There is often evidence of confusion between two forms of the constant percentage learning curve model: the cumulative average and the individual unit forms. Failure to distinguish between the two models can lead to their misuse and to potentially serious errors of estimation. A precise statement of the difference between the two clarifies the errors of misspecification. This note provides an analytical comparsion of the two models and addresses empirical estimation issues. Résumé. On a souvent la preuve de la confusion entre deux formules de modèle de la courbe d'apprentissage à pourcentage constant: celle de la moyenne cumulative et celle de l'unité individuelle. Le fait de ne pas distinguer les deux modèles peut conduire à une mauvaise utilisation et éventuellement à de sérieuses erreurs d'estimation. Un examen précis de la différence entre les deux peut clarifier les erreurs de spécification. Cet article présente une comparaison analytique des deux modèles et traite des questions d'estimation empirique.

We investigate the interaction of mandatory disclosure and the gathering of decision‐relevant information in a setting in which a competitor may enter the market. Gathering detailed information allows for an efficient allocation of resources, but eventually attracts competition by revealing beneficial information to competitors. In contrast, refraining from generating detailed information implies inefficient decisions, but eventually prevents competitors from entering the market. Our results show that an incentive not to generate internal information arises for two reasons: If the incumbent's cost advantage is sufficiently large, disclosing aggregated information can be an instrument to avoid competition by reducing the likelihood of market entry. If the incumbent's cost advantage is small, disclosing aggregated information attracts competition by increasing the likelihood of market entry. In this case, imprecise cost information serves as a commitment device to reduce the intensity of competition by forcing the competitor to take into account his efficiency disadvantage in making his production decision.

We examine the role of cash flow from operations (CFO) in chief executive officer (CEO) cash compensation. We predict that CFO is contract‐relevant in the presence of earnings, and more so when (1) the quality of earnings relative to the quality of CFO as a measure of performance is low and (2) the need for CFO as a financing source is high. Our analysis is motivated principally by normative arguments and anecdotes from financial disclosures linking CFO to managerial effort and contracts, notwithstanding the traditional role of earnings in performance measurement. We find that the weight of CFO in the compensation model is positive and significant in the presence of earnings and stock returns. We also find that the relative quality of CFO compared with that of earnings has a positive (negative) impact on the weight of CFO (earnings). We further find that the relative weight of CFO is enhanced substantially when enterprise activities crucially depend on internally generated cash flow. These findings are unaltered when we include CEO age, firm size, and risk in the model and allow the coefficients to vary across industries.

Much research over the last 30 years has provided evidence that individuals display accounting fixation; that is, their cognitive process does not appropriately adapt to cross‐sectional or temporal differences in an accounting method. This paper presents the results of a quasi‐experimental test of the hypothesis that cognitive adaptation to a change in accounting method is an ordinal interactive function of three person characteristics: relevant accounting knowledge, general problem‐solving ability, and intrinsic motivation to appropriately engage in the decision task. Based on a product‐pricing decision task in which participants are provided with product costs reported by two generally employed product‐costing methods (activity‐based costing [ABC] and volume‐based costing), the results show that the majority of participants did not change their cognitive behavior when there was a change in the costing method. Further, those participants who did adapt to the change in accounting method, and thus avoided accounting fixation, did so by debiasing costs reported by volume‐based costing but not by ABC. Finally, these adapters generally exhibited high values for all three of the person characteristics compared with those who did not adapt.

