Game theory, Decision making, Rationality, IE-DM relationship

The article reports that on a time-state preference simulation model, it has been shown that there is little synergistic effect of combining a net present value objective function with a payback constraint and there is a possibility to increase greatly the performance of a net present value model by assigning projects to two or three risk classes and using a different discount rate for evaluating projects in each risk class. From this, several tentative conclusions may be drawn. First, the increasing use of a payback period as a secondary criterion in capital budgeting is not completely irrational since it does improve the decisions of a straight NPV model in highly uncertain environments. However, the NPV-PBK model in general leaves much room for improvement. Second, the dominant use of the NPV model seems warranted, provided different discount rates are used for different risk classes of projects. From the performance levels when only two or three risk classes are used, it appears that the NPV-RC model provides decisions nearly as good as even the most sophisticated models.

In two recent articles in the periodical "The Accounting Review," Beaver and Dukes (B⁄D), have used market association tests to assess the relative information content of accounting earnings numbers under various tax allocation principles. This article is a brief comment on two of their measures of association, "Percent Correct" and "Composite Average Price Index (API)." Correct interpretation of these measures is important for policy makers who might rely on their results and for researchers who may want to use their research method. The reinterpretation of the ⁄D data does not change the conclusions they draw regarding the consistency of different earnings numbers with the set of information used in setting security prices. Rather, its significance lies in the added confidence a policy maker can put in these results. There seems to be no ex ante reason to expect negative composite APl's or especially that the proportion of times that positive forecast errors are associated with negative unexpected price changes should be statistically significant.

This article focuses on conventional and modern accounting researches devoted to questions of accounting policy. The purpose of this article is to offer a model for organizing one's thoughts and efforts directed toward the process of accounting policy making and related research strategies. The motivation for attempting such a task is a conviction that results from individual accounting research studies must, suggestively, be interpreted as interrelated building blocks for accounting policy decisions. The authors consider accounting policy making, at first, as a social choice process. They argue that the most promising use of any given research strategy in the area of financial reporting policy is not in selecting optimal alternatives; rather, it is in contributing, along with all other available strategies, to developing theories that then may be used by policy makers to settle specific issues. The statements of goals of financial accounting made to date suffer from two major problems: first, that they have not received general acceptance and second, that they do not provide a basis for selecting among alternative policies. The framework of a standard accounting policy decisions is proposed here having a prime goal for maximization of social welfare.

This article presents a reply from the authors to the criticism of their article underlying a set of market-clearing security prices by Robert P. Magee, published in a recent issue of the journal "The Accounting Review." In their earlier work, the authors showed that there is a potential bias against non-extant accounting alternatives built into association tests based on extant security prices. Magee shows that under certain conditions the bias may be sufficiently reduced such that a nonextant alternative which actually contains more information will indeed be judged so on the basis of its association with market prices. He concludes that the conditions that they specified under which association tests will be valid for nonextant alternatives are too restrictive. There is no nontrivial accounting disclosure change that will not potentially cause a redistribution of wealth; consequently, there is no change for which social welfare impacts can be accurately surrogated by results of market association tests for differential information content. The authors concluded that market association tests may provide data that policy makers can use to revise their prior beliefs about the relative desirability of alternative accounting disclosure requirements.