welfare use and children s longer term achievement we investigate the effects of mothers welfare use on children s longer term performance to address issues of improper comparison groups and the endogenous nature of welfare participation we focus on less educated single mothers and adopt a correction function approach data are drawn from the national longitudinal survey of youth 1979 children and young adult from 1994 to 2010 estimation results confirm the positive longer term effects of mothers welfare use on average a child whose mother used welfare in all 20 quarters after childbirth experiences a 0 56 point increase in their yearly high school grade point average is 12 more likely to graduate from high school and earns 1112 76 more in the first observed income than a child whose mother does not

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

discussion of the effect of fair value accounting on the performance evaluation role of earnings abstract using the setting of ifrs adoption defond hu hung and li 2020 examine the impact of fair value accounting on the usefulness of earnings in executive performance evaluation and compensation in this discussion we review the research design discuss the implications of the findings and provide suggestions for future research in particular defond et al s measure of the impact of fair value accounting may contain substantial measurement error which calls for additional analyses we believe that defond et al address an important question motivated by recent developments in accounting standard setting yet the broader question of whether and how ifrs fair value provisions affect the way compensation contracts are written and the usefulness of accounting information not just that of earnings has not been fully understood

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

ex ante randomization in agency models we consider how a principal can use randomized strategies in designing optimal contracts in agency settings we distinguish between ex post randomization overfee schedulesfollowing act selection by the agent and ex ante randomization overfee schedules before act selection we show that ex ante randomization may be efficient in both full information and private information settings under certain assumptions regarding preferences and the production technology it is particularly significant that additive separability and concavity ofthe agent s utility function as well as concavity of the production function do not rule out efficient ex ante randomized contracts in private information settings although as is known they rule out ex post randomization

dynamic incentives and retirement abstract this paper examines multi period compensation contracts when retirement is anticipated short term contracts in long term employment relationships are equivalent to a long term renegotiation proof contract the dynamic of incentive rates is determined by i how and in which periods managerial effort affects the contractible performance measures and by ii the time series correlation of error terms in performance reports the model explains why long term investments can decrease while incentive rates increase as managers approach retirement earnings persistence is negatively associated to earnings based incentive rates but towards retirement high earnings persistence implies increasing earnings based incentive rates

monitoring costs managerial ethics and corporate governance a modeling approach this article evaluates effectiveness and costs of external regulation in particular the sarbanes oxley act of 2002 sox in restricting managerial malfeasance and safeguarding shareholder interests it discusses the role of managerial ethics as an alternative corporate governance mechanism to protect shareholder value this article builds a mathematical model to illustrate shareholders choices of best corporate governance mechanisms taking into account the influence of managerial ethics effectiveness and costs of monitoring we suggest that the best corporate governance design and the optimal monitoring expenses are influenced by managerial types monitoring efficiency and effectiveness of ethics education we conclude that stringent regulation and monitoring may not always enhance shareholder value when managerial ethics could be improved by ethics education or social norms ethics education may be a better alternative than stringent regulation

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

strategic transfer pricing most research into cost systems has focused on their motivational implications this paper takes a different approach by developing a model where two oligopolistic firms strategically select their cost based transfer prices duopoly models frequently assume that firms game on their choice of prices product prices however are ultimately based on the firms transfer prices that communicate manufacturing costs to marketing departments it is for this reason that transfer prices will have a strategic component to them we derive implications for cost system choice and transfer pricing including showing that firms may cross subsidize their products a result consistent with the empirical evidence

executive effort and selection of risky projects this article examines the incentives of executives to adopt risky projects the agency problem considered is that of motivating the executive to expend effort to generate information about the profitability of projects and to select the best project conditional upon the information that his effort generates we show that the executive and the principal will not always agree regarding which project is best we provide conditions under which this conflict of interest leads from the principal s perspective to either an underinvestment or an overinvestment in risky projects