The above article has been retracted at the request of authors Robert Libby and Hun‐Tong Tan, in agreement with the Editor‐in‐Chief, Patricia C. O'Brien, the copyright holder, the Canadian Academic Accounting Association (CAAA), and Wiley Periodicals, Inc. Bentley University conducted an investigation confirming that Dr. J. E. Hunton, while a faculty member at Bentley University and without the knowledge of his co‐authors, engaged in research misconduct, specifically data fabrication. Dr. Hunton provided the data used in the above study, and did not respond to a request for comment. Based on Bentley's initial report and further investigation into details specific to this paper, we conclude that the validity of the data cannot be confirmed. To correct the academic literature and maintain standards of academic integrity, we therefore retract the paper. The article was published online in Contemporary Accounting Research on 13 May 2010, in Wiley Online ( wileyonlinelibrary.com ). Reference Tan , H.‐T. , R. Libby , and J. E. Hunton . 2010 . . Contemporary Accounting Research 27 (): 187 – 208 . doi: 10.1111/j.1911‐3846.2010.01006.x

We hypothesize that managers use their hierarchical role as reviewers of accounting judgments and estimates to manage earnings, which we call indirect earnings management (IEM). Across a series of experiments using highly experienced financial executives as participants, we provide evidence that IEM (1) is likely used by managers to achieve current and future earnings targets, (2) reduces both cognitive dissonance associated with managing earnings and the extent to which managers think that their behaviors constitute earnings management, and (3) is more likely to be used when corporate governance is strong than when corporate governance is weak. The results of this study suggest new directions for future research on earnings management and highlight the important role of the hierarchical structure of the accounting function in efforts to understand how earnings are managed.

With increased interest in voluntary sustainability reports from investors and other stakeholders, more companies are having these reports assured. The issue of what is considered material in these assurance engagements is important, and yet research on materiality has focused only on financial statement audits. This article reports the results of an experiment where auditors assess the materiality of audit differences in the same magnitude for both a financial audit and a sustainability (water) assurance engagement. Two factors, the risk of breaching a contract and community impact, are manipulated between‐subjects. We find that auditors assess the materiality of an audit difference significantly higher for a financial case than for a water case. This difference is significantly greater when there is no risk of breaching a contract than when there is a risk of breaching a contract. The risk of breaching a contract has a stronger effect on the difference in auditors' materiality assessments when there is no community impact than when there is a community impact. Overall our findings suggest that qualitative factors have a greater impact on sustainability (water) materiality assessments than on financial statement materiality assessments when an audit difference is between 5 percent and 10 percent of a relevant base. Understanding the factors that impact material judgments in sustainability reports is important as these factors affect the reliability of the reported disclosures.

Accountants making judgments with respect to a particular set of standards are increasingly aware of standards from other reporting regimes that offer additional or conflicting guidance. In fact, IFRS encourages reliance on out‐of‐regime standards when IFRS lacks guidance. This paper reports the results of two experiments which provide evidence that auditors in such circumstances are vulnerable to contrast effects , whereby reporting judgments under IFRS are systematically influenced away from the accounting treatment supported by standards from another regime (U.S. GAAP ). Contrast effects are observed (i) when out‐of‐regime standards are considered before making a reporting judgment under IFRS , and (ii) when out‐of‐regime standards are applied as local GAAP for a subsidiary of a foreign parent that reports under IFRS . We also find that contrast effects are reduced when auditors believe IFRS lacks guidance. These results have implications for financial statement preparers and auditors in the current incomplete‐convergence environment.

Impact of the type of audit team discussions on auditors' generation of material frauds

We examine shareholders' perceptions about how external tax advisors contribute to corporate tax planning. As residual claimants of corporate tax planning, shareholders benefit from lower corporate taxes, but also bear the financial and reputational costs of subsequent tax enforcement. Despite the influential advisory role of external tax advisors in corporate tax planning, existing research on how shareholders perceive this role is limited. Using event study methods and exploiting the heightened regulation of tax advice through the covered opinion rules as a setting, we observe average and cross‐sectional stock returns consistent with shareholders perceiving external tax advisors as contributing unfavorably to tax planning by promoting excessively risky strategies. We further find that risky and overall tax planning declined across firms after the enactment of the rules, consistent with shareholders' perceptions about tax advisors' contributions to firms' tax planning. Overall, our findings contribute to research on shareholder perceptions and valuation of tax planning, and have important implications for practice, where regulatory oversight of external tax advisors remains a significant concern.