sequential formation of coalitions in games with externalities and fixed payoff division this paper analyzes a sequential game of coalition formation when the division of the coalitional surplus is fixed and the payoffs are defined relative to the whole coalition structure gains from cooperation are represented by a valuation which maps coalition structures into payoff vectors i show that any core stable coalition structure can be attained as a stationary perfect equilibrium of the game if stationary perfect equilibria may fail to exist in general games a simple condition is provided under which they exist in symmetric games furthermore symmetric stationary perfect equilibria of symmetric games generate a coalition structure which is generically unique up to a permutation of the players a general method for the characterization of equilibria in symmetric games is proposed and applied to the formation of cartels in oligopolies and coalitions in symmetric majority games journal of economic literatureclassification numbers c78 c71 1996 academic press inc

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

transfers to sustain dynamic core theoretic cooperation in international stock pollutant control international environmental agreements aiming at correcting negative externalities generated by transboundary pollution are difficult to achieve for many reasons important obstacles arise from asymmetry in costs and benefits and instability may occur due to the fact that coalitions of countries may attempt to do better for themselves outside of any proposed agreement in a static context it has already been shown that it is possible to achieve stability in the sense of the core of a co operative game by means of appropriately defined transfers between the countries involved however the transboundary pollution problems that are most important are caused by accumulated pollutants so that a dynamic analysis is required this paper provides a transfer scheme that yields a core property in a dynamic context the possibility of computing such transfers numerically is discussed

environmental taxation in open economies unilateralism or partial harmonization there are two reasons why countries might set weak environmental policies transboundary pollution and concerns for competitiveness this article explores the full interactions between these two features within a unified general equilibrium framework first we show that competitive concerns change the structure of output taxes but not that of emission taxes they lead to a lowering of output taxes lower polluting good prices an increase in emission taxes adoption of less or same polluting technologies increased aggregate emissions and lower overall welfare levels second we show that partially harmonizing commodity taxes above their unrestricted nash equilibrium value can potentially hurt as well as improve the pollution technology overall quality of the environment and welfare the three attributes move positively together on the other hand harmonizing of emission taxes above their nash equilibrium values appear to always lead to improvements in the environment and welfare via adoption of cleaner technologies

discussion of a market based evaluation of discretionary accrual models the use of accrual models has been pervasive in accounting research in the past ten years this literature has sought to examine whether and why managers use discretion in financial reporting the findings suggest that managers use their discretion for a wide range of reasons including to increase their own compensation and protect their job security to communicate their expectations of long term firm performance with investors and to create stockholder wealth at the expense of other stakeholders such as debtholders taxpayers and regulatory bodies of course the power and internal validity of these tests depend critically on whether the models of accruals used in the studies are well specified guay kothari and watts s henceforth gkw paper attempts to provide evidence on this question by modeling the relation between stock returns and discretionary accruals and nondiscretionary earnings gkw then examine whether the five most popular accrual models used in the literature produce discretionary accruals and nondiscretionary earnings that conform to their modeling predictions the findings suggest that even the most effective models the jones and modified jones models do only a modest job of parsing earnings into discretionary and nondiscretionary components taken at face value the findings of the gkw paper have serious consequences for how readers should interpret the findings of earlier earnings management studies however such strong conclusions are

co operation and unilateral commitment in the presence of global environmental problems this paper focuses on the link between group co operation and unilateral commitment of some countries in the presence of global environmental problems we show that in case of a failure of negotiation some countries can decide to commit unilaterally and reduce their emissions we call this behaviour precautionary commitment absence of international agreement does not mean global defection from the environmental issue we also show that the emergence of a non co ordinated global co operation can result from a strategic action from the members of the coalition the insiders of the coalition create an incentive for the non members to reduce without co ordinating their emissions

climate change heterogeneities and stability of international fiscal harmonization this paper analyzes the instability introduced into multilateral agreements by two types of heterogeneity heterogeneity of countries size and number of producing members and heterogeneity of lobbies asymmetric influence at the national versus the international level the work extends theoretical prospective analyses on environmental taxation as illustrated by the harmonization of fuel taxes we show that the acceptability of the tax set at the multilateral level depends on the type of coalitions that participate in the multilateral negotiation size and number of producing countries and the asymmetry in the local state level power of lobbies during negotiations

endogenous structures of association in oligopolies the formulation of associations of firms in an oligopoly with linear demand is analyzed as a two stage noncooperative game in the first stage firms form associations in order to decrease their costs and in the second stage they compete on the market examples of associations include r d joint ventures and groups of firms adopting common standards in equilibrium the associations formed exhibit two general features they are asymmetric and inefficient