on the relative performance of linear vs piecewise linear threshold intertemporal incentives this paper employs numerical simulations to compare the relative performance of linear contracts with piecewise linear threshold contracts in the case where the agent chooses actions over time these contracts are restricted to be functions of the ending value of aggregate output we find strong evidence that only linear contracts need be considered in comparison with piecewise linear threshold contracts in the situation where cumulative output is only updated periodically and the agent s utility function is exponential this finding holds even when there are only two periods and hence one change of action by the agent however we find that the best piecewise linear threshold contract is significantly superior to the best linear contract when the agent has a power utility function these numerical simulations also call into question the use of a cap when the agent s compensation is based on the ending value of aggregate output and the agent s effort takes place over time

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

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

employment horizon and the choice of performance measures empirical evidence from annual bonus plans of loss making entities we examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans we argue that managers of loss making firms are likely to voluntarily or forcibly depart in the near future and consequently have a shorter employment horizon loss making firms then need to increase the emphasis on forward looking nonfinancial performance measures to motivate long term effort of their managers thus we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings we find consistent support for our hypothesis using different archival survey and field data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures

implications for gaap from an analysis of positive research in accounting based on extant literature we review the positive theory of gaap the theory predicts that gaap s principal focus is on control performance measurement and stewardship and that verifiability and conservatism are critical features of a gaap shaped by market forces we recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally we conclude that rather than converging u s gaap with ifrs competition between the fasb and the iasb would allow gaap to better respond to market forces

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

contracts without memory in multiperiod agency models abstract settings are considered in which optimal multiperiod contracts can have no memory i e where second period payments do not need to depend on first period outcomes if contracts have no memory a repeated agency game can be played myopically there are no gains to long term relationships conditions on preferences for a no memory contract are presented in an agency game with moral hazard on the act selection preference separability and domain additivity imply the existence of a no memory contract in a setting without moral hazard but with asymmetric information on the outcome domain additivity implies no memory

an empirical investigation of the relative performance evaluation hypothesis the principal agent framework has become a widely used paradigm in accounting and economics for analyzing issues in performance evaluation management control and the design of incentive systems while recent work in experimental economics has begun to examine empirically some of the underlying assumptions and implications of agency theory see baiman and lewis 1989 and kirby forthcoming few precise hypotheses have been tested using real world or naturally occurring data one exception has been the empirical investigation of the relative performance evaluation rpe hypothesis agency theory suggests that there are benefits associated with evaluating agents on the basis of their relative performances when the agents performances are affected by a common shock term e g see diamond and verrecchia 1982 and holmstrom 1979 1982 specifically a relative performance based contract can remove the common shock term from an agent s performance which enables a better evaluation of the agent s actions

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

a structural model of multiple welfare program participation and labor supply work on estimating the labor supply effects of high marginal tax rates in welfare programs has been hindered by the difficulty of estimating the effects of participation in multiple welfare programs simultaneously the authors solve this problem by applying methods of simulation estimation to a model of labor supply and multiple program participation the results show asymmetric wage and tax rate effects with fairly large wage elasticities of labor supply but very inelastic responses to moderate changes in cumulative marginal tax rates implying that high welfare tax rates do not necessarily induce major reductions in work effort copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

are incentive contracts rigged by powerful ceos we argue that some powerful ceos induce boards to shift the weight on performance measures toward the better performing measures thereby rigging incentive pay a simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of ceo wage function using u s data we find support for the model s predictions rigging accounts for at least 10 of the compensation to performance sensitivity and it increases with ceo human capital and firm volatility moreover a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4 8 in firm value and 7 5 in operating return on assets

formal measures in informal management can a balanced scorecard change a culture abstract we extend traditional agency theory by exploring the roles for formal measures when managerial behavior is not governed by rules formulas or contracts part i describes relational incentive contracts with informal weights on formal performance measures more importantly it also explores how formal measures could be used in models of informal management such as adaptation and coordination politics and influence leadership and informal authority part ii considers the benefits from allowing key stakeholders to develop their own potentially inferior performance measures the collaboration to create a balanced scorecard of performance measures can help change an organization s culture

