bluuebunny/crossref_metadata_2025 huggingface dataset:
International Accounting Standards for Line‐of‐Business Reporting and Oligopoly Competition*
Authors: GIGLER FRANK , HUGHES JOHN , RAYBURN JUDY
Published: April 2010

Abstract. This article presents a model in which the impact of international accounting standards on product market competition can be assessed. Formulating the choice of disclosure rules as the first stage in a multistage game between countries and representative incumbent and entrant firms, we establish conditions under which an enforceable international standard to require line‐of‐business (LOB) reporting could lead to strict improvement in the expected national welfare of participating countries over the equilibrium that would otherwise be attained. Additional results consider the effects of changes in certain model assumptions and the addition of tariffs as further trade policy instruments.

Résumé. Les auteurs proposent un modèle permettant d'évaluer l'incidence des normes comptables internationales sur la concurrence, sur les marchés de produits. Ils posent d'abord le choix des règles de présentation de l'information comme étant la première étape d'un jeu à multiples épisodes entre les pays et entre les sociétés en place représentatives du secteur et les nouvelles venues. Ils établissent ensuite les conditions dans lesquelles l'application possible d'une norme internationale exigeant la publication d'information sectorielle pourrait mener à une stricte amélioration de la prospérité nationale attendue des pays participants, au‐delà du niveau d'équilibre qui serait autrement atteint. Les auteurs s'intéressent entre autres, dans leurs travaux, aux répercussions de la modification de certaines hypothèses du modèle et de l'introduction des tarifs douaniers à titre d'instruments de la politique d'échange.
Disclosure Rules and R&D Spending Revisited*
Authors: HUGHES JOHN S. , KAO JENNIFER L.
Published: April 2010

Abstract. This article reconciles a disparity between one of Hughes and Kao's (1991) predictions on the effects of firm disclosures regarding future benefits of R&D spending and evidence of reductions in R&D spending pursuant to SFAS No. 2 reported by Horowitz and Kolodny (1980) and others. By assuming Bertrand price competition in place of Cournot quantity competition, it is shown that equilibrium R&D expenditures by risk‐averse duopolists will be lower when firm disclosures are uninformative about R&D outcomes than when they are informative. This result is especially useful in that price competition appears to be descriptive of competition in high technology industries.

Résumé. Les auteurs réussissent à concilier l'une des prédictions de Hughes et Kao (1991) portant sur l'incidence de l'information présentée par l'entreprise au sujet des avantages futurs des dépenses de R‐D, et l'évidence de la réduction des dépenses de R‐D depuis l'entrée en vigueur du SFAS n***o 2, dont font état Horowitz et Kolodny (1980) ainsi que d'autres chercheurs. En substituant l'hypothèse de Bertrand relative à la concurrence axée sur le prix à celle de Cournot relative à la concurrence axée sur la quantité, les auteurs démontrent que les dépenses de R‐D au point d'équilibre engagées par des entreprises en situation de duopole qui présentent une aversion pour le risque sont plus faibles lorsque l'information présentée ne renseigne pas sur les résultats découlant des dépenses de R‐D que lorsque l'information présentée renseigne sur ces résultats. Cette conclusion est particulièrement utile du fait que le prix semble bien être l'objet de la concurrence que se livrent les entreprises des secteurs de haute technologie.
Evolving Financial Reporting Practices: A Comparative Study of the Nordic Countries' Harmonization Efforts*
Authors: MONSEN NORVALD , WALLACE WANDA A.
Published: April 2010

Abstract. In the 1960s, a group of culturally similar countries—the Nordic countries—cooperated in harmonizing their companies acts, including their accounting requirements. They even issued a Nordic proposal for new companies acts, intended to be enacted as new laws in each of the Nordic countries. The purpose of the paper is to study this harmonization effort and to suggest future research to enhance our understanding of diverse financial reporting practices. The paper shows that accounting harmonization in this context was difficult, even though the prerequisites for success were excellent. Future research should explore the experiences of accounting harmonization in other contexts.

Résumé. Dans les années 60, un groupe de pays de même parenté culturelle — les pays nordiques — ont collaboré à l'harmonisation de leurs lois sur les sociétés ainsi que de leurs exigences en matière comptable. Ils ont même produit une Proposition des pays nordiques relative à de nouvelles lois sur les sociétés, qui devaient être sanctionnées dans chacun des pays participants. Les auteurs ont ici pour but d'analyser cet effort d'harmonisation et de suggérer d'éventuels travaux de recherche qui nous amèneraient à mieux comprendre différentes pratiques en matière d'information financière. Les auteurs expliquent que l'harmonisation comptable, dans ce contexte, s'est révélée difficile, même si les préalables au succès étaient excellents. Les travaux de recherche à venir devraient porter sur l'analyse des expériences d'harmonisation comptable dans d'autres contextes.
Reduction of Outcome Variance: Optimality and Incentives*
Authors: METH BRACHA
Published: April 2010

