the changing time series properties of earnings cash flows and accruals has financial reporting become more conservative abstract this paper documents changes in the patterns of earnings cash flows and accruals over the last four decades in the absence of a generally accepted definition of conservatism a number of measures of reporting conservatism are identified and examined these measures rely on the accumulation of nonoperating accruals the timeliness of earnings with respect to bad and good news characteristics of the earnings distribution and the market to book ratio the patterns are consistent with an increase in conservative financial reporting over time the findings have implications for accounting standard setting regulation of financial information and financial statement analysis

product market imperfections and loan commitments i show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower s industry a bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank while it is individually rational for a firm to obtain a loan commitment all the firms in that industry taken together are made worse off by the existence of loan commitments a loan commitment is a contract guaranteeing future availability of credit to a borrower at a prespecified fixed or stochastic interest rate although bank loan commitments are an important financial instrument and there exists an extensive literature analyzing them the rationale for their existence is still a matter of research this paper provides an explanation for the existence of bank loan commitments to borrowers from industries in which there is imperfect competition in the product market it is shown that in such industries the option to acquire financing at predetermined rates enhances the borrower s strategic power and thus creates value for the individual borrower consider an industry with imperfect competition where firms face the problem of noncooperatively exploiting a product market opportunity the optimal product market strategy of a firm depends on the output of its rivals a firm with access to resources at a lower marginal cost than its competitors has a strategic advantage that it can exploit to gain a larger market share and profits it is shown here that a firm that does not have such a strategic advantage can create it by purchasing for a fixed initial fee an option to acquire a factor of production such as financing at favorable terms specifically by initially negotiating a bank loan commitment the firm can finance an expansion of output to meet a strategic contingency at more favorable terms than would be possible if the expansion had to be financed in the spot market the ability to exercise the commitment enables the firm to threaten its rivals strategically and moves the industry to an equilibrium more favorable to that firm thus creating value for the borrower it is shown below that it is optimal for all firms to acquire bank loan commitments altering the industry equilibrium in the process

vertical integration and transaction specific sunk costs abstract the purpose of this paper is to analyze vertical integration long term contracts and spot markets as institutional alternatives when transaction specific investments are involved firm activities are divided into two periods in the first period the ex ante world decisions on the amount of transaction specific sunk costs are made whereas after realization of a random state of the world short run production decisions are made in the ex post world the problem analyzed is to determine what form of organizations and or contracts will emerge between upstream and downstream firms in the ex ante world to regulate their ex ante transaction specific investments if any as well as their ex post production decisions and the distribution of resulting profits

going going gone the apparent demise of the accruals anomaly consistent with public statements made by sophisticated practitioners we document that the hedge returns to sloan s sloan r g 1996 do stock prices fully reflect information in accruals and cash flows about future earnings accounting rev 71 3 289 315 accruals anomaly appear to have decayed in u s stock markets to the point that they are on average no longer reliably positive we explore some potential reasons why this has happened our empirical analyses suggest that the anomaly s demise stems in part from an increase in the amount of capital invested by hedge funds into exploiting it as measured by hedge fund assets under management and trading volume in extreme accrual firms a decline in the size of the accrual mispricing signal as measured by the magnitude of extreme decile accruals and the relative persistence of cash flows and accruals may also play a weaker role this paper was accepted by stefan reichelstein accounting

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

collective choice in the commons experimental results on proposed allocation rules and votes we analyse and empirically examine a multi level common pool resource cpr game consisting of a collective choice level game and an operational level game in the collective choice game participants anonymously propose allocation rules to be used in the operational game and vote anonymously on the proposed rules majority and unanimity rules are investigated our major finding is that both types of voting rules substantially increase efficiency relative to a baseline with no opportunity for collective choice but the distributional consequences of the rules differ to understand the process by which efficiency is improved better we examine four predictive theories related to proposals votes and outcomes

