Knowledge that Transforms

This article hypothesizes that the level of managerial ownership affects both the informativeness of earnings and the magnitude of discretionary accounting accrual adjustments. The hypothesis draws on the theory of the firm, and exploits: (1) separation of ownership from control of economic decisions, (2) the extent and consequences of accounting-based contractual constraints, and (3) managers' incentives in selecting and applying accounting techniques. Results show managerial ownership is positively associated with earnings' explanatory power for returns and inversely related to the magnitude of accounting accrual adjustments. Moreover, ownership is less important for regulated corporations, suggesting regulation monitors managers' accounting choices.

This paper evaluates the effects of allowing auditors to limit their liability by incorporating. Using a model that integrates the audit market with the market for the firms being audited, it predicts that, once incorporation becomes an option, the least wealthy employed auditors under unlimited liability either exit the audit market or earn lower profits from auditing than before. The most wealthy employed auditors earn higher profits; they incorporate and remove wealth from their corporations. The model also explains the recent shift in auditors' attitudes toward incorporation, and why insurance and other wealth-sheltering devices imperfectly substitute for incorporation.

Prior studies document an insignificant effect of unrealized gains/losses (URGL) and a negative effect of realized gains/losses (SGL) on bank stock returns. We argue that these results may reflect the omission of changes in value of other net assets resulting from interest rate changes. We find that after controlling for effects of other (on-balance sheet) net assets, both URGL and SGL have significant positive effects on bank returns in normal periods. But the SGL effect is significantly lower in periods of low capital and earnings. These findings are relevant to the market value accounting debate.

A theoretical and empirical analysis of within-job and promotion-based incentives for middle managers is presented, using personnel data from a firm. Within-job incentives are stronger than implied by previous studies. Evidence is provided that promotions sort employees by ability, and also generate incentives. Promotions are associated with large increases in lifetime earnings, as long as performance is sustained in the future. There is little evidence that the firm trades off within-job and promotion-based incentives as predicted. Instead, it appears to use a simple incentive scheme, resulting in declining incentives for those passed over for promotion.

This paper investigates partner selection and group formation in cooperative benchmarking, a practice of information sharing among firms to improve their operations. Firms gather preliminary information about potential partners only when the choice problem is difficult, and more information is gathered when there is more uncertainty. Based on an analysis of benchmarking benefits and costs, there is a unique equilibrium group structure characterized by a segregation of firms by their stock of technological information. It is argued that today's changing business environment tends to increase group size and the number of firms participating in cooperative benchmarking.

This paper presents the results of 32 experimental markets designed to test hypotheses based on Wagenhofer's (1990) disclosure model. The model predicts the existence of multiple disclosure equilibria in cases where a manager balances the effects that disclosures can have on two sets of external agents: investors and an opponent. The experimental results support the partial-disclosure equilibrium over the full-disclosure option. Additionally, a lower level of disclosure was observed in those markets in which the discloser repeatedly interacted with information receivers. Lower disclosure reduces the level of proprietary costs which is beneficial to the information sender.

This paper examines the empirical relation between corporate ownership structure and innovation. We test the hypothesis that diffusely-held firms are less innovative than firms with either a high concentration of management ownership or a significant equity block held by an outside investor. Overall, the evidence indicates that diffusely-held firms are less innovative along the dimensions we examine: patent activity, growth by acquisition versus internal development, and timing of long-term investment spending. These results are consistent with the conjecture that concentrated ownership and shareholder monitoring are effective at alleviating the high agency and contracting costs associated with innovation.

Collusion may benefit an organization if the employees, by sharing effort, information, or risk, can enhance production or lower costs. Collusion is detrimental if it leads to less effort or to withholding of information. A contract that utilizes the agents' cooperative behavior dictates less relative performance evaluation than does a noncooperative contract or a contract that ensures the employees do not cooperate. Delegation of decision authority is beneficial for a broader range of organizations if employees collude than if they do not. The constructed contracts are incentive compatible for coalitions as well as for individuals.

The development of both brand name reputation and industry specialization by Big 8 auditors is argued to be costly and therefore to increase audit fees. For a sample of 1484 Australian publicly listed companies we estimate audit fee premia for Big 8 auditors. On average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big 8 auditors, and the Big 8 brand name premium over non-Big 8 auditors averages around 30%. These results support that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation.

Diversified corporations have been widely criticized as being inefficient innovators with an orientation to maximizing short-term profits. This study investigates this criticism by testing whether the number of new products introduced per R&D dollar is lower among more diversified firms. We find no statistically discernible effect of diversification on innovative efficiency in a sample of 706 research-intensive firms in the 1981–1988 period. This suggests that diversified organizations are rationally designed to minimize incentive and communication problems which may hinder innovation. Consistent with this view, we find that diversified firms are more likely to have separate research and development centers.