Abstract. It is well known that monitoring information can be used to reduce moral hazard problems. This paper analyzes a model in which the agent can affect the precision (or quality) of the information observed by the principal. In particular, the agent is assumed to be capable of supplying two types of effort: productive effort and effort that reduces the outcome variance. Variance reduction improves the principal's ability to use the outcome to infer the agent's productive effort. However, if the agent's variance‐reducing actions are unobservable, a moral hazard problem related to those actions arises. The principal then faces a trade‐off between obtaining monitoring benefits from variance reduction and the costs of motivating the agent to choose the desired level of outcome variance. Moreover, the incentives that the principal sets up to motivate the agent to reduce the variance also affect the agent's incentives to increase the outcome. The paper establishes conditions under which the principal motivates the agent to expend nonzero effort in reducing the variance. The incentives for variance reduction depend on the agent's degree of risk aversion and on the feasibility of nonmonotonic contracts. The results explain a variety of observed contracts such as bonus plans, bonus plans with an upper bound, and stock options.

Résumé. Chacun sait que l'information de contrôle peut servir à réduire les problèmes de risque moral. L'auteur analyse un modèle dans lequel le mandataire peut modifier la précision (ou la qualité) de l'information observée par le mandant. Il pose notamment l'hypothèse selon laquelle le mandataire est en mesure de fournir deux types d'effort: un effort productif et un effort qui réduit la variance des résultats. La réduction de la variance améliore la capacité du mandant de tirer, à partir des résultats, des conclusions relatives à l'effort productif fourni par le mandataire. Si, toutefois, les actions du mandataire visant à réduire la variance ne sont pas observables, ces actions soulèvent un problème de risque moral. Le mandant se trouve alors devant un compromis entre l'obtention des avantages que présente la réduction de la variance en matière de contrôle et les coûts que suppose la motivation du mandataire à choisir le niveau souhaité de variance des résultats. En outre, les mesures incitatives que le mandant instaure pour motiver le mandataire à réduire la variance ont également une incidence sur les motivations du mandataire à augmenter les résultats. L'auteur établit les conditions dans lesquelles le mandant incite le mandataire à déployer un effort mesurable de réduction de la variance. Les incitatifs à la réduction de la variance dépendent du degré d'aversion pour le risque du mandataire et de la possibilité de lui offrir un contrat indexé sur les résultats. Les résultats sont l'enjeu d'une grande variété de contrats observés: régimes de gratification, régimes de gratification comportant une limite supérieure et régimes d'options d'achat d'actions, par exemple.
Properties of Economic Income in a Private Information Setting*
Authors: FARLEE MITCHELL A. , FELLINGHAM JOHN C. , YOUNG RICHARD A.
Published: April 2010

Abstract. This paper adopts a valuation perspective within an asymmetric information setting and explores properties of economic income. The optimal intertemporal contract induces an accrual component of income which would not exist absent the information problem. The contracting solution introduces a dampening effect—if cash flow increases by one dollar, income increases by less than one dollar. Thus, the accrual is inversely related to cash flows. Further, this dampening is greater for more favorable cash outcomes.

Résumé. Les auteurs adoptent la perspective de l'évaluation en situation d'asymétrie de l'information et explorent les propriétés du bénéfice économique. Le contrat intertemporel optimal fait intervenir une amplification du bénéfice qui n'existerait pas si ce n'était de la présence du problème d'information. La solution contractuelle amène un effet atténuateur — c'est‐à‐dire qu'à une augmentation du flux monétaire de un dollar correspond une augmentation du bénéfice de moins de un dollar. Ainsi, l'amplification est en relation inverse avec les flux monétaires. En outre, l'atténuation est plus marquée dans le cas de résultats monétaires plus avantageux.
Determinants of Corporate Leverage: A Time‐Series Analysis Using U.S. Tax Return Data*
Authors: SHIH MICHAEL S. H.
Published: April 2010

Abstract. The study examines how the risk of exhausting corporate tax liabilities before deducting interest expense affects corporate leverage. It differs from prior studies in three ways: (1) it uses data compiled by the Internal Revenue Service (IRS) from corporate tax returns rather than accounting data; (2) it measures risk of tax exhaustion more accurately; and (3) it adopts a first‐difference time‐series approach, so that firms act as their own control between adjacent years. These methodological innovations reduce biases caused by measurement error and omitted variables that were present in prior research.

The results suggest that, all else being equal, high risk of tax exhaustion reduces firms' use of leverage. As well, the study provides the first evidence that personal taxes significantly affect corporate leverage. The effects on leverage decisions of other variables are also tested and the results are consistent with predictions from prior theoretical work.
The Effects of Cross‐Sectional Scale Differences on Regression Results in Empirical Accounting Research*
Authors: BARTH MARY E. , KALLAPUR SANJAY
Published: April 2010

Abstract. This study investigates coefficient bias and heteroscedasticity resulting from scale differences in accounting levels‐based research designs analytically and using simulations based on accounting data. Findings indicate that including a scale proxy as an independent variable is more effective than deflation at mitigating coefficient bias, even if the proxy is 95 percent correlated with the true scale factor. In fact, deflation can worsen coefficient bias. Also, deflation often does not noticeably reduce heteroscedasticity and can decrease estimation efficiency. White (1980) standard errors are close to the true ones in regressions using undeflated variables. Replications of specifications in three recent accounting studies confirm the simulation findings. The findings suggest that when scale differences are of concern, accounting researchers should include a scale proxy as an independent variable and report inferences based on White standard errors.

