent with the positive theory of accounting standard setting choice we also present evidence that smaller firms and or firms in less concentrated industries do not appear to make accounting policy choice decisions that are consistent with this theory

comparing abnormal accruals models a non parametric approach the purpose of this study is to compare the distribution of discretionary accruals produced by the standard and modified jones models using a non parametric approach evidence is provided that discretionary accruals produced by the two models have an almost identical distribution moreover it is found that whether or not an intercept is included in the model produces more intra distribution mobility than the use of the standard or the modified version of the model

stocking and pricing decisions under endogenous demand and reference point effects abstract in this paper we study the newsvendor s pricing and stocking decisions under reference point effects the demand faced by the newsvendor is endogenous and the customers may also decide to procure the product from an outside option we characterize the firm s optimal pricing and stocking decisions our analysis reveals a threshold policy on the firm s ordering and pricing decisions while considering the impact of reference point effects we also find that as the level of optimism increases the firm s optimal ordering level decreases and optimal price increases we further study the impact of loss aversion on the firm s ordering and pricing decisions

exploring the impact of internal corporate governance on the relation between disclosure quality and earnings management in the uk listed companies this study investigates the impact of internal corporate governance on the relation between disclosure quality and earnings management in the uk listed companies in particular whether governance mechanisms have deterrent effect on earnings management similar to firms disclosure quality unlike prior literature we measure a number of board and audit committee related governance instruments three disclosure quality proxies i e investor relation magazine award forward looking disclosure and analyst forecast accuracy and the modified jones model to test the hypotheses of the study on a matched pair sample data of investor relation magazine award winning and non winning firms our findings in the ols and sensitivity analyses using heckman procedure and 2sls regressions consistently report a significant negative association between earnings management and disclosure quality for all proxies in restraining earnings management in contrast corporate governance variables are mostly insignificantly related to earnings management this provides an emerging trend of the outperformance of disclosure quality over internal governance mechanisms in lessening earnings management these findings warrant due attention of the policy makers investors corporate firms and other stakeholders in shaping a high quality disclosure and governance regime in corporate settings to mitigate managerial manipulations of earnings across the countries in the world

price versus production postponement capacity and competition this article presents a comparative analysis of possible postponement strategies in a two stage decision model where firms make three decisions capacity investment production inventory quantity and price typically investments are made while the demand curve is uncertain the strategies differ in the timing of the operational decisions relative to the realization of uncertainty we show how competition uncertainty and the timing of operational decisions influence the strategic investment decision of the firm and its value in contrast to production postponement price postponement makes the investment and production inventory decisions relatively insensitive to uncertainty this suggests that managers can make optimal capacity decisions by deterministic reasoning if they have some price flexibility under price postponement additional postponement of production has relatively small incremental value therefore it may be worthwhile to consider flexible ex post pricing before production postponement reengineering while more postponement increases firm value it is counterintuitive that this also makes the optimal capacity decision more sensitive to uncertainty we highlight the different impact of more timely information which leads to higher investment and inventories and of reduced demand uncertainty which decreases investment and inventories our analysis suggests appropriateness conditions for simple make to stock and make to order strategies we also present technical sufficiency and uniqueness conditions under price postponement these results extend to oligopolistic and perfect competition for which pure equilibria are derived interestingly the relative value of operational postponement techniques seems to increase as the industry becomes more competitive

flexible service capacity optimal investment and the impact of demand correlation we consider a firm that provides multiple services using both specialized and flexible capacity the problem is formulated as a two stage single period stochastic program the firm invests in capacity before the actual demand is known and optimally assigns capacity to customers when demand is realized sample applications include a car rental company s use of mid sized cars to satisfy unexpectedly high demand for compact cars and an airline s use of business class seats to satisfy economy class demand we obtain an analytical solution for a particular case when services may be upgraded by one class the simple form of the solution allows us to compare the optimal capacities explicitly with a solution that does not anticipate flexibility given that demand follows a multivariate normal distribution we analytically characterize the effects of increasing demand correlation on the optimal solution for the case with two customer classes the effects of demand correlation are intuitive increasing correlation induces a shift from flexible to dedicated capacity when there are three or more classes there are also adjustments to the resources not directly affected by the correlation change as correlation rises these changes follow an alternating pattern for example if the optimal capacity of one resource rises then the optimal capacity of the adjacent resource falls these results make precise conjectures based on numerical experiments that have existed in the literature for some time