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

overfunded defined benefit pension plan settlements without asset reversions abstract this study examines why firms settle their overfunded defined benefit pension plans under the new accounting standard fasb statement no 88 companies settling their overfunded pension plan can immediately recognize a portion of deffered pension gain as current earnings focusing on settlement transactions unaccompanied by asset reversions we examine financial characteristics of settlement firms including earnings debt covenants management incentive compensation and firms risk and financial structures our results suggest that firms undertake settlement to offset a decline in earnings and mitigate restrictive debt covenant constraints however a settlement firm s systematic risk beta does not change after settlement

political cost incentives for earnings management in the cable television industry abstract this study tests political costs theory by examining the cable television industry during periods of congressional scrutiny earnings management is measured using discretionary accruals and data are consistent with managerial incentives to mitigate the effects of political scrutiny and potential industry reregulation tests are also done using within sample comparisons of firms firms for which proposed regulations are expected to be more harmful have greater income decreasing accruals and for some tests firms for which cable television operations are more important have greater income decreasing accruals test results are robust to the inclusion of control variables for firm performance and size

an empirical examination of the relation between debt contracts and management incentives abstract prior research on the factors influencing the use of debt covenants restricting dividends and additional borrowing is extended by considering management incentives when alternative incentive variables are considered separately we find covenants have a significant negative relation to ceo cash compensation an insignificant relation to the value of ceo equity held and significant positive relations to both the ratio of the value of ceo equity holdings to cash compensation and the fraction of equity held by the ceo in two stage simultaneous equations models only the latter is significant when jointly considered with each of the other incentive variables

the economic determinants of accounting choices the unique case of equity carve outs under sab 51 abstract since 1983 parents carving out subsidiaries have faced two unusual accounting choices first whether to take the carve out gain into income or directly to equity second whether to provide a book tax on the gain or not we find that parent leverage unexpected write offs in the carve out year the carve out gain size and unexpected future earnings generate predicted probabilities that are concordant with 78 of the observed equity versus net income choices and 73 of tax versus no tax choices we conclude that parents sab 51 decisions reflect forces from efficient contracting earnings management and information signaling theories of accounting choice

political internalization of economic externalities and environmental policy abstract this paper derives the characteristics of endogenous environmental policy in a common agency model of politics and proceeds to show that competition between lobby groups is an important source of internalization of economic externalities our analysis generalizes bhagwati s principle of targeting to the case of distorted political markets moreover we show that the politically optimal structure of environmental taxes incorporates a pigouvian adjustment however since lobby groups care about the distribution of income as well as about efficiency the equilibrium structure of taxes differs considerably from the pigouvian rule

depreciation policy changes tax earnings management and investment opportunity incentives abstract contrary to previous studies we find managers change depreciation policies in predictable ways we identify three dimensions of depreciation policy changes whether it is a method change or an estimate revision whether it is income increasing or decreasing and whether it applies to new assets only or both new and existing assets this disaggregation leads to three findings first a 1981 tax law altered the frequency of estimate revisions and method changes second firms adopting income increasing method changes for all assets experience worse performance than those adopting such changes only for new assets finally non income increasing policy changes are associated with changes in investment opportunities

the use of accounting flexibility to reduce labor renegotiation costs and manage earnings abstract we investigate the determinants of discretionary sfas 106 choices of non regulated firms we find that more unionized firms are more likely to use immediate recognition consistent with incentives to reduce labor renegotiation costs immediate recognition is more prevalent among post adoption plan modifiers particularly if their transition obligation is large consistent with incentives to increase future reported earnings immediate recognition together with post adoption benefit plan reduction frees future income from the transition obligation amortization expense and adds a positive component as negative prior service costs are amortized immediate recognition is less prevalent among firms with higher potential debt contracting costs