Résumé. Les auteurs examinent, tant sur le plan analytique qu'au moyen de simulations basées sur les données comptables, la distorsion des coefficients et l'hétéroscédasticité résultant des différences d'échelle dans les plans de recherche comptable basés sur les niveaux. Leurs constatations révèlent que l'inclusion d'un substitut d'échelle à titre de variable indépendante est plus efficace que la déflation pour atténuer la distorsion relative au coefficient, même si le substitut présente une corrélation de 95 pour cent avec le véritable facteur d'échelle. En fait, la déflation peut accentuer la distorsion relative au coefficient. Aussi, il arrive souvent que la déflation, sans réduire de façon appréciable l'hétéroscédasticité, puisse diminuer l'efficience de l'estimation. Les erreurs‐types de White (1980) se rapprochent des erreurs véritables dans les régressions faisant appel à des variables non déflatées. La répétition des mêmes caractéristiques dans trois études comptables récentes confirme les résultats de la simulation. Les conclusions de l'étude donnent à penser que lorsque les différences d'échelle sont sujet de préoccupation, les chercheurs en comptabilité devraient faire intervenir un substitut d'échelle à titre de variable indépendante et formuler les inférences à partir des erreurs‐types de White.
Incremental Information Content of the Change in the Percent of Production Added to Inventory*
Authors: JIAMBALVO JAMES , NOREEN ERIC , SHEVLIN TERRY
Published: April 2010

Abstract. Manufacturing firms can manipulate income by producing in excess of the quantity needed to meet current period demand, thereby allocating part of current period fixed manufacturing overhead costs from cost of goods sold to inventory. Because it is subject to manipulation, the component of earnings due to producing in excess of sales may be of lower quality than the remaining component of earnings. We investigate this possibility using a regression of security returns on unexpected income and an estimate of the change in percent of production added to inventory (CPAI). An analytical model indicates that CPAI determines the “earnings surprise” subject to manipulation by overproducing. Assuming the market recognizes this, the coefficient on CPAI should be negative because this low quality component must be deducted from the total “good news” conveyed by the change in reported earnings.

Alternatively, CPAI may convey good or bad news to the market that is unrelated to the manipulation of current period earnings. Firms may increase the percent of production added to inventory in anticipation of high levels of future sales. In this case, the estimated coefficient on CPAI should be positive. Or, if the increase in the percent of production added to inventory reflects anticipation of a strike or an unexpected downturn in current sales, the estimated coefficient should be negative.

Cross‐sectional tests using a large sample of manufacturing firms indicate a significant positive relation between security returns and CPAI. This finding is consistent with market participants viewing CPAI as a leading indicator of firm performance. Although the results are most supportive of CPAI conveying good news, there is some evidence that CPAI is used by managers to smooth earnings and, for firms classified as smoothing earnings, there is weak evidence that the component of earnings related to CPAI is viewed by market participants to be of lower quality.
An Experimental Investigation of the Effect of Cost Information and Feedback on Product Cost Decisions*
Authors: GUPTA MAHENDRA , KING RONALD R.
Published: April 2010

Abstract. In this paper we report the results of an experiment designed to investigate the potential benefits of more accurate costing systems. Subjects in our experiment participated in one of four single‐person decision making settings, which varied in terms of the accuracy of costing systems (less accurate versus more accurate cost reports) and in the complexity of the economic environment (less heterogeneous versus more heterogeneous products). The costing systems provided imperfect reports that subjects could use to select forecasts of future product costs. Forecast accuracy determined the resulting payoffs for subjects. In addition to having the cost reports when making forecasts, subjects also observed the association between forecasts and actual profits for previous periods and the rank ordering of the products' relative usage of resources at each of the production processes.

The results from our experiment indicate that subjects did not select forecasts based only on reported costs. Rather they updated forecasts using profit feedback and the supplemental rank information about the products' relative usage of resources. We found that profits decreased as the complexity of economic environment increased but increased with the accuracy of cost reports.

