bluuebunny/crossref_metadata_2025_split huggingface dataset:
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 Audit Quality on Earnings Management*
Authors: BECKER CONNIE L. , DEFOND MARK L. , JIAMBALVO JAMES , SUBRAMANYAM K.R. 
Published: April 2010

AbstractThis 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

AbstractThis 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

AbstractIn 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

AbstractThis 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

AbstractPrice 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.