the economic consequences of accounting choice implications of costly contracting and monitoring abstract in this paper we review research into the economic consequences of voluntary and mandatory choices of accounting techniques and standards we discuss how the predictions of extant economic consequence theories are driven by contracting and monitoring costs associated with management compensation contracts bond covenants regulation and or political visibility we review empirical tests of economic consequence theories categorize those tests and discuss their strengths and weaknesses the empirical tests reveal two systematic associations with accounting choice size a proxy for political visibility and leverage a proxy for contracting and monitoring costs of lending agreements interpretation of the results is difficult due to general limitations of the tests we conclude by suggesting some directions for future research based on our analysis of the potential payoffs associated with different types of empirical tests

insubstance defeasances security price reactions and motivations abstract this paper examines the bond and stock price reactions to the announcement of insubstance defeasances and the motivations for the transaction we find a reliably positive bond price reaction and a reliably negative stock price reaction however the bond price reaction is much less than would be predicted had the defeased bonds been made riskless we find evidence suggesting that some firms defease to window dress their earnings some defease to avoid restrictions in bond covenants and some defease as a use for excess cash on hand

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

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

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

the investment opportunity set and accounting procedure choice abstract this paper provides evidence on the cross sectional relation between firms investment opportunities their debt and compensation contracts their size and financial leverage and their accounting procedure choices this evidence is important because previous studies hypothesize that the link between firms investment opportunities and their accounting choices helps explain extant results on the size debt equity and bonus plan hypotheses however while i find that firms investment opportunities do affect the nature of their contracts i also find that the traditional explanations for accounting choice are important after controlling for the effects of the investment opportunity set

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

discussion of the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting abstract ramanna 2007 the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting journal of accounting and economics provides interesting and novel evidence on how firms use contributions from their political action committees pacs to members of congress as a means of lobbying for preferred positions on the two exposure drafts that led to sfas 141 and sfas 142 my discussion raises some concerns about his main conclusion that pooling firms lobbied the fasb to obtain a fair value based impairment rule to facilitate their ability to manipulate financial statements i offer a more benign explanation and make some other observations about how this line of research could proceed in the future

geographic income shifting by multinational corporations in response to tax rate changes we investigate geographic income shifting by 191 u s multinational corporations in response to worldwide changes in tax rates during 1984 90 between 1984 and 1986 the united kingdom reduced corporate tax rates from a maximum of 45 to 35 and in 1985 france reduced rates from 50 to 45 following these reductions in european rates the united states reduced top corporate tax rates from 46 to 34 between 1986 and 1988 canadian rates increased between 1984 and 1986 and then decreased through 1989 beginning in 1988 numerous countries enacted tax cuts apparently in response to those that occurred earlier in other countries as discussed in section 3 differential changes in tax rates provide incentives for geographic income shifting by multinational firms we identify two subperiods during 1984 90 in which relative tax rate changes

tax evasion fiscal competition and economic integration abstract this paper examines the implications of tax evasion for fiscal competition and tax harmonization policies in an economic union first for symmetric countries it proves that the equilibrium values of the tax and audit rates are less than optimal tax harmonization alone will also lead to a less than optimal audit rate second for asymmetric countries the paper shows that integration may turn an honest country into an evading one it argues that tax harmonization alone may be a bad policy in that it can make both countries worse off it may also cause an otherwise honest country to turn to evasion

corporate compliance with debt covenants in this paper i present and test a model of corporate compliance with the debt covenant requiring payment of a current obligation this study adds to the empirical literature on forecasting financial distress by showing conditions under which debt default may be a rational economic decision by the firm s shareholders this analysis departs from empirical financial distress studies which are often not linked to an underlying economic theory the focus on covenant default also extends the literature which has modeled bankruptcy bulow and shoven 1978 and liquidation decisions titman 1984 but which has not considered a common first symptom of financial distress covenant default briefly the model examines the costs that influence shareholders decision to comply with or violate a particular debt covenant payment of a current obligation these costs include those associated with bondholders reaction to possible default the model predicts that shareholders will default when holding other factors constant i interest rates have declined relative to coupon rates stated in the debt issue ii the probability of paying future obligations is high and iii the cost of obtaining funds to pay the obligation is high the model also predicts when stockholders and bondholders will renegotiate the debt contract and the amount of wealth transferred in the renegotiation finally the