The profits associated with less accurate costing systems, however, were not as low as we would have predicted had the subjects used the cost reports as their forecasts. In fact, using profit feedback, subjects were able to converge toward optimal profits even with imperfect cost information.
Evidence that Prices Do Not Fully Reflect the Implications of Current Earnings for Future Earnings: An Experimental Markets Approach*
Authors: CALEGARI MICHAEL , FARGHER NEIL L.
Published: April 2010

Abstract. Analysts have been found to underweight the innovation in the most recent quarterly earnings when forecasting next‐quarter earnings, and these expectations have been posited as an explanation for post‐earnings‐announcement drift. This study uses an experimental asset market to examine whether similar errors in forecasting quarterly earnings are made by student‐subjects. We examine two aspects of their behavior: (1) do subjects underestimate the autocorrelation in quarterly earnings when forming earnings expectations? and (2) are asset prices consistent with a subject's underestimation of the autocorrelation in quarterly earnings?

We observe subject errors in forecasts that underweight extreme innovations in the most recent quarterly earnings by approximately 40 percent. The prices in the experimental markets also fail to reflect fully the most recent innovation in quarterly earnings. We are able to predict the sign of the incorrect pricing, from the mean initial earnings predictions of the subjects, in 74 percent of the 135 markets. These forecast errors observed in this study are consistent with forecast errors observed for analysts, and this consistency suggests that errors in analysts' forecasts may be at least partially attributable to the use of judgmental heuristics.
Corporate Disclosure of Environmental Liability Information: Theory and Evidence*
Authors: LI YUE , RICHARDSON GORDON D. , THORNTON DANIEL B.
Published: April 2010

Abstract. The decision to disclose information concerning a firm's environmental liabilities is modeled as a sequential game involving the firm, a capital market, and outside stakeholders who can impose proprietary (political) costs on the firm. A partial disclosure equilibrium is derived in which firms reveal information strategically, maximizing the share‐value net of expected political costs. Inherent uncertainty regarding the existence and size of the liabilities creates a setting where outsiders are uncertain if management is informed about these liabilities, so firms can plausibly withhold “bad news”, that is, they do not disclose liabilities that exceed a threshold level. Three novel hypotheses are that a firm is more likely to disclose as (1) its pollution propensity increases, (2) outsiders' knowledge of its environmental liabilities increases, and (3) the risk of incurring proprietary costs decreases. Empirical support is found for the hypotheses, based on the accounting disclosures made by sample firms selected from the records of the Ontario Ministry of the Environment and Energy.

Improved accounting and auditing standards for environmental disclosure would build on at least three implications of the study:

To the extent that inherent uncertainty leaves managers with discretion as to what to disclose, the partial disclosure equilibrium result suggests that not all firms will comply with disclosure standards.

Publishing broad environmental performance indicators for companies in nonaccounting outlets would increase public awareness of a manager's private information endowment, making voluntary accounting disclosures of the liabilities more likely.

If a significant decline in stakeholder tolerance of pollution occurs, the expected proprietary costs of disclosing increase, and companies become less likely to disclose.
Resource Allocation Decisions in Audit Engagements*
Authors: HACKENBRACK KARL , KNECHEL W. ROBERT
Published: April 2010

Abstract. We examine the empirical relationship between auditors' resource allocations and selected engagement characteristics. Our measure of resources is hours of grades of labor (partner, manager, etc.) “charged” to audit activities (planning, internal control evaluation, etc.). Engagement characteristics examined are client size, industry affiliation, client complexity, risk, auditor provision of management advisory services to the auditee, and degree of control reliance. The data were obtained from publicly available sources and a survey developed and administered by an international public accounting firm.

We find the cross‐sectional variation in the labor charged to various audit activities can be explained by engagement characteristics found to be important in prior studies on audit fees, total labor inputs, and the mix of labor inputs. Measures of client size, industry, complexity, risk, and services provided are associated with changes in the allocation of labor among audit activities. We find no substitution of internal control review/testing for substantive testing on reliance audits. Task assignments vary by rank. Measures of client size, complexity, risk, and services provided are associated with activity‐specific changes in the labor mix.
The Effect of Limited Liability on the Market Response to Disclosure*
Authors: FISCHER PAUL E. , VERRECCHIA ROBERT E.
Published: April 2010

Abstract. We formalize the effects of an earnings disclosure on security prices under an assumption of limited liability. We derive various nonlinear relations between equity prices and earnings under a variety of capital structure assumptions and. if possible, we tie the relations attained to results from the existing empirical literature. We also characterize how debt prices respond to earnings when holders of debt have limited liability. Finally, we analyze how changes in the degree of leverage and conversion features of debt affect the relation between price and earnings.
Foreign Currency Exposure of Multinational Firms: Accounting Measures and Market Valuation*
Authors: BARTOV ELI
Published: April 2010