additional evidence on bonus plans and income management abstract we extend healy 1985 by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980 1990 period contrary to healy we find that when earnings before discretionary accruals fall below the lower bound managers select income increasing discretionary accruals and vice versa we believe that our results are more consistent with the income smoothing hypothesis than with healy s bonus hypothesis however mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results

accruals management investor sophistication and equity valuation evidence from 10 q filings the release of the full set of financial statements in form 10 q provides investors with the data necessary to estimate the discretionary portion of earnings thereby allowing them to better assess the integrity of reported quarterly earnings we thus expect a negative association between unexpected discretionary accruals estimated using 10 q disclosures and stock returns around 10 q filing dates consistent with our expectations we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10 q filing date furthermore this association varies systematically with investor sophistication finally results from portfolio tests indicate that this association is economically as well as statistically significant one interpretation of our findings is that accruals management has substantial valuation consequences which are quickly impounded into stock prices

smoothing income in anticipation of future earnings abstract recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance we find support for this theory our evidence suggests that when current earnings are poor and expected future earnings are good managers borrow earnings from the future for use in the current period conversely when current earnings are good and expected future earnings are poor managers save current earnings for possible use in the future however sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings

legal inforcement short maturity debt and the incentive to manage earnings abstract prior research contends that weak legal regimes discourage lender enforcement of contracts by making it either costly or ineffective however diamond observes that this lender passivity can be overcome by structuring debt as a short term loan his argument is that an arrival of bad news in the presence of short term debt can result in externalities that will trigger a run on the firm and that this in turn creates ex ante incentives for lenders to enforce their contracts we examine whether short term debt creates an incentive for borrowers to delay the recognition of bad news through earnings management using a sample of firm level data from 33 countries over a 10 year period we find that short term debt induces greater earnings management this impact of short term debt is especially greater in countries with weak legal regimes this evidence is consistent with the hypothesis that borrowers will manage earnings to circumvent lender enforcement

process flexibility in supply chains process flexibility whereby a production facility can produce multiple products is a critical design consideration in multiproduct supply chains facing uncertain demand the challenge is to determine a cost effective flexibility configuration that is able to meet the demand with high likelihood in this paper we present a framework for analyzing the benefits from flexibility in multistage supply chains we find two phenomena stage spanning bottlenecks and floating bottlenecks neither of which are present in single stage supply chains which reduce the effectiveness of a flexibility configuration we develop a flexibility measureg and show that increasing this measure results in greater protection from these supply chain inefficiencies we also identify flexibility guidelines that perform very well for multistage supply chains these guidelines employ and adapt the single stage chaining strategy of jordan and graves 1995 to multistage supply chains

research note the role of production lead time and demand uncertainty in marketing durable goods firms often have to make their production decisions under conditions of demand uncertainty this is especially true for product categories such as automobiles and technology goods where the lead time needed for manufacturing forces firms to make production decisions well in advance of the selling season once the firm has produced the goods the available production volume affects the firm s subsequent marketing decisions in this paper we study the relationship between the firm s production and marketing decisions for a durable goods manufacturer we develop a dynamic model of a durable product market in which the demand functions are developed from a micromodeling of consumer utility functions and an equilibrium analysis of consumer strategies after taking into account the demand uncertainty as well as the potential for cannibalization of future sales the manufacturer makes its production and sales decisions we find that the firm s optimal inventory level is u shaped in the durability of the product and that the firm suffers a larger loss due to uncertainty when it is leases rather than sells its products furthermore unlike the case for nondurables for durable goods we find that the effect of uncertainty persists even after the uncertainty has been resolved