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

how ethical are managers goodwill impairment decisions in spanish listed firms this article provides an analysis of the ethical behavior of managers making goodwill impairment decisions following the adoption of the international financial reporting standard ifrs 3 on business combinations replacing the systematic amortization of goodwill with the impairment only approach has been a highly controversial step although the aim of ifrs 3 was to provide users with more value relevant information regarding the underlying economics of the business it has been criticized for the potential earnings management inherent in impairment testing this study is based on a sample of spanish listed companies between 2005 and 2011 a period that embraces the economic crisis after controlling for the underlying economic factors of the firms the results suggest that managers are exercising discretion in the reporting of goodwill impairment losses and big bath and smoothing strategies are influencing the decisions whether or not to impair goodwill and about the magnitude of the impairment firm size is an attribute that appears significant in the analysis suggesting that the cost and complexity of running the impairment test affect managers decisions additional analyses suggest that the macroeconomic environment influences opportunistic and unethical behaviors

labor utilization and nonwage labor costs in a disequilibrium macro framework the literature on labor utilization and nonwage labor costs is extended to incorporate recent approaches to macroeconomic disequilibrium modeling based on the smoothing by aggregation principle this leads to a reformulation of the basic sneessens dreze type model by treating employment and working hours as separate inputs the inclusion of nonwage labor costs serves a double purpose first they represent a restriction in the profit maximizing process and second they serve as a proxy for the fixity of labor the results differ substantially from simulation studies that disregard the utilization of labor and the nonlinear structure of labor costs

hybrid carbon incentive mechanisms and political acceptability this paper analyses how hybrid systems of carbon taxes and tradeable permits optimize some conflicting dimensions of political acceptability related to the design of these instruments pure systems like taxes without exemptions or auctioned tradeable permits cause problems for political acceptability in open economies due to high overall costs abatement cost plus payments on the tax or auctions for current polluters unfortunately pure systems based on grandfathering of emission rights across the board do not provide a feasible alternative because of monitoring and enforcement problems in contrast consciously designed hybrid systems employ grandfathering of emission rights together with either carbon taxes or auctioned carbon permits in order to overcome acceptability problems of pure systems while leaving incentives to reduce emissions at the margin untouched moreover monitoring and enforcement costs of the hybrid systems are less due to the lower number of participating agents compared with the pure systems while opportunities for cost or burden sharing exist as well

effects of shorter hours on employment in disequilibrium models abstract in this paper the employment effects of a wage compensated and non compensated reduction of standard working time are examined in the context of disequilibrium theory in disequilibrium models with exogenous working time noncompensated shorter standard hours increase employment in both regimes keynesian and classical unemployment wage compensation reduces the employment response at a regime dependent rate if working time is endogenized by taking into account overtime effects the employment response of shorter hours is positive in keynesian unemployment and negative in classical unemployment wage compensation increases the employment effect in the keynesian regime and decreases it in the classical regime a model is presented that allows for hours as well as capital stock adjustment and integrates non competitive price setting

capital adequacy ratio regulations and accounting choices in commercial banks abstract this study examines a commercial bank manager s incentives to reduce regulatory costs imposed when the bank s capital adequacy ratio falls below its regulatory minimum it also tests the general political sensitivity hypothesis that a manager seeks to reduce political costs incurred when revenue is unusually large tests of adjustments to the loan loss provision loan charge offs and securities gains and losses attempt to control for exogenous economic conditions and previous investing decisions results are consistent with hypotheses associating accounting adjustments with capital adequacy ratio guidelines but fail to support the political sensitivity hypothesis

environmental disclosures regulatory costs and changes in firm value abstract union carbide s chemical leak in bhopal india during december 1984 resulted in approximately 4 000 deaths and 200 000 injuries this study examines the market reaction of chemical firms other than union carbide to this catastrophe evidence indicates that a significant negative intra industry reaction occurred however firms with more extensive environmental disclosures in their financial report prior to the chemical leak experienced a less negative reaction than firms with less extensive disclosures this result suggests that investors interpreted such disclosures as a positive sign of the firm managing its exposure to future regulatory costs