Abstract. The accounting method in Statement of Financial Accounting Standards (SFAS) No. 8 for restatement of a foreign operation's financial statements denominated in a foreign currency into the parent's currency equivalents for inclusion in the parent company's financial statements was severely criticized by market participants and managers. Its replacement, SFAS No. 52, represented an attempt to improve on the methods of SFAS No. 8. This study examines two questions: did SFAS No. 8 produce relevant information for valuing US multinational firms, and are the results reported under SFAS No. 52 more valuation relevant than those reported under SFAS No. 8? Valuation relevance is studied because the Financial Accounting Standards Board (FASB) has stated that relevance is an important criterion for choosing among alternative accounting methods. Considered collectively, the results suggest that the rules in SFAS No. 8 produced a poor accounting measure for valuing US multinational firms, and that the introduction of SFAS No. 52 has resulted in a significant improvement in the valuation relevance of the accounting numbers associated with the restatement of a foreign operation's financial statements. However, this improvement applies only to the subset of firms that designated a foreign currency as their functional currency (i.e., switched to the current‐rate method) and not to firms that designated the dollar as their functional currency (i.e., as if they still reported under SFAS No. 8).
The Effect of Audit Quality on Earnings Management*
Authors: BECKER CONNIE L. , DEFOND MARK L. , JIAMBALVO JAMES , SUBRAMANYAM K.R.
Published: April 2010

This study examines the relation between audit quality and earnings management. Consistent with prior research, we treat audit quality as a dichotomous variable and assume that Big Six auditors are of higher quality than non‐Big Six auditors. Earnings management is captured by discretionary accruals that are estimated using a cross‐sectional version of the Jones 1991 model. Prior literature suggests that auditors are more likely to object to management's accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are more likely to be sued when they are associated with financial statements that overstate earnings (as compared to understate earnings). Therefore, we hypothesize that clients of non‐Big Six auditors report discretionary accruals that increase income relatively more than the discretionary accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a sample of 10,379 Big Six and 2,179 non‐Big Six firm years. Specifically, clients of non‐Big Six auditors report discretionary accruals that are, on average, 1.5‐2.1 percent of total assets higher than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with earnings management, we find that the mean and median of the absolute value of discretionary accruals are greater for firms with non‐Big Six auditors. This result also indicates that lower audit quality is associated with more “accounting flexibility”.
An Application of the Boostrap Method to the Simultaneous Equations Model of the Demand and Supply of Audit Services*
Authors: DEIS DONALD R. , HILL R. CARTER
Published: April 2010

This paper extends the application of the bootstrap method in accounting research to a simultaneous equations model of the demand and supply of audit services with mixed qualitative and continuous dependent variables. A moderately sized sample of 118 quality control reviews (Copley, Doucet, and Gaver 1994) is used to demonstrate the bootstrap method and compare results to estimates of standard errors obtained from Amemiya's 1978 asymptotic generalized least squares (GLS) procedure. We find that the GLS t‐statistics are inflated by as much as 55 percent and the corresponding p‐values are likewise overstated when compared to the bootstrap results. The problem is more acute with the qualitative dependent variable for audit quality, which is often the key variable of interest.
An Examination of Factors Affecting Audit Practice Development*
Authors: COHEN JEFFREY R. , TROMPETER GREGORY M.
Published: April 2010

In this study, we examine the possibility that audit managers' judgments may be affected by practice development objectives. Given the competitive nature of public accounting, the extent to which auditors are inclined to be aggressive in the domain of practice development may be a function of their superiors' preferences. This study builds on the exploratory work of Hooks, Cheramy, and Sinich 1994 and Asare, Hackenbrack, and Knechel 1994 by examining the delicate balance that exists between a public accounting firm's need to “grow its business” and its need to maintain its objectivity and professionalism. An experiment is conducted to determine whether the auditor's willingness to tender a bid on an engagement is affected by (1) the nature of the auditor‐auditee relationship (i.e., do existing clients receive the same treatment as potential clients?), or (2) the audit partner's aggressiveness with respect to practice development, which also includes elements of ethics and competence.

Seventy‐four audit managers from two Big‐Six firms participated in the study. The results indicate that the type of client (current or potential) and the type of partner (more or less aggressive with respect to practice development) significantly affected the auditors' judgments. Specifically, subjects in the “current client” condition, as well as those who are accountable to a more aggressive partner, are more likely to recommend bidding for the client. The experimental results of this study are based on a case where the client was proposing a relatively aggressive position with respect to accounting for research and development (R&D) costs. Our findings also suggest that the judgements related to bidding on the client are not independent of the auditor's willingness to accept the client's accounting treatment. These results also provide further evidence that the influence of accountability is important in the professional audit environment.
MD&A Quality as Measured by the SEC and Analysts' Earnings Forecasts*
Authors: BARRON ORIE E. , KILE CHARLES O. , O'KEEFE TERRENCE B.
Published: April 2010

This study examines the predictive value of Management Discussion and Analysis (MD&A) information. More specifically, this study tests the association between properties of analysts' earnings forecasts and MD&A quality, where MD&A quality is measured by the Securities Exchange Commission (SEC). We find that high MD&A ratings are associated with less error and less dispersion in analysts' earnings forecasts after controlling for many other expected influences on analysts' forecasts. We also find that estimated regression coefficients are consistent with MD&A information having a substantial effect on earnings forecasts. Finally, we find our results are driven by forward‐looking disclosures about capital expenditures and operations, and also by historical disclosures about capital expenditures. These findings are consistent with the suggestion by many constituencies (including the SEC) that the type of information found in high quality MD&A is particularly relevant for predicting earnings.
Earnings Management under Price Regulation*
Authors: NAVISSI FARSHID
Published: April 2010

