Knowledge that Transforms

This paper analyzes a principal-agent model in which the agent (manager) can exert effort in every period in order to gain access to some investment opportunity. He or she then decides whether the firm undertakes the opportunity. My analysis focuses on satisfactory incentive schemes which motivate the manager to exert effort and to invest in all profitable projects. As a consequence, the principal's gross benefit is held fixed, and the variable of interest is the resulting agency cost, i.e., the present value of all compensation payments to the manager. The manager's compensation payments are based on a performance measure chosen by the principal. My analysis compares performance measures based only on realized cash flows with the residual income performance measure. I assume that the calculation of residual income is based on depreciation charges which reflect the useful life of assets as well as the intertemporal distribution of cash flows generated by those assets. For suitably chosen depreciation charges, residual income reflects at each point in time the value currently created by the manager.

Joseph D. Piotroski, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 1-41

Auditing, Competition, Audit quality, Auditor performance

Christian Leuz, Robert E. Verrecchia, The Economic Consequences of Increased Disclosure, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 91-124

Earnings Patterns, IPO, China, Financial packaging

Christine A. Botosan, Mary S. Harris, Motivations for a Change in Disclosure Frequency and Its Consequences: An Examination of Voluntary Quarterly Segment Disclosures, Journal of Accounting Research, Vol. 38, No. 2 (Autumn, 2000), pp. 329-353

Michael L. Ettredge, Daniel T. Simon, David B. Smith, Mary S. Stone, The Effect of the External Accountant's Review on the Timing of Adjustments to Quarterly Earnings, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 195-207

Stock markets myopia, Short term earnings, Future earnings, Mispricing

Guochang Zhang, Accounting Information, Capital Investment Decisions, and Equity Valuation: Theory and Empirical Implications, Journal of Accounting Research, Vol. 38, No. 2 (Autumn, 2000), pp. 271-295

Using financial accounting data from manufacturing firms in 16 countries for 1986-1995, we demonstrate that the value relevance of financial reports is lower for countries where the financial systems are bank-oriented rather than market-oriented; where private sector bodies are not involved in standard setting process; where accounting practices follow the Continental model as opposed to the British-American model; where tax rules have a greater influence on financial accounting measurements; and where spending on auditing services is relatively low. Results are robust to alternative measures of value relevance of financial accounting data, including measures based on earnings (using a regression and a hedge-portfolio approach), accruals, and earnings and book value of equity combined. We show that the extent to which earnings information is reflected in leading-period returns as compared to contemporaneous returns is greater for bank-oriented than for market-oriented countries. This feature potentially induces spurious associations between value relevance measures and financial system characteristics. Our results are robust to using value relevance measures adjusted for this confounding effect.