This paper examines the ability of financial statement measures of average and marginal tax rates (MTR) to capture tax attributes utilizing firm-level tax and financial data. The results suggest commonly used average tax rate measures provide little insight about statutory tax burdens, and may introduce substantial bias into analyses of tax incidence. Financial statement-based proxies for MTR, particularly those based on simulation methods, are found to perform well in estimating current year tax rates. Both current year and present value MTR are found to be highly correlated with an easily constructed binary proxy of firms’ tax status.

Engel/Hayes/Wang and Farrell/Whidbee provide new evidence on how firms weight alternative performance measures in making CEO retention and replacement decisions. While their results are statistically significant, firm performance continues to explain very little of the variation in CEO turnover. I argue we have probably reached a point of diminishing returns in estimating logit models that focus on the relation between CEO turnover and firm performance measures. We will have to consider other less-explored issues to increase our understanding of CEO turnovers and replacements. Analyzing age-related issues is one example.

This paper reviews agency theory and its application to accounting issues. I discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems. I review theoretical research on the role of performance measures in compensation contracts, and I compare how information is aggregated for compensation purposes versus valuation purposes. I also review the literature on communication, including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place. The paper also discusses capital allocation within firms, including transfer pricing and cost allocation problems.

I investigate factors affecting firms' uses of three types of performance metrics to evaluate division mangers: division accounting metrics, firm accounting metrics and firm stock price. Survey data reveal that division accounting metric use increases with the divisions' industry's price–earnings correlation and decreases with divisional growth opportunities; firm accounting metric use increases with the manager's impact on other divisions and decreases with growth opportunities and other managers' impact on that division; and firm stock price use increases with relative division size and the correlation between firm stock returns and market-wide returns.

This study examines discretionary disclosures and stock price effects for 81 UK firms that received first-time modified audit reports during 1982–1990. Results indicate that these firms' managers are forthcoming about adverse developments, and appear to perceive the advantages of withholding negative news to be minimal. However, managers of many of the 58 stressed sample firms make disclosures about expected future performance that are overly optimistic relative to financial outcomes. As expected, stock market participants discount these stressed firms' positive tone disclosures. Evidence in this study confirms that there is a strong incentive problem with voluntary disclosure.

This study documents one effect of the theory of implicit taxes, providing evidence that a change in the tax rate results in a change in pre-tax returns. Yield spreads of pairs of Treasury bills maturing in the last week of December and the first week of January are examined. Year-ends not affected by rate changes show a significant positive yield spread between these pairs of bills, reflecting an upward-sloping yield curve. However, for year-ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills.

It is commonly observed that the compensation paid to senior level executives depends on both accounting and security price measures of performance. The articles by Kim and Suh, Bushman and Indjejikian, and Sloan, which I have been invited to discuss, examine the issue of how much weight to place on these two measures in the contract. The first two papers analyze the role that earnings can play in removing the ‘noise’ in stock price in a rational expectations pricing model. The Sloan paper analytically and empirically examines the role that earnings can play in removing macroeconomic factors from stock price.

More powerful tests of a theory of choice of accounting methods and the effect of changes in these choices on equity values are provided. The power increase comes from efficiently aggregating results across studies. One conclusion is that at least six variables common to more than one study have explanatory power. These variables are managerial compensation, leverage, size, risk, and constraints on interest coverage and dividends. Another conclusion is that the posterior probability that the theory taken as a whole has explanatory power is close to one. This conclusion includes the effect of variables that only appear in one study.

This paper examines cross-sectional analysis procedures common to many market-based accounting research papers. Both the economic and econometric properties of ‘levels’ and ‘returns’ studies are discussed. Topics covered include the relations between the accounting studies and cash flow valuation models, the role of expectations of accounting variables, deflators, spurious inference, risk adjustment and its relation to growth, size and leverage, residual dependence, dependence among explanatory variables, and the effect of scale differences across firms. Major conclusions are that market value is the correct deflator in returns studies, and that levels and returns studies are economically but not econometrically equivalent.