Price controls1 have a major impact on firms' earnings and cash flows. Because price control regulation is costly to firms, it is a type of regulatory intervention that can impact a firm's accounting decisions (Watts and Zimmerman, 1978). Thus, regulatory changes that give firms relief from price controls provide incentives for earnings management. This paper examines discretionary accruals made by New Zealand manufacturing firms in response to two sets of regulations issued in 1971 and 1972. These regulations allowed manufacturing firms to apply for price increases to gain relief from financial hardship caused by the 1970 Price Freeze Regulation. Using a modified accruals mode! that adjusts for price‐level movements, the paper tests discretionary accruals of two samples of manufacturing firms and one control sample of nonmanufacturing firms. The results provide evidence of income decreasing discretionary accruals by manufacturing firms for the years during which they could apply for price increases. The control firms do not exhibit significant discretionary accruals in 1971 or 1972. Also, this paper provides evidence that failing to adjust for price‐level movements in high inflationary periods could result in inferences of income decreasing discretionary accruals where none may exist.
Selection from Many Investments with Managerial Private Information*
Authors: ANTLE RICK , BOGETOFT PETER , STARK ANDREW W.
Published: April 2010

We investigate capital investment problems when a manager knows the costs of a set of available projects, while the owner only holds probabilistic beliefs about these costs.

With mutually exclusive projects, an optimal policy can be defined by a series of cost targets, one for each of the possible projects. The project with the lowest reported cost relative to the target is chosen, and funded as if the cost were equal to the target. The optimal investment policy can deviate from a traditional policy of selecting the project with the highest, positive net present value (NPV) in a number of ways. First, under‐investment arises to limit the manager's ability to capture the economic rents. Second, when investment takes place, it is not always the project with the highest NPV that is implemented. Third, projects with lower cost variability can be favored.

We extend the analysis to non‐mutually exclusive projects. With two independent projects, batch processing is superior to individual appraisal whenever both optimal individual appraisal cost targets are interior. Individual appraisal ignores the impact of individual targets on incentives to report the costs of other potential projects. Batch processing can improve individual assessment by cost effective switching of investment away from the individual projects and into the batch as a whole.

The results suggest that the common practice of analyzing batches of capital requests in an annual capital budgeting cycle provides advantages in the organization's attempt to deal with asymmetric information and incentive problems.
Inventory Accounting Method and Earnings‐Price Ratios*
Authors: DHALIWAL DAN S. , GUENTHER DAVID A. , TROMBLEY MARK A.
Published: April 2010

Lee (1988) finds that LIFO firms have higher earnings‐price (EP) ratios than non‐LIFO firms despite the income‐reducing effects of LIFO, a result contrary to economic intuition that Lee describes as a “puzzle.” This paper attempts to resolve this puzzle by introducing refined measures of variables that are related to both EP ratios and inventory costing method choices. The improved proxies are analysts' expectations of future growth rather than realized growth, beta computed using a procedure designed to reduce measurement error rather than the usual OLS beta, and leverage as a supplemental risk measure. Further, we control for expected earnings changes, since transitory earnings shocks that are not expected to persist in future earnings affect the numerator of the EP ratio. After controlling for these factors, we find that EP ratios for LIFO firms are actually lower than those of non‐LIFO firms, a result consistent with economic intuition and the result expected by Lee.
Client Satisfaction and Big 6 Audit Fees*
Authors: BEHN BRUCE K. , CARCELLO JOSEPH V. , HERMANSON DANA R. , HERMANSON ROGER H.
Published: April 2010

This study examines whether client satisfaction can help explain cross‐sectional variation in Big 6 audit fees paid by Fortune 1000 clients. After controlling for other factors related to audit fees (including audit quality attributes), client satisfaction with the audit team is positively associated with fees. It appears that a dimension of client satisfaction unrelated to audit quality attributes is the factor associated with an audit fee premium. This dimension of satisfaction may reflect other aspects of service quality not documented in the literature, or it may simply enable an auditor to earn economic rents through enhanced bargaining power. Client satisfaction with the audit firm does not appear to be priced in this segment of the audit market.

