Knowledge that Transforms

In this paper I use a principal-agent framework to explore the relation between the hierarchical structure of firms and the accounting information technologies available to them. My analysis is related to that in Melumad, Mookherjee, and Reichelstein [1992] and Ziv [1993]. Melumad, Mookherjee, and Reichelstein model a principal who employs two privately informed agents and chooses either a flat structure where both agents contract and communicate with the principal, or a hierarchical structure in which the principal contracts with only one agent, who subsequently writes a subcontract with a second agent, creating a twolayer organizational form.' Melumad, Mookherjee, and Reichelstein use the revelation principal to prove the general superiority of the flat structure. They add exogenous restrictions on communication (with respect to dimensionality and complexity of the message space) to demonstrate a demand for hierarchy. Ziv [1993], in a moral hazard setting, solves for the optimal number of agents in a one-layer firm, under different exogenously given information structures. In this paper, I take an approach that allows the principal to choose the number of layers in the firm, the

Lawrence D. Brown, Jerry C. Y. Han, Do Stock Prices Fully Reflect the Implications of Current Earnings for Future Earnings for AR1 Firms?, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 149-164

Valuation, Intangible assets, Components of Goodwill, Acquisitions

Gerald T. Garvey, Todd T. Milbourn, EVA versus Earnings: Does It Matter Which Is More Highly Correlated with Stock Returns?, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 209-245

The purpose of this paper is to evaluate whether the expanded requirements of SAS No. 59 (A/CPA [1988]), which requires auditors to actively evaluate and report on a client's going-concern status for the coming year, have allowed investors to make more accurate ex ante assessments of firms that eventually file for bankruptcy. We extend Chen and Church [1996] (hereafter CC), who conclude that SAS No. 34 (AICPA [1981]) "subject to" going-concern opinions have information value because they reduce the surprise associated with bankruptcy announcements. We hypothesize that if SAS No. 59 has achieved what was intended, going-concern opinions issued under SAS No. 59 should further reduce investor surprise at bankruptcy announcements. While we do not believe SAS No. 59 was issued for the specific purpose of helping users to predict bankruptcy, we do suggest that the increased auditor responsibility and improved communication should provide users with information that is of relatively higher quality. This argument is based on a number of important differences between SAS No. 34 and SAS No. 59.