the changing landscape of accrual accounting a fundamental property of accrual accounting is to smooth temporary timing fluctuations in operating cash flows indicating an inherent negative correlation between accruals and cash flows we show that the overall correlation between accruals and cash flows has dramatically declined in magnitude over the past half century and has largely disappeared in more recent years the adjusted r 2 from regressing changes in accruals on changes in cash flows drops from about 70 90 in the 1960s to near zero under 20 in more recent years in exploring potential reasons for the observed attenuation we find that increases in non timing related accrual recognition as proxied by one time and nonoperating items and the frequency of loss firm years explain the majority of the overall decline on the other hand temporal changes in the matching between revenues and expenses and the growth of intangible intensive industries play only a limited role in explaining the observed attenuation finally the relative decline of the timing role of accruals does not appear to be associated with an increase in the asymmetrically timely loss recognition role

public choice and the economic analysis of anarchy a survey public choice economists began studying anarchy in the 1970s since then the amount of research on anarchy has burgeoned this article surveys the important public choice contributions to the economics of anarchy following early public choice economists many economists are researching how individuals interact without government from non public interested explanations of the creation of government to historical studies of internalizing externalities under anarchy public choice scholars are arriving at a more realistic perspective of human interaction with and without government although the economics of politics receives more attention the economics of anarchy is an important area of research in public choice

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

sunk investment bargaining and choice of capital structure this paper shows how a firm might optimally choose debt to affect the outcome of bilateral bargaining with workers or other input suppliers it is shown that debt may alleviate the well known underinvestment problem associated with the inability to write precommitment contracts also in such circumstances debt could be pareto improving over complete equity financing the relationship between the optimal level of debt and asset specificity of investment and bargaining power of the firm vis a vis the workers is explored the williamson conjecture that higher asset specificity will lead to less debt is shown not to be valid in general

information asymmetry valuation and the corporate spin off decision we empirically analyze the information hypothesis that the separation of a rm s divisions into independently traded units through a spin o enhances value because it mitigates information asymmetry about the rm consistent with this hypothesis we nd that rms that engage in spin o s have higher levels of information asymmetry compared to their industry and size matched counterparts and the information problems decrease signi cantly after the spin o the gains around spin o s are positively related to the degree of information asymmetry and this relation is more pronounced for rms with fewer negative synergies between divisions finally rms with higher growth opportunities and rms in need of external capital show a higher propensity to engage in spin o s they also raise more capital following a spin o which is consistent with the view that

corporate risk management and the incentive effects of debt this paper demonstrates how the incentive of manager equityholders to substitute toward riskier assets commonly referred to as the asset substitution problem is related to the level of observable risk in the firm when observable and unobservable risks are sufficiently positively correlated increases decreases in observable risk generate the incentive for manager equityholders to increase decrease unobservable risk thus credible commitments to hedge observable risk can benefit the firm s manager equityholders by reducing the incentive to shift risk and the associated agency cost of debt this provides a positive rationale for hedging diversifiable risk at the firm level in the last few years a sizeable literature has emerged which is devoted to explaining how shareholders can benefit from hedging undertaken by the firm such hedging may include the purchase of insurance the use of financial futures and options and even diversification at the level of the firm four lines of reasoning have been pursued in the literature smith and stulz 1985 and campbell and kracaw 1987 rely on the fact that under optimal contracting between managers and shareholders managers are less diversified than are shareholders hedging by the firm which reduces the manager s exposure to risk can improve on the optimal compensation contract between the manager and equityholders this argument may be applied to a firm with any capital structure or any degree of leverage the other arguments apply to firms which are financed with risky debt smith and stulz show that hedging may be useful in reducing expected bankruptcy costs they also show as does macminn 1985 that hedging by the firm may reduce the probability that depreciation tax shields may be lost due to financial distress finally diamond 1984 has shown that monitoring costs may be reduced through diversification macminn s result is of particular interest part of his analysis is based on an earlier paper by green and talmor 1985 which demonstrates that the equityholders of a levered firm will have an incentive to underinvest in risky assets if the firm cannot capture its interest and depreciation tax shields with certainty in green and talmor s analysis the firm has no mechanism to reduce or hedge the uncertainty surrounding its tax shields other than to alter its investment decisions however as macminn argues if the firm is allowed to hedge its risks

