Knowledge that Transforms

Abstract Reviews the book "Accounting Theory," by Gokul Sinha.

Abstract Reviews the book "Research and Current Issues in Management Accounting," edited by Michael Bromwich and Anthony G. Hopwood.

Abstract ABSTRACT: This study investigates the influence of both the state corporate income tax rate and the form of the income tax base structure on foreign investment in manufacturing assets. An econometric model of foreign investment is derived from a supply-oriented theory of regional investment, That is, the decision to develop productive capacity in one region as opposed to another is due to regional advantages. Empirical results suggest that tax structures that use the unitary method of accounting have a substantial impact on the amounts of foreign investment. On the other hand, business income tax rates appear to have little impact.

Abstract ABSTRACT: The two most commonly used transfer pricing rules for tax purposes pursuant to Reg. Sec. 1.482 are the "resale price" method and the "cost plus" method. This paper analyzes the effects of each of these methods on the resource allocation decisions of multinational firms when the tax rate abroad is lower than in the U.S. We show that, relative to the resource allocation that would exist in the absence of taxation: (1) the resale price method can cause either an increase or decrease in imports, an overuse of domestic resources, and overproduction of the "most similar product"; and (2) the cost plus method causes a decrease in imports, a decrease in the use of domestic resources, and overproduction of the most similar product. These effects are reversed when the tax rate abroad is higher than in the U.S. In addition, we deal with the case where the MNE faces different transfer pricing regulations in the U.S. and the foreign country.

Abstract ABSTRACT: Current financial reporting practices have traditionally emphasized measures of accrual earnings. On the other hand, the link between future cash flows and firm value is well accepted by financial economists, and recently there has been increased interest in measures of cash flow. This paper provides evidence on the role of accrual (i.e., earnings and working capital from operations [WCFO]) and cash flow measures in an explanatory model of security prices. This issue is first examined by testing for an association between unexpected security returns and unexpected cash flows, after controlling for the relation between unexpected returns and unexpected earnings. We also examine the obverse issue by testing for an association between unexpected security returns and unexpected earnings, after controlling for the relation between unexpected returns and unexpected cash flows. We test these relations in two contexts: in results pooled over the entire ten-year time period studied and in year-by-year cross-sectional regressions. Results for our complete sample are generally consistent with: (1) cash flow data having incremental information content relative to that contained in earnings; (2) cash flow data having incremental information content in addition to that contained in earnings and WCFO; and (3) accrual data (i.e., earnings and WCFO) jointly and separately having incremental information content in addition to that contained in cash flow data. However, the results do not support the hypothesis that WCFO has incremental information content relative to that contained in earnings.

Abstract Reviews the book "Currency Fluctuations and the Perception of Corporate Performance," by Loretta Graziano.

Abstract ABSTRACT: This paper Investigates the explanatory power of various measures that indicate the value of a firm's oil and gas properties. The empirical method relies on cross-sectional valuation models applied over the 1979-83 period. The evidence demonstrates that the primary statements' net book value data are highly significant in explaining the market value of oil and gas properties. This measure dominates the supplementary valuation measures supplied in firms' footnotes, including the "standardized present value" measure. The evidence also clearly shows that the market distinguishes rationally between the successful efforts and the full cost accounting methods.

Abstract Reviews the book "Fifty Years of Statistical Auditing," edited by William R. Kinney Jr.

Abstract ABSTRACT: This paper discusses the effects of setting budget goals on task performance in different task situations. The main hypothesis developed from this analysis is that the effect of setting specific, difficult budget goals on task performance depends on the level of task uncertainty. Specifically, it is argued that, where task uncertainty is high, setting budget goals is less effective in promoting task performance than where task uncertainty is low. In addition, it is suggested that, although limited,-available evidence is consistent with this hypothesis. Finally, the research implications of the analysis are considered.

Abstract Reviews the book "Readings in the Concept and Measurement of Income," edited by R.H. Parker, G.C. Harcourt and G. Whittington.