Studies examining managerial accounting decisions postulate that executives rewarded by earnings-based bonuses select accounting procedures that increase their compensation. The empirical results of these studies are conflicting. This paper analyzes the format of typical bonus contracts, providing a more complete characterization of their accounting incentive effects than earlier studies. The test results suggest that (1) accrual policies of managers are related to income-reporting incentives of their bonus contracts, and (2) changes in accounting procedures by managers are associated with adoption or modification of their bonus plan.

Research optimism among securities analysts has been attributed to incentives provided by underwriting activities. We examine how analysts’ forecast and recommendation optimism varies with the business activities used to fund research. We find that analysts at firms that funded research through underwriting and trading activities actually made less optimistic forecasts and recommendations than those at brokerage houses, who performed no underwriting. Optimism was particularly low for bulge underwriter firm analysts, implying that firm reputation reduces research optimism. There is also evidence that analysts at retail brokerage firms are more optimistic than those serving only institutional investors. We conclude that analyst optimism is at least partially driven by trading incentives.

Financial reporting and disclosure are potentially important means for management to communicate firm performance and governance to outside investors. We provide a framework for analyzing managers’ reporting and disclosure decisions in a capital markets setting, and identify key research questions. We then review current empirical research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure. Our survey concludes that current research has generated a number of useful insights. We identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.

Accounting-based dividend constraints in lending contracts are imperfect means of mitigating conflicts of interests between stockholders and bondholders since managers have flexibility to make accounting decisions to circumvent the covenants. This paper documents firms' accounting and dividend responses to an increase in the tightness of dividend constraints. Firms cut dividends and do not appear to make accounting changes to circumvent the dividend restriction. The magnitude of the dividend cut is proportional to the tightness of the dividend constraint. This suggests that accounting-based covenants are effective means for bondholders to restrict firmsś dividend policies.

This paper examines the effect of accounting procedure changes on cash salary and bonus compensation to CEOs. We estimate whether there is an adjustment to the statistical relation between compensation and corporate earnings following changes that lower earnings (FIFO to LIFO inventory valuation) and that raise earnings (accelerated to straight-line depreciation). The results indicate that (1) subsequent to these changes salary and bonus payments are based on reported earnings, rather than earnings under the original accounting method, and (2) the potential compensation effect of the changes is small compared to the effect of economy- or industry-wide changes in compensation.