why do people keep their promises an experimental test of two explanations numerous psychological and economic experiments have shown that the exchange of promises greatly enhances cooperative behavior in experimental games this paper seeks to test two theories to explain this effect the first posits that individuals have a preference for keeping their word the second assumes that people dislike letting down others payoff expectations according to the latter account promises affect behavior only indirectly because they lead to changes in the payoff expectations attributed to others i conduct an experiment designed to distinguish between and test these alternative explanations the results demonstrate that the effects of promises cannot be accounted for by changes in payoff expectations this suggests that people have a preference for promise keeping per se

sourcing decisions with capacity reservation contracts abstract by committing to long term supply contracts buyers seek to lower their purchasing costs and have products delivered without interruption when a long term contract is available suppliers are less pressured to find new customers and can afford to charge a price lower than the prevailing spot market price we examine sourcing decisions of a firm in the presence of a capacity reservation contract that this firm makes with its long term supplier in addition to the spot market alternative this contract entails delivery of any desired portion of a reserved fixed capacity in exchange for a guaranteed payment by the buyer we investigate rational actions of the two parties under two different types of periodic review inventory control policies used by the buyer the two number policy and the base stock policy when typical demand probability distributions are considered inclusion of the spot market source in the buyer s procurement plan significantly reduces the capacity commitments from the long term supplier

earnings quality evidence from the field abstract we provide insights into earnings quality from a survey of 169 cfos of public companies and in depth interviews of 12 cfos and two standard setters cfos believe that i above all high quality earnings are sustainable and repeatable specific characteristics include consistent reporting choices backing by actual cash flows and absence of one time items and long term estimates ii about 50 of earnings quality is driven by non discretionary factors such as industry and macro economic conditions iii in any given period about 20 of firms manage earnings to misrepresent economic performance and for such firms 10 of eps is typically managed iv earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags in addition cfos disagree with current standard setting on a number of issues including the sheer number of promulgated rules the top down approach to rule making the neglect of the matching principle and the emphasis on fair value accounting they indicate that a rules based culture makes the audit function centralized and mechanical and hinders the development of audit professionals a summary impression from our work is that cfos view earnings quality as more of a single and unconditional characteristic in contrast to current research where measures of earnings quality are strongly conditional on the decision setting this cfo view is related to their idea of one number a single earnings metric that shapes both their interactions with external stakeholders and internal decision making

using the capital market as a monitor corporate spinoffs in an agency framework a model is developed in which corporate spinoffs are a feature of incentive contracts for product managers in diversified firms i argue that the possibility of a future spinoff can improve current incentives for divisional managers even if a spinoff rarely actually occurs spinoff incentive policies exploit the fact that after a spinoff the stock value of the product line is a much cleaner signal of managerial productivity than when the division belongs to the parent firm i show that providing current incentives through such a reorganization policy can dominate standard principal agent contracts in highly diversified firms empirical implications of the model are developed regarding corporate spinoff behavior and the compensation of divisional managers

the social contract in the laboratory an experimental analysis of self enforcing impartial agreements social contract theories are based on the idea of the consent of the governed according to which norms rules and institutions constitutions in particular must be based on the general consensus or unanimous consent of the individuals who are subject to the regulation the article reports the results of an experiment aimed at identifying the conditions for the emergence of a self enforcing social contract in the laboratory our main result is that spontaneous compliance with a non self interested norm of distribution is likely to occur if individuals have been part of the same process of ex ante agreement on the distributive norm under a veil of ignorance to which the emergence of reciprocal expectations of conformity is also related this is in line with rawls s idea of an endogenous sense of justice stabilizing ex post institutions that would have been ex ante chosen in the original position

the relation between earnings and cash flows abstract a model of earnings cash flows and accruals is developed assuming a random walk sales process variable and fixed costs and that the only accruals are accounts receivable and payable and inventory the model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating cash cycle also the model is used to predict serial and cross correlations of each firm s series the implications and predictions are tested on a 1337 firm sample over 1963 1992 both earnings and cash flow forecast implications and correlation predictions are generally consistent with the data

social contract i harsanyi and rawls this paper analyzes the bargaining problem faced by two individuals in the rawlsian original position along strictly rawlsian lines the resulting model closely resembles that used by j harsanyi in defending utilitarianism three difficulties with harsanyi s version of the model are identified these concern the underlying symmetry assumption the origin of the necessary interpersonal comparison of utility and the reasons why individuals should be regarded as committed to the social contract negotiated in the original position the paper seeks to resolve the first two difficulties by supposing that the extended sympathy preferences required in harsanyi s model are chosen strategically by evolutionary forces