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

discussion of accounting discretion in fair value estimates an examination of sfas 142 goodwill impairments beatty and weber examine an accounting choice that managers made upon adoption of statement of financial accounting standards 142 whether to record a goodwill asset impairment as a cumulative effect of an accounting change at the time of adoption or delay the recognition of such an impairment to the future perhaps indefinitely when they would be recorded as expenses in earnings from continuing operations the authors consider several factors that might influence management s reporting of transition effects including contracting equity market incentives and regulatory forces participants at the 2005journal of accounting research conference questioned whether such a complex accounting decision can be captured with simple linear models and noisy proxy variables while also speculating upon whether the results would generalize to other settings in this discussion i summarize beatty and weber s research highlight its contribution to the accounting literature and provide a record of the main issues raised by the conference participants 1 summary

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

choice of accounting method by not for profit institutions accounting for investments by colleges and universities abstract this study reports a preliminary empirical investigation into the relation between the choice of investment accounting method used by colleges and universities and factors such as type of institution endowment size and returns and debt because these institutions use fund accounting the effects of the choice of investment accounting method can reasonably be isolated from other accounting decisions the results indicate that the selection of investment accounting method is influenced by type of institution endowment size and returns but not by debt covenants

the implications of unverifiable fair value accounting evidence from the political economy of goodwill accounting abstract i study the evolution of sfas 142 which uses unverifiable fair value estimates to account for acquired goodwill i find evidence consistent with the fasb issuing sfas 142 in response to political pressure over its proposal to abolish pooling accounting the result is interesting given this proposal was due in part to sec concerns over pooling misuse i also find evidence consistent with lobbying support for sfas 142 increasing in firms discretion under the standard agency theory predicts such unverifiable discretion can be used opportunistically

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

a discussion of belgian unemployment combining traditional concepts and disequilibrium econometrics with a gdp of less than 100 billion and exports of more than 60 billion belgium comes perhaps closer than any other country to being a small open economy consequently trends in world trade and export performance have a major impact on domestic activity whereas the impact of domestic fiscal policy is damped by import leakages table 1 presents a few figures confirming these observations

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

asymmetric timeliness of earnings market to book and conservatism in financial reporting abstract using an accounting conservatism theory that reflects accounting s role in practice we investigate the relation between two extensively used measures of conservatism asymmetric timeliness of earnings and the market to book ratio mtb we predict and observe that when asymmetric timeliness is measured cumulatively over long periods its relation with end of period mtb is positive when asymmetric timeliness is measured over short periods its dependence on beginning of period composition of equity value ev is responsible for its negative association with mtb further asymmetric timeliness appears to measure conservatism more efficiently when it is estimated cumulatively over multiple periods

the impact of taxes on the choice of divestiture method abstract this paper estimates the magnitude of tax costs and their impact on the decision to divest assets via a taxable sale rather than a tax free spin off we find that the tax costs are substantial averaging 8 of market value of the divested assets and that cross sectional variation in tax costs has a large impact on managers choice of divestiture method our results are consistent with two explanations first managers are willing to incur avoidable tax costs to gain earnings and cash flow benefits second managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs

aggregation of test statistics abstract in the preceding paper christie provides three tests to facilitate formal inferences in survey papers that examine related empirical studies those tests reinforce the view that accounting technique choice is related to variables that may proxy for contracting and monitoring costs in the market and political processes however the contribution of the tests is limited because the fundamental question of the relation between the empirical regularities and the theory remains unexamined