making work pay changes in effective tax rates and guarantees in u s transfer programs 1983 2002 in the 1990s many states liberalized statutory rules regarding the tax treatment of earned and unearned income for welfare program eligibility and benefit levels i use quality control data from the afdc tanf program over 1983 2002 to document changes in the corresponding effective tax rates and benefit guarantees after welfare reform i find that effective tax rates fell by 50 percent on earned income and by at least 70 percent on unearned income states that aggressively reformed their welfare programs especially those that implemented a stringent sanctions policy on benefits experienced more rapid reductions in effective tax rates and guarantees

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

price adjustment policies in procurement contracting an analysis of bidding behavior the fluctuations in fuel prices over the past decade led a number of government agencies to introduce price adjustment clauses in procurement contracting those clauses were primarily designed to reduce contractors uncertainty without considering the impact of such initiatives on bidding and the budget we analyze a newly constructed detailed panel of observations on bids for construction contracts and compare bidding behavior across periods and projects and across items within projects estimates from a difference in differences approach indicate that bidding becomes more aggressive and less dispersed after the implementation of this policy the difference is more pronounced when we consider itemized bids than overall project bids alternative techniques of regression discontinuity and nonparametric estimation are applied and yield consistent results

theory research design assumptions and causal inferences abstract ferri zheng and zou test fischer and verrecchia s 2000 prediction that a reduction in investors uncertainty about managers financial reporting objectives leads to an increase in the valuation relevance of earnings reports they use mandatory cd a disclosures as an arguably exogenous shock that provided investors with more precise information about managers contractual incentives and find that these enhanced disclosures increased the relation between firms unexpected earnings and stock returns using ferri et al as a backdrop we discuss the implicit assumptions invoked in natural experimental research designs and the fundamental role of theory in drawing causal inferences from empirical evidence

optimal monitoring policies in agencies this article considers a principal agent problem in which the principal has access to a costly monitoring technology that can be used to acquire additional information about the agent s actions subsequent to observing the agent s output although randomized monitoring policies are feasible we show that in a variety of contexts optimal monitoring policies are deterministic and lower tailed that is there exists some critical level of output such that further investigation of the agent s actions occurs if and only if output falls below this critical level

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies

corporate governance tourism growth and firm performance evidence from publicly listed tourism firms in five middle eastern countries this study explores the under researched relationship between corporate governance and firm performance in tourism companies we employ instrumental variable modelling using 2sls for publicly listed firms in five countries in the middle east board independence is found to be positively related to firm performance and stock performance suggesting that having independent directors among board members will improve overall firm performance board size shows opposing results large boards enhance firm profitability however small boards exhibit more efficient stock performance finally we support the tourism led growth hypothesis in our selected sample these findings have empirical implications for policy makers governments and academics

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

a note on economically optimal performance evaluation and control systems the optimality of two tailed investigations the cost variance investigation problem has been modeled in a multiperson setting by baiman and demski bd 1980a 1980b their results include the pareto optimality of one tailed investigations of costs wherein either very large or very small variances but not both should be investigated by the principal one of the sufficient conditions for their result was that the agent have a utility function that belongs to the hyperbolic absolute risk aversion hara class while this class is rich incorporating power exponential and logarithm utility functions different functional forms may imply the optimality of two tailed investigations the purpose of this paper is to derive conditions under which two tailed investigations are optimal within their model assuming two non hara utility functions for the agent in the next section i provide a brief description of the bd 1980b model the hara assumption the optimal investigation rule and the optimal investigation region this provides a basis for comparing results derived when a specific non hara utility function is assumed in section 3 i substitute two non hara agent utility functions for the hara form