implementing supplier codes of conduct in global supply chains process explanations from theoretic and empirical perspectives western buying companies impose supplier codes of conduct scc on their suppliers in developing countries however many suppliers cannot fully comply with scc and some of them even cheat in scc in this research we link contract characteristics price pressure production complexity contract duration to the likelihood of supplier s commitment to scc through a mediating process how the buying companies govern their suppliers our structural equation model analysis shows that the hierarchy relational norms governance is a perfect mediator of contract characteristics effects on the likelihood of supplier s commitment the market governance an insignificant one the managerial implications are provided for successfully implementing scc in global supply chains

efficient sourcing and debt financing in imperfect product markets supplier relations play an important role in determining a firm s product market strategy and position by affecting the cost and quality of the product produced by the firm these relations are especially significant because the cost of purchased materials for an average firm is more than half its total sales in this paper we model the adverse incentives of a firm that sources from a competitive supplier industry we show that a firm s propensity to behave opportunistically towards its suppliers raises the firm s input costs by decreasing the number of suppliers servicing it this results in a suboptimal production decision compared to the firm s first best choice we argue that an appropriate level of debt financing alters the shareholder incentives and mitigates the hold up problem further we also show that at the optimal debt level the firm produces its first best level of output

excess capacity as a commitment to promote entry this paper studies dominant firms incentives for holding capacities in excess of their production requirements the explanation most frequently put forward is to view behaviour of this kind as an attempt to set up barriers to entry as emphasized by spence 1977 holding excess capacity is a relatively effective form of entry deterrence it has the great advantage of constituting a credible threat to potential entrants because a large fraction of capacity costs are usually irreversible the view that holding excess capacities constitutes a form of anticompetitive behaviour has to be qualified however part of the motivation for holding them may well be of a more benign nature many large firms maintain economic relations with other smaller upstream or downstream companies quite often they make up a considerable part of these companies total activities the companies usually have to invest certain specific sunk costs into their relationship with the dominant firm before deciding on these sunk investments they will often like to have some assurance that the dominant firm will not behave opportunistically once these sunk costs have been incurred by opportunistic behaviour we mean a strategy whereby the dominant firm reduces the quantity it demands or supplies at any given price to such an extent that the companies can no longer obtain an economic rate of return on their sunk investments in the absence of long run contracts a dominant firm s decision to invest into excess capacities may well be an effective means to give the upstream or downstream firms the assurance they require the essential message is thus as follows rather than or in addition to being a threat to potential entrants excess capacity held by a dominant firm may also constitute a promise to upstream suppliers or downstream retailers they constitute an effective promise to buy or supply a sufficiently large quantity at any given price to ensure that the upstream or downstream firm

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

guilt in games a clear conscience is a good pillow why does this old proverb contain an insight the emotion of guilt holds a key psychologists report that the prototypical cause of guilt would be the infliction of harm loss or distress on a relationship partner roy baumeister arlene m stillwell and todd f heatherton 1994 245 june price tangney 1995 moreover guilt is unpleasant and may affect behavior to render the associated pangs counterfactual baumeister stillwell and heatherton state if people feel guilt for hurting their partners and for failing to live up to their expectations they will alter their behavior to avoid guilt in ways that seem likely to maintain and strengthen the relationship avoided guilt is the down of the sound sleeper s bolster how can guilt be modeled how are human interaction and economic outcomes influenced we offer a formal approach for providing answers start with an extensive game form which associates a monetary outcome with each end node say that player i lets player j down if as a result of i s choice of strategy j gets a lower monetary payoff than j expected to get before play started player i s guilt may depend on how much he lets j down player i s guilt may also depend on how much j believes i believes he lets j down we develop techniques to analyze equilibria when players are motivated in part by a desire to avoid guilt the intellectual home for our exercise is what has been called psychological game theory this framework originally developed by john geanakoplos david pearce and ennio stacchetti 1989 and recently extended by battigalli and dufwenberg 2005 henceforth b d allows players utilities to depend on beliefs about choices states of nature