Knowledge that Transforms

In a team setting, wherein only group performance is tracked, we show that muted incentive contracts may be sufficient to motivate team members. By having the team repeat a task, explicit (contractual) incentives can be substituted by implicit incentives team members provide to each other. We also study an example in which, despite uncorrelated individual performance measures being available, it is optimal to condition each manager's pay on both managers' performance. This can be viewed as creating a group performance measure. Using a group performance measure provides each manager with incentives to monitor and a means of punishing other managers.

[This paper develops and tests an option-style valuation model, whose main prediction is that equity value is a convex function of both earnings and book value, where the function depends on the relative values of earnings and book value. Earnings provides a measure of how the firm's resources are currently used. Book value provides a measure of the value of the firm's resources, independent of how the resources are currently used. When the ratio earnings/book value is high, the firm is likely to continue its current way of using resources, and earnings is the more important determinant of equity value. When earnings/book value is low, the firm is more likely to exercise the option to adapt its resources to a superior alternative use, and book value becomes the more important determinant of equity value. Evidence from a variety of empirical specifications is consistent with the convexity prediction.]

This study examines discretionary disclosures and stock price effects for 81 UK firms that received first-time modified audit reports during 1982–1990. Results indicate that these firms' managers are forthcoming about adverse developments, and appear to perceive the advantages of withholding negative news to be minimal. However, managers of many of the 58 stressed sample firms make disclosures about expected future performance that are overly optimistic relative to financial outcomes. As expected, stock market participants discount these stressed firms' positive tone disclosures. Evidence in this study confirms that there is a strong incentive problem with voluntary disclosure.

Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. We find support for this theory. Our evidence suggests that when current earnings are ‘poor’ and expected future earnings are ‘good’, managers ‘borrow’ earnings from the future for use in the current period. Conversely, when current earnings are ‘good’ and expected future earnings are ‘poor’ managers ‘save’ current earnings for possible use in the future. However, sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings.

The accounting and management literature reflects an increasing interest in relative performance evaluation (RPE) measures, often called ‘benchmarking’. In this paper we illustrate how stochastic frontier estimation (SFE) can be used to estimate benchmark performance standards which control for differences in the environments of the benchmarked operating units. Our application of SFE uses cross-sectional data reported by school districts in the state of Missouri for the year 1990–1991. The results suggest that the districts may have had as much as $394 million of excess expenditures in their operations.

This paper examines the benefits from communications made at corporate presentations to securities analysts. We examine whether firms benefit by increasing analyst following or by correcting mispricing, and whether analysts gain by acquiring information that improves the frequency or quality of their forecasts. The results show significant increases in analyst following, and significantly positive abnormal returns on the presentation date, with larger reactions observed for underpriced securities. Finally, although we find an increase in forecasting activity following the presentations, we find no evidence that analysts' post-presentation forecasts are less disperse, more accurate or less biased than their pre-presentation forecasts.

Discretionary disclosures, SFAS No. 106, Accounting standard adoption, Private information

Internal control, Budgeting, Hierarchical organization, Managerial accounting system

Michael B. Mikhail, Beverly R. Walther, Richard H. Willis, Do Security Analysts Improve Their Performance with Experience?, Journal of Accounting Research, Vol. 35, Studies on Experts and the Application of Expertise in Accounting, Auditing, and Tax (1997), pp. 131-157

Auditing, Technical knowledge, Audit planning, Performance evaluation