earnings and price based compensation contracts in the presence of discretionary trading and incomplete contracting abstract the paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information and share price is set rationally based on privately held information publicly available and contractible information and publicly available but noncontractible information in addition we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy

an agency theory perspective on the owner manager relationship in tourism based condominiums abstract this paper draws on field study data to provide an examination of the condominium owner manager relationship in the australian tourism context although there has been considerable growth in tourism accommodation owned through strata title no research examining the somewhat idiosyncratic relationship between unit owners and resident managers has been found in the literature the peculiar nature of the relationship underlines its significance as a context in which to apply the agency theoretical model as australian condominium resident unit managers provide letting and caretaker services for condominium unit owners it appears that the relationship can be justifiably viewed as a principal agent exchange mills p k j business res 20 1990 31 the study specifically focuses on strata title condominiums located in major tourism regions this sub sector of the condominium management industry was chosen for study because it exhibits several key attributes distinguishing it from the non tourist based condominium sector for example two different parties represent the principal resident owners and investor owners also a significant proportion of a resident manager s work relates to the management of short term holiday unit letting in light of the particular agency relationship dynamics arising in large tourist based condominium governance several suggestions concerning the legal environment of the industry are provided

optimal incentive schemes in bottleneck constrained production environments this paper analyzes the design of incentives and control measures in a manufacturing setting in the environment we consider the output of one operation serves as the input for a second operation where there is a bottleneck inputs must be processed at both workstations to produce the final output thus high production volume at the first operation does not translate into high benefits to the owner unless the output is subsequently processed at the second workstation this is a familiar context in manufacturing management lawrence and buss 1992 critics such as goldratt 1990 argue that in these situations typical cost accounting efficiency measurements motivate the nonbottleneck operation to produce output beyond the available capacity of the bottleneck resource leading to waste and excess work in process inventories however workers at the nonbottleneck operation can be induced not to overproduce if restricting production is desired by the owner we characterize management accounting practices and incentive arrangements that balance output production at nonbottleneck operations with the input demands of the bottleneck facility

reducing incremental costs associated with the delegation of incentive contracting decisions an analysis of planning and control decisions in a manufacturing setting in the presence of moral hazard abstract we compare and contrast two specific regimes involving the centralization and delegation of the incentive contracting decision in manufacturing organizations in the centralization regime a single individual simultaneously makes the allocation of demand to production facilities and determines the incentive compensation scheme for the managers at the facilities under the delegation regime the demand allocation is decided upon initially by a superior and the incentive contracting decision is subsequently made by a subordinate who is neither of the two managers in charge of the production facilities using the principal agent paradigm which assumes that the managerial efforts are unobservable we demonstrate that the centralization regime performs no worse than the delegation regime for situations where strategic or other requirements necessitate firms to opt for the delegation of the incentive contracting decision we propose a heuristic that significantly increases the likelihood of mimicking the allocation and contracting decisions made under the centralized regime

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

how common are intentional gaap violations estimates from a dynamic model this paper uses data on detected misstatements earnings restatements and a dynamic model to estimate the extent of undetected misstatements that violate gaap the model features a ceo who can manipulate his firm s stock price by misstating earnings i find the ceo s expected cost of misleading investors is low the probability of detection over a five year horizon is 13 91 and the average misstatement if detected results in an 8 53 loss in the ceo s retirement wealth the low expected cost implies a high fraction of ceos who misstate earnings at least once at 60 with 2 22 of ceos starting to misstate earnings in each year 2003 2010 inflation in stock prices across ceos who misstate earnings at 2 02 and inflation in stock prices across all ceos at 0 77 wealthier ceos manipulate less and the average misstatement is larger in smaller firms this article is protected by copyright all rights reserved