The results are consistent with the view that a Big 6 audit is a service that is differentiable in the eyes of client management, and the results highlight the importance of the audit team composition in allowing a Big 6 audit firm to differentiate the audit product. Also, if auditors are earning local rents due to enhanced satisfaction levels, then a perfect competition model may not be appropriate for the audit services market.
“Low‐Balling” and Efficiency in a Two‐Period Specialization Model of Auditing Competition*
Authors: CHAN DEREK K.
Published: April 2010

This paper develops a simple, two‐period specialization model to analyze the effect of start‐up costs on auditing competition. Audit firms in the model make strategic specialization and pricing decisions. Through specialization, an audit firm achieves a comparative cost advantage over its competitors for all clients whose characteristics are closer to its area of specialization. This comparative cost advantage is further fortified by the presence of start‐up costs. As a result, each audit firm obtains some market power and is able to price‐discriminate across clients by offering “specialization‐and‐relationship‐specific” audit fee schedules. This paper demonstrates that the practice of “low‐balling” is a natural consequence of competition among audit firms. However, low‐balling occurs only in a certain market segment where audit firms compete fiercely. This paper also shows that a policy of banning low‐balling acts as a substitute for the commitment of the audit firms to partially collude their pricing policies and results in increased profits for audit firms and increased fees. However, it also results in audit firms choosing specializations in a more efficient way, thereby reducing total auditing costs.
The Interpretation of Coefficients in N‐Chotomous Qualitative Response Models*
Authors: LECLERE MARC J.
Published: April 2010

Researchers in financial accounting often use qualitative response models in choice‐based empirical research. Most of this research relies on the familiar techniques of dichotomous probit or logistic regression. Only a limited amount of this research uses n‐chotomous qualitative response models such as ordered probit or multinomial logistic regression. A potential explanation for this limited use is that the interpretation of model coefficients in qualitative response models with limited dependent variables (dichotomous or n‐chotomous) differs substantially from OLS regression, and econometric texts do not provide a systematic approach to coefficient interpretation. This paper discusses several approaches to interpreting coefficients in n‐chotomous qualitative response models. These methods focus on partial derivatives, elasticities of probability, sensitivity analysis, and odds ratios. The methods are applied to the models presented in Thomas (1989) and Mittelstaedt (1989). Additional analyses of the models demonstrate that the methods of interpretation can provide different conclusions or strengthen existing conclusions. The methods provide a better understanding of the directional effects of model coefficients, the relative responsiveness of the probability of choice to changes in the independent variables, and the effects of changes in the independent variables on the probability of choice. These methods should make these models more attractive to researchers interested in choice‐based financial accounting research, and allow for a broader range of decision outcomes than that provided by dichotomous qualitative response models.
The Difference between Earnings and Operating Cash Flow as an Indicator of Financial Reporting Fraud*
Authors: LEE THOMAS A. , INGRAM ROBERT W. , HOWARD THOMAS P.
Published: April 2010

This paper examines the relation between earnings and operating cash flow to derive and test an indicator of financial statement fraud. Accrual measurement concepts indicate that financial statement fraud should be associated with high levels of earnings relative to operating cash flow. We demonstrate that the excess of earnings over operating cash flow is extreme in most fraud cases in years immediately prior to the fraud discovery based on a sample of 56 fraud cases from 1978 to 1991. We compare the distribution of the earnings minus operating cash flow variable for fraud firms with that for a sample of 60,453 firm‐years for firms listed on COMPUSTAT. We test a logistic regression model in which the discovery/nondiscovery of fraud is the dependent variable, and earnings minus operating cash flow is the explanatory variable. Other control variables are included in the model based on prior studies. Results are consistent with expectations derived from accrual measurement theory. We then examine the predictive ability of the model using our sample of fraud firms and a sample of nonfraud firms in the same four‐digit SIC code industries. Observations for the fraud firms are for the fiscal year prior to the discovery of fraud. Observations for the nonfraud firms are for the same fiscal years as the fraud firms in the same industries. The predictive ability of the model, including the excess of earnings over operating cash flow, is substantially higher than the predictive ability of the model omitting this variable. We conclude that the earnings‐operating cash flow relation provides important information for those interested in identifying financial statement fraud, especially when considered in conjunction with other factors associated with fraud risk.
New autosomal recessive mutations in aquaporin‐2 causing nephrogenic diabetes insipidus through deficient targeting display normal expression in Xenopus oocytes
Authors: Leduc‐Nadeau Alexandre , Lussier Yoann , Arthus Marie‐Françoise , Lonergan Michèle , Martinez‐Aguayo Alejandro , Riveira‐Munoz Eva , Devuyst Olivier , Bissonnette Pierre , Bichet Daniel G.
Published: April 2010