1974 lifo excess stock return and analyst forecast error anomalies revisited in this paper i reexamine three lifo anomalies reported by ricks 1982 and biddle and ricks 1988 with the aim of investigating the degree of analyst and investor sophistication in responding to fiscal 1974 lifo adoptions biddle and ricks henceforth br s first anomaly is that their sample of 1974 lifo adopters realized a reliably negative mean excess stock return at their annual earnings announcement br view this as anomalous because 1974 lifo adopters switched voluntarily and almost always obtained substantial tax savings second br find even firms who publicly disclosed lifo adoptions in advance of their annual earnings announcements earned negative returns at the annual earnings announcement date taken at face value this result implies an opportunity

discretionary behavior with respect to allowances for loan losses and the behavior of security prices abstract the study examines the capital market pricing of discretionary and nondiscretionary components of a major accrual in the banking industry the allowance for loan losses the analysis employs a two stage approach in which the allowance account is first decomposed into estimates of its nondiscretionary and discretionary components the second stage evaluates the market s valuation of the estimates of the components evidence suggests that the capital market perceives the allowance to be comprised of two components a nondiscretionary component which is negatively priced and a discretionary component whose incremental pricing coefficient is positive

non discretionary conservatism evidence and implications a large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices we extend existing research by modeling the impact of extant accounting rules on conservative accounting accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values we document evidence of the resulting non discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives

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

green lobbies and transboundary pollution in large open economies abstract we employ a common agency model of policy making to examine how green lobbies affect the determination of trade and environmental policies in two large countries that are linked by trade flows and transboundary pollution we show that the impact of green lobbying on environmental policy outcomes depends crucially on the prevailing trade regime cooperative or non cooperative on whether environmental agencies act in a unilateral or coordinated manner and on the size of the emission leakages and transboundary spillovers under free trade a unilateral increase in pollution taxes reduces domestic emissions at the cost of increased foreign emissions in this case if the emission leakages and the associated transboundary spillovers are large enough green lobbying can create a bias towards lower pollution taxes

accounting standards and debt covenants has the balance sheet approach led to a decline in the use of balance sheet covenants abstract recent years have seen a sharp decline in the use of balance sheet based covenants in private debt contracts i hypothesize that changes in accounting standards can explain part of this decline standard setting has shifted towards a balance sheet approach which i predict has made the balance sheet less useful for contracting i measure the effect of the balance sheet approach on specific borrowers using a volatility ratio i find that borrowers with greater volatility ratios are less likely to have balance sheet based covenants this evidence is consistent with reductions in the contracting usefulness of the balance sheet being associated with reductions in balance sheet covenants

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

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

cost and income based measures of human capital human capital is increasingly believed to play an important role in the growth process however adequately measuring its stock remains controversial in this paper three general approaches to measurement are identified cost based income based and educational stock based this survey focuses on the first two approaches and provides a critical review of the theories and their applications to data from a range of countries particular emphasis is placed upon the work of jorgenson and fraumeni 1989 1992 and some new results for new zealand based upon their approach are also presented

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

deposit insurance and wealth effects the value of being too big to fail this paper investigates the effect on bank equity values of the comptroller of the currency s announcement that some banks were too big to fail and that for those banks total deposit insurance would be provided using an event study methodology we find positive wealth effects accruing to tbtf banks with corresponding negative effects accruing to non included banks we demonstrate that the magnitude of these effects differed with bank solvency and size we also show that the policy to which the market reacted was that suggested by the wall street journal and not that actually intended by the comptroller the role of deposit insurance has become a topic of increasing debate advocates argue that by removing the incentive to run deposit insurance protects individual financial institutions from instability in the intermediation process thereby providing stability to the financial system as a whole 1 the recent rise in bank failures and the concomitant crises in the s l industry however demonstrate that this stability is not guaranteed moreover critics note that deposit insurance may introduce incentive problems and wealth effects into the financial system both of which can impede the effective functioning of any deposit insurance system these problems have prompted concern about the structure of the current deposit insurance system and have led to numerous proposals regarding its restructuring 2 this paper investigates one aspect of this debate by analyzing the effect on bank equity values of the policy decision to insure completely some banks but not others specifically in september 1984 the comptroller of the currency testified before congress that some banks were simply too big to fail tbtf and that for those banks total deposit insurance would be provided while not explicitly naming the banks the comptroller admitted that this policy would apply to the eleven largest banks using an event study methodology we analyze