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

Earnings Patterns, IPO, China, Financial packaging

Brian J. Bushee, Christopher F. Noe, Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility, Journal of Accounting Research, Vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm (2000), pp. 171-202

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

William H. Beaver, Stephen G. Ryan, Biases and Lags in Book Value and Their Effects on the Ability of the Book-to-Market Ratio to Predict Book Return on Equity, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 127-148

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

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

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

Auditing, Competition, Audit quality, Auditor performance

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