are employee selection and incentive contracts complements or substitutes there is a debate in the literature as to whether employee selection is a substitute or complement to incentive contracting we argue that incentive contracts and selection can be both complements and substitutes conditional on the contracting difficulty faced by the firm we examine these control choices in a setting where contracting difficulties arise due to the firm s choice of strategy and from the volatility created by the firm s external environment we select a firm s commitment to organizational learning ol as our strategic choice variable as this provides a useful proxy for identifying settings where explicit incentive contracting is difficult the results show that as firms become increasingly committed to ol incentive contracts and employee selection operate as complements however with a high commitment to ol and an increasing level of external volatility contracting on performance measures will become less effective in this context our results indicate that there is a substitution effect toward employee selection

cost allocation and opportunity costs one explanation for the widespread use of allocated fixed costs is that they can serve as a proxy for difficult to calculate opportunity costs this explanation is pursued by modeling a service department as an m m s s queueing system two main results are that the expected value of opportunity costs equals both the incremental productivity of capacity and the optimal transfer price when the cost of capacity is of the form cs as and is close to one we show that allocated fixed costs are a good proxy for average opportunity costs however if there are great economies of scale is close to zero then a method which charges users only for the variable costs of the service department is recommended finally the economic efficiency of transfer prices based on either variable cost or full cost is compared with optimal transfer pricing policies

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

managerial discretion in the choice among financial reporting alternatives abstract this paper considers the role of an agent choosing among reporting alternatives when that choice is unobserved by the principal and the agent s compensation contract is optimal the agent is allowed to take post outcome costly actions which lead to more precise reports of actual profits than would be yielded by less precise but costless conventional translations of outcomes e g gaap the extent to which the principal allows the agent this discretion depends upon the improvement in profits as an indicator of the agent s pre outcome effort when post outcome actions take place versus the attendant cost of these actions

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

correlation and relative performance evaluation this paper reexamines the issue of relative versus joint incentive schemes in a multi agent moral hazard framework the model allows a full analysis of the information and dependence structure an important result is that the widespread notion that greater correlation in outcomes calls for more competition is not robust first when the dependence structure is effort sensitive the optimal incentive scheme in general mixes elements of relative evaluation and joint evaluation second under limited liability higher equilibrium correlation tends to make joint performance evaluation more desirable examples are provided regarding incentives in firms finance and innovation

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

accounting information disclosure and the cost of capital in this paper we examine whether and how accounting information about a firm manifests in its cost of capital despite the forces of diversification we build a model that is consistent with the capital asset pricing model and explicitly allows for multiple securities whose cash flows are correlated we demonstrate that the quality of accounting information can influence the cost of capital both directly and indirectly the direct effect occurs because higher quality disclosures affect the firm s assessed covariances with other firms cash flows which is nondiversifiable the indirect effect occurs because higher quality disclosures affect a firm s real decisions which likely changes the firm s ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market we show that this effect can go in either direction but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital

dynamic agency with renegotiation and managerial tenure this paper proves the renegotiation proofness principle for a dynamic len linear contracts exponential utility normal distributions model and examines the impact of repeated renegotiation on incentives and managerial tenure when performance information is serially correlated in addition to providing a general solution to a multiperiod agency problem with serially correlated performance measures this paper characterizes optimal managerial tenure turnover policies as a function of the time series properties of performance measures with negatively correlated performance measures the principal prefers longer managerial tenure and no turnover is optimal with positively correlated performance measures absent a switching cost turnover every period is optimal in the presence of a fixed switching cost interior optimal turnover policies exist if the performance measures are positively correlated switching costs are necessary but not sufficient for interior optimal tenure the optimal turnover policies present an alternative to theories of performance driven managerial turnover and are consistent with evidence that a majority of managerial turnovers are age related normal retirements

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

noncontrollable costs and responsibility accounting an important characteristic of management control systems is the use of responsibility accounting as baiman 1982 p 197 notes responsibility accounting states that a person should be evaluated only on the basis of those factors that he controls this is usually interpreted to mean that a person should be evaluated only on the basis of those outcomes that he affects emphasis in the original this notion gives rise to the desire to distinguish between controllable and noncontrollable costs because the latter presumably should not be used to evaluate an individual s performance for example solomons 1965 p 83 states that it is almost a self evident proposition that in appraising the performance of divisional management no account should be taken of matters outside the division s control however this interpretation of responsibility accounting is often violated in practice for example we often observe a division manager who has profit responsibility for his division being evaluated and compensated on the basis of his division s capacity costs over which he exercises no control in this paper we reexamine the process of constructing performance