Aquaporin‐2 (AQP2), located at the luminal side of the collecting duct principal cells, is a water channel responsible for the final concentration of urine. Lack of function, often occurring through mistargeting of mutated proteins, induces nephrogenic diabetes insipidus (NDI), a condition characterized by large urinary volumes. In the present study, two new mutations (K228E and V24A) identified in NDI‐affected individuals from distinct families along with the already reported R187C were analysed in comparison to the wild‐type protein (AQP2‐wt) using Xenopus laevis oocytes and a mouse collecting duct cell‐line (mIMCD‐3). Initial data in oocytes showed that all mutations were adequately expressed at reduced levels when compared to AQP2‐wt. K228E and V24A were found to be properly targeted at the plasma membrane and exhibited adequate functionality similar to AQP2‐wt, as opposed to R187C which was retained in internal stores and was thus inactive. In coexpression studies using oocytes, R187C impeded the functionality of all other AQP2 variants while combinations with K228E, V24A and AQP2‐wt only showed additive functionalities. When expressed in mIMCD‐3 cells, forskolin treatment efficiently promoted the targeting of AQP2‐wt at the plasma membrane (>90%) while K228E only weakly responded to the same treatment (∼20%) and both V24A and R187C remained completely insensitive to the treatment. We concluded that both V24A and K228E are intrinsically functional water channels that lack a proper response to vasopressin, which leads to NDI as found in both compound mutations studied (K228E + R187C and V24A + R187C). The discrepancies in plasma membrane targeting response found in both expression systems stress the need to evaluate such data using mammalian cell systems.
Inhibitory neurones of the spinal substantia gelatinosa mediate interaction of signals from primary afferents
Authors: Zheng Jihong , Lu Yan , Perl Edward R.
Published: April 2010

The spinal substantia gelatinosa (SG; lamina II) is a major synaptic zone for unmyelinated (C) primary afferents. Whereas a substantial proportion of intrinsic SG neurones are GABAergic inhibitory, their relationship to afferent activity is unknown. In spinal cord slices from a transgenic mouse in which certain GABAergic lamina II neurones are labelled with green fluorescent protein (GFP), we compared primary afferent input with local efferent connections made by inhibitory SG neurones. Simultaneous whole‐cell recordings from characterized neurones establish that inhibitory SG neurones receive monosynaptic input from a subset of unmyelinated primary afferents and connect to other lamina II cells that have input from a different set of afferents, permitting interactions between distinctive afferent messages. Certain lamina II inhibitory cells were found to connect to one another by reciprocal links. Inhibitory lamina II connections appear arranged to modulate activity from different sets of peripheral unmyelinated fibres through neural circuitry that includes disinhibition.
Afferent‐specific properties of interneuron synapses underlie selective long‐term regulation of feedback inhibitory circuits in CA1 hippocampus
Authors: Croce Ariane , Pelletier Joe Guillaume , Tartas Maylis , Lacaille Jean‐Claude
Published: April 2010

Hebbian long‐term potentiation (LTP) develops at specific synapses onto hippocampal CA1 oriens/alveus interneurons (OA‐INs), suggesting selective regulation of distinct input pathways. Afferent‐specific properties at interneuron synapses have been characterized extensively in CA3 stratum lucidum cells, but given interneuron diversity these rules of transmission and plasticity may not hold in other interneuron types. Here, we used paired recordings and demonstrate that CA2/3 pyramidal cell (PC) feedforward and CA1 PC feedback synapses onto OA‐INs show distinct AMPA receptor rectification and Ca2+permeability, short‐term plasticity and mGluR2/3‐mediated inhibition. Only feedback synapses undergo Hebbian LTP. OA‐IN firing during repeated synaptic stimulation displays onset‐transient or late‐persistent responses consistent with activation of feedforward and feedback inputs, respectively. Input–output functions are preserved after theta‐burst stimulation, but late‐persistent responses selectively show mGluR1‐dependent long‐term increases. Thus, cell type‐ and afferent‐specific rules of transmission and plasticity underlie distinct OA‐IN input–output functions, providing selective long‐term regulation in feedback inhibitory networks.
An Inverse Method for Investigating Deformation Zone Temperatures in Metal Cutting
Authors: Stephenson D. A.
Published: April 2010

A major obstacle in verifying metal cutting temperature models and including thermal variables in empirical studies is the experimental difficulty of measuring physically meaningful cutting temperatures. This is especially true for deformation or shear zone temperatures, which influence the mechanical properties of the work material. This paper describes an inverse method for investigating deformation zone temperatures in end turning tests on thin-walled tubes. The method is based on analytical solutions for the quasi-steady state temperature distributions in a thin-walled ring heated by a rotating temperature source and a thin-walled tube heated by a helically moving source; using these solutions, remote temperature measurements on the tube can be used to back-calculate an effective source temperature which corresponds physically to an average deformation zone temperature. The method has been used in a broad range of experiments on steel, brass, aluminum, and cast iron to verify cutting temperature models. Sample calculations and infrared thermograms from these experiments are used to illustrate the application of the method.
Dynamic Generation of Machined Surfaces, Part 2: Construction of Surface Topography
Authors: Zhang G. M. , Kapoor S. G.
Published: April 2010

In Part 1 of these two-part papers, a normal distribution model has been formulated to describe the random excitation system present during machining. Part 2 presents a methodology to dynamically generate the surface topography under the random excitation environment through computer simulation. The proposed methodology uses the tool vibratory motion along with the tool geometrical motion to construct the topography of a machined surface. Both experimental and simulation results confirm that when a small feed is used, the influence of the spiral trajectory of tool geometrical motion on the surface generation decays dramatically and the random excitation system, on the opposite, is strengthened playing a significant role in surface texture generation.