Knowledge that Transforms

In the preceding paper Christie provides three tests to facilitate formal inferences in survey papers that examine related empirical studies. Those tests reinforce the view that accounting technique choice is related to variables that may proxy for contracting and monitoring costs in the market and political processes. However, the contribution of the tests is limited because the fundamental question of the relation between the empirical regularities and the theory remains unexamined.

Three alternative, but not mutually exclusive, perspectives on accounting method choice are contrasted: the opportunistic behavior, efficient contracting, and information perspectives. Much of the empirical work on accounting method choice is based on the opportunistic behavior perspective. The Malmquist and Main and Smith papers are attempts to view accounting method choice as a means of improving the monitoring capabilities of contracts which rely on accounting numbers. The papers serve as useful vehicles for illustrating the difficulties of delineating a set of maintained assumptions that result in hypotheses about how accounting method choice affects the monitoring characteristics of contracts, and distinguishing between hypotheses based on the three perspectives on accounting method choice.

For a random sample of 83 firms, we show that public and private debt agreements filed at the SEC yield a more comprehensive set of accounting constraints than annual reports or Moody's. For firms with accounting constraints, measures of proximity to leverage, net worth, and working capital constraints are significantly correlated to leverage. We incorporate constraint-related data into Zmijewski and Hagerman's (1981) income strategy model. Both a leverage constraint indicator and leverage are significantly associated with accounting choice. This suggests that leverage is proxying for factors in addition to the existence of accounting-based constraints.

Using the model of discretionary disclosure suggested in Verrecchia (1983), I show that an increase in the quality of private information received by a manager results in more disclosure on his part. I also discuss how this result influences a manager's choice over levels of quality.

Firms that alter their divisional configurations on average increase shareholder wealth. Gains appear to come from information about investment opportunities and increases in efficiency. Performance before the restructurings suggests poorly organized firms are motivated by market pressures to change their organizations. Change also occurs in healthy firms as part of the growth process. Restructuring often occurs where there is no evidence of takeover threats. While stock prices increase around the restructurings, there is a contemporaneous decline in earnings due to increased expenses. These findings appear inconsistent with the contention that the market pressures managers into focusing on short-run earnings.

In the preceding paper Darrough and Stoughton suggest that firm interdependence, modelled as an entry game among firms in a product market, can yield endogenous proprietary costs. This allows the costs associated with the dissemination of information about the firm to depend upon the information's content in some direct way. My comments focus on: first, the structure of the game, which emphasizes the potential for full disclosure; second, the extent to which the entry game exaggerates the usefulness of ‘bad news’; and third, their suggestion that more competition among firms implies more, and not less, disclosure, an observation seemingly contrary to Verrecchia (1983).

This study examines a commercial bank manager's incentives to reduce regulatory costs imposed when the bank's capital adequacy ratio falls below its regulatory minimum. It also tests the general political sensitivity hypothesis that a manager seeks to reduce political costs incurred when revenue is unusually large. Tests of adjustments to the loan loss provision, loan charge-offs, and securities gains and losses attempt to control for exogenous economic conditions and previous investing decisions. Results are consistent with hypotheses associating accounting adjustments with capital adequacy ratio guidelines, but fail to support the political sensitivity hypothesis.

This paper describes the background and objectives of a series of papers written fifty years ago at the London School of Economics (LSE). One objective was to encourage the use of accounting numbers in economic research. A second objective was to improve the theory and practice of accounting. Understanding cost accounting and opportunity costs within a firm was tied to understanding the organization of firms. The theory of the accounting system is part of the theory of the firm. Like a similar request made fifty years ago, the paper concludes with a call for interdisciplinary studies between economics and accounting.

This paper empirically examines hypothesis from the accounting, manufacturing, and strategy literatures about volume-based, complexity-based, and efficiency-based drivers of manufacturing overhead costs. Cross-sectional data from a questionnaire of thirty-seven facilities of an electronics company are examined. Subject to caveats regarding the cross-sectional tests, strongest empirical association is found for volume-related cost drivers. There is not consistently strong empirical association for complexity- or efficiency-related drivers. Explanations for the limited association for the complexity- and efficiency-related drivers include proxy problems with the complexity and efficiency concepts and problems in developing uniform measures of variables across a broad cross-section of facilities.

The comparative ability of valuation rules using economy-weighted versus industry-weighted price indexes to estimate the unobserved economic value of a basket of assets in modelled. Industry-weighted indexes do not necessarily provide valuations of higher accuracy than economy-weighted indexes. Dominance depends on (1) the relative magnitude of the mean and variability of price changes and (2) the magnitude of errors of measurement in the current price data. Larger measurement errors favor economy-weighted indexes; larger mean and variability of prices changes favor industry-weighted indexes.