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

endogenous selection and moral hazard in compensation contracts the two major paradigms in the theoretical agency literature are moral hazard i e hidden action and adverse selection i e hidden information prior research typically solves these problems in isolation as opposed to simultaneously incorporating both adverse selection and moral hazard features we formulate two complementary generalized principal agent models that incorporate features observed in real world contracting environments e g agents with power utility and limited liability lognormal stock price distributions and stock options as mathematical programs with equilibrium constraints mpec we use state of the art numerical algorithms to solve the resulting models we find that many of the standard results no longer obtain when wealth effects are present we also develop a new measure of incentives calculated as the change in the agent s certainty equivalent under the optimal contract for a change in action evaluated at the optimal action this measure facilitates interpretation of the resulting contracts and allows us to compare contracts across different contracting environments

changes in college skills and the rise in the college wage premium the college wage premium for new labor market entrants rose sharply during the 1980s we ask how much of this change arose from changes in the skill level of the typical college graduate we find that skills attained prior to college as measured by standardized test scores and high school grades had no effect on the change in the college wage premium for men in contrast the returns to math ability rose considerably for women failing to account for math skills thus substantially overstates the growth in the female college wage premium skills acquired in college as reflected in the distribution of students across majors had important effects on the relative wages of men the trend away from low skill subjects such as education and toward high skill subjects such as engineering accounts for one fourth of the rise in the male college wage premium

introducing convexity into optimal compensation contracts abstract we study when it is appropriate to add a convex component such as stock options to an optimal managerial compensation contract we show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion in addition we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price the opposite effect results when increases in skewness leave the mean stock price unchanged

conjectures regarding empirical managerial accounting research abstract the empirical managerial accounting literature has failed to produce a substantive cumulative body of knowledge this literature has not matured beyond describing practice to developing and testing theories explaining observed practice like other areas of accounting research while the lack of publicly available data is a popular reason for this literature s underdeveloped state it is not the only one other conjectures include its inductive approach researchers incentives its use of non economics based frameworks the lack of empirically testable theories and its emphasis on decision making not control

relative performance evaluation and project selection relative performance evaluation rpe occurs when one person s compensation depends on the relation of his output to that of others agency theory e g lazear and rosen 1981 and holmstrom 1979 1982 predicts that managerial compensation will use relative performance when other firms outputs reveal information about the manager s actions which is not knowable from the manager s output alone tests of the theory measure other firms outputs using the performance of other firms in the same industry or some macroeconomic measures of performance these two approaches are designed to separate industry and economy effects from the effects of the manager s actions empirical tests by antle and smith 1986 and janakiraman lambert and larcker 1992 found limited evidence that managerial compensation is adjusted for industry effects gibbons and murphy 1990 found some adjustment in ceo compensation for industry performance and much more adjustment for changes in market wide rates of return this paper provides an explanation for these empirical results by illustrating how the benefits of rpe based schemes depend on the absence of project choice decisions in the canonical agency model 1

does managerial sentiment affect accrual estimates evidence from the banking industry abstract we examine whether managerial sentiment is associated with errors in accrual estimates using public banks we find 1 managerial sentiment is negatively associated with loan loss provision estimates 2 future charge offs per dollar of provision are positively associated with sentiment when the provision is estimated and 3 the effects of sentiment are greater for firms with more uncertain charge offs results are similar for private banks suggesting accrual manipulation related to capital market incentives is unlikely to explain the results although economic fundamentals explain most of the variation in the provision we find sentiment has an incremental and economically meaningful effect