This paper examines whether the type of competition in a market influences the association between the intensity of competition and demand for accounting information. Empirical analysis using a sample of 1,578 hospital-year observations from hospitals in California finds no association between the intensity of competition and demand for accounting information in the presence of quality competition; however, when firms compete on price, the need to control costs leads to a positive association between the two. In addition, the change in the unit of analysis in the hospital industry from the payer to the ailment increased the demand for accounting information for all California hospitals. This study suggests that competition intensity increases the demand for accounting information under one type of competition (price), but not another (quality competition), and thereby contributes to our understanding of the reasons for the mixed evidence in prior literature on the relation between competition and the demand for accounting information.

This paper examines the extent to which accounting systems separately identify all the costs of environmental regulation. We estimate the relation between the “visible” costs of regulatory compliance (costs that firms' accounting systems correctly classify as “environmental”) and “hidden” environmental costs embedded in other accounts. We use plant-level data from 55 steel mills to estimate hidden costs, and we follow up with structured interviews of corporate-level managers and plant-level accountants. Empirical results show that a $1 increase in the visible cost of environmental regulation is associated with an increase in total cost (at the margin) of 10–11, of which 9–10 are hidden in other accounts. The findings suggest that inappropriate identification and accumulation of the costs of environmental compliance are likely to distort costs in firms subject to environmental regulation.

This study investigates the effects of relative performance feedback and incentive compensation method on performance. We examine whether the presence and the content of relative performance feedback have different effects on performance when participants are compensated via a tournament or an individual incentive scheme. Our experimental results show a disordinal interaction between incentive scheme and feedback. Specifically, providing relative performance feedback improves the mean performance of participants compensated under an individual incentive scheme regardless of the precision or specific content of the feedback. In contrast, providing relative performance feedback deteriorates the mean performance of participants compensated under a tournament incentive scheme, but only if the feedback is sufficiently precise. Supplementary analysis suggests that this deterioration in performance is due to ineffective task strategies rather than reduced effort. We also find that in the absence of relative performance feedback, participants compensated under a tournament incentive scheme perform better, and their performance improves to a greater extent over time, compared to participants compensated under an individual incentive scheme. These results have implications for the design of accounting, control, and reporting systems in firms.

Performance-measure weights for incentive compensation are often determined subjectively. Determining these weights is a cognitively difficult task, and archival research shows that observed performance-measure weights are only partially consistent with the predictions of agency theory. Ittner et al. (2003) have concluded that psychology theory can help to explain such inconsistencies. In an experimental setting based on Feltham and Xie (1994), we use psychology theories of reasoning to predict distinctive patterns of similarity and difference between optimal and actual subjective performance-measure weights. The following predictions are supported. First, in contrast to a number of prior studies, most individuals' decisions are significantly influenced by the performance measures' error variance (precision) and error covariance. Second, directional errors in the use of these measurement attributes are relatively frequent, resulting in a mean underreaction to an accounting change that alters performance measurement error. Third, individuals seem insufficiently aware that a change in the accounting for one measure has spillover effects on the optimal weighting of the other measure in a two-measure incentive system. In consequence, they make performance-measure weighting decisions that are likely to result in misallocations of agent effort.

This paper extends prior literature on cost behavior by providing insights into how firms achieve changes to cost structure in response to two important risk drivers, i.e., demand uncertainty and financial risk. Using theory from labor economics, supply-chain management, and finance, we posit that demand uncertainty and financial risk influence cost management activities. Specifically, we argue that firms are likely to alter resource procurement choices to increase cost elasticity in response to these two risk drivers. We use data from California hospitals that allow for the calibration of three distinct resource procurement choices that increase cost elasticity: outsourcing, leasing of equipment, and hiring contract labor. Mediation analysis using 2,202 hospital year observations indicates that both demand uncertainty and financial risk influence cost elasticity. Importantly, these effects are mediated by the three aforementioned resource procurement choices. Overall, our findings support the view that firms make procurement choices to manage the risk associated with cost structures. Data Availability: Data used in this study are publicly available from the Office of Statewide Health Planning and Development (see: http://www.oshpd.ca.gov/).

We examine whether nonprofit organizations understate fundraising expenses in their publicly available financial statements. A large body of anecdotal evidence notes that an inexplicable number of nonprofits report zero fundraising expenses. We provide empirical evidence that the zero fundraising expense phenomenon is at least partly due to inappropriate reporting. We then examine to what extent these misreported expenses are the result of managerial incentives. Prior research finds an association between reported expenses and managerial compensation as well as the level of donations received. Using these findings we construct two incentive variables and find a positive association between misreporting behavior and managerial incentives. Our results also suggest that the use of an outside accountant reduces the probability that a nonprofit will misreport expenses, consistent with the use of an outside paid accountant increasing the reliability and usefulness of nonprofit financial reports. Finally, we find that SOP 98-2 reduced the probability that a nonprofit will misreport fundraising expenses.

This study reports the results of three experiments that examine how preferences for wealth and honesty affect managerial reporting. We find that subjects often sacrifice wealth to make honest or partially honest reports, and they generally do not lie more as the payoff to lying increases. We also find less honesty under a contract that provides a smaller share of the total surplus to the manager than under one that provides a larger share, suggesting that the extent of honesty may depend on how the surplus is divided between the manager and the firm. The optimal agency contract yields more firm profit than a contract that relies exclusively on honest reporting. However, a modified version of the optimal agency contract, which makes use of subjects' preferences for honest reporting, yields the highest firm profit. These results suggest that firms may be able to design more profitable employment contracts than those identified by conventional economic analysis.