Knowledge that Transforms

We investigate whether accounting discretion is (i) abused by opportunistic managers who exploit lax governance structures, or (ii) used by managers in a manner consistent with efficient contracting and shareholder value-maximization. Prior research documents an association between accounting discretion and poor governance quality and concludes that such evidence is consistent with abuse of the latitude allowed by accounting rules. We argue that this interpretation may be premature because, if such association is indeed evidence of opportunism, we ought to observe subsequent poor performance, ceteris paribus. Following Core et al. (1999) we conduct our analysis in two stages. In the first stage, we extend the prior literature and again find a link between poor governance and managers' accounting discretion. However, in the second stage we fail to detect a negative association between accounting discretion attributable to poor governance and subsequent firm performance. This suggests that, on average, managers do not abuse accounting discretion at the expense of firms' shareholders. Rather, we find some evidence that discretion due to poor governance is positively associated with future operating cash flows, which suggests that shareholders may benefit from earnings management, perhaps because it signals future performance.

Using data from Ontario hospitals, we investigate the conjecture that the stickiness of costs would be greater for functions that relate to an organization's core competency. We find operating costs for the hospital as a whole are sticky. Moreover, we find higher stickiness in costs pertaining to patient care relative to costs in other functions. Indeed, there is no evidence of stickiness in the operating costs of support departments that are peripherally related to the hospital's mission.

for providing analyst forecast data, available through the Institutional Brokers' Estimate System.These data have been provided as part of a broad academic program to encourage earnings expectation research.We also thank those companies, and the Securities and Exchange Commission, which generously provided copies of Form 20-Fs and Form 20-F filing dates for our research project.'cancelled out' in the averaging process that determines equilibrium prices" (Bamber and Cheon 1995, 418;Kim and Verrecchia 1991).Consequently, when investigating information content, price reaction and trading volume reaction may not yield identical results even for the same event (Bamber and Cheon 1995).Moreover,