In this article, I study the interaction between cost accounting systems and pricing decisions in a setting where a monopolist sells a base product and related support services to customers whose preference for support services is known only to them. I consider two pricing mechanisms—activity‐based pricing (ABP) and traditional pricing—and two cost‐accounting systems—activity‐based costing (ABC) and traditional costing, for support services. Under traditional pricing, only the base product is priced, whereas support services are provided free because detailed cost‐driver volume information on the consumption of support services by each customer is unavailable. Under ABP, customers pay based on the quantities consumed of both the base product and the support services because detailed cost‐driver volume information is available for each customer. Likewise, under traditional costing for support services the firm makes pricing decisions on cost signals that are noisier than they are under ABC. I compare the equilibrium quantities of the base product and support services sold, the information rent paid to the customers, and the expected profits of the monopolist under all four combinations of cost‐driver volume and cost‐driver rate information. I show that ABP helps reduce control problems, such as moral hazard and adverse selection problems, for the supplier and increases the supplier's ability to engage in price discrimination. I show that firms are more likely to adopt ABP when their customer base is more diverse, their customer support costs are more uncertain, their costing system has lower measurement error, and the variable costs of providing customer support are higher. Firms adopt ABC when their cost‐driver rates for support services under traditional costing are noisier measures of actual costs relative to their cost‐driver rates under ABC and when the actual costs of support services are inherently uncertain. I also show that cost‐driver rate information and cost‐driver volume information for support services are complements. Although the prior literature views ABC and activity‐based management (ABM) as facilitating better decision making, I show that ABC and ABP (a form of ABM) are useful tools for addressing control problems in supply chains.

Auditing, Auditor litigation, Rule 10b-5, Auditor liability

The earliest known commercial use of the English term was in 15711 although the idea which it conveys is probably much older. Yet when Francis More read a paper2 on goodwill3 to the Chartered Accountants' Students' Society of Edinburgh in 1891, he felt the need to preface his remarks on valuation with an apology. He regretted his inability to quote any authorities on the subject; he was unaware of any previous writings on goodwill valuation. The earlier writings on goodwill had concentrated on legal aspects, particularly the protection of attendant property rights. If anyone had considered the effect of different factors on price and how goodwill might be valued in the absence of the direct evidence of a market transaction, his opinion seems to have remained unpublished. Twenty-three years after the appearance of More's paper, P. D. Leake first published his views on the valuation of goodwill in a paper4 read to the Leicester Chartered Accountants' Students' Society. In the intervening period, however, the subject seems to have aroused considerable interest, and several writings included a discussion of it. Many factors contributed to this surge of interest. An increasing number of accountants were joining professional societies, many of which had been founded in the decade or so before 1891. There followed more organised oppor-

We conduct a field experiment, based on a registered report accepted by the Journal of Accounting Research , to test performance effects of setting a high reference point for peer‐performance comparison. Relative to providing the median as a reference point for online students to compare themselves to, providing the top quartile: damps performance for those below the median, boosts performance for those between the median and top quartile, and, in the case of outcome but not process comparison, boosts performance for those above the top quartile. We do not find that either reference point yields a greater average performance effect. However, providing the more effective reference point in each partition of initial performance yields a 40% greater performance effect than providing either reference point uniformly. Students access the online courses intermittently over the span of a year. Our effects derive from small portions of our treatment groups—5% in the case of process comparison and 26% in the case of outcome comparison—who accessed treatment and who were, on average, more active leading up to and during our intervention.

Forecasting models, Management forecasts, ARIMA models, Analyst forecasts

Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision‐making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers’ abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if the accounting system recognizes economic losses in earnings in a timely fashion. Thus, the demand for timely loss recognition should increase with a contract's reliance on covenants. Consistent with this conjecture, I find evidence that reliance on covenants in public debt contracts is positively associated with the degree of timely loss recognition. I also find evidence that the presence of prior private debt mitigates this relationship.

Management control system, Internal control, Performance evaluation models, Contracting

Auditing, Auditor size, Audit fees, Audit partnerships

Bala V. Balachandran, Ram T. S. Ramakrishnan, [Discussion of Internal Control and External Auditing for Incentive Compensation Schedules]: A Reply, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 182-183

Bala V. Balachandran, Ram T. S. Ramakrishnan, Internal Control and External Auditing for Incentive Compensation Schedules, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 140-171