Knowledge that Transforms

[This study investigates the incremental information in alternative measures of constant dollar and current cost operating income reported under SFAS No. 33 over historical cost income and its cash and accural components. To do so, it examines contemporaneous associations between unexpected returns at the time of release of the annual report or 10-K report and variables measuring the unexpected components of these alternative income measures. The research design exploits the difference in timing of the release of historical cost income and of SFAS No. 33 income. The empirical analysis indicates that current cost and constant dollar operating income measures have incremental information over historical cost income and its cash and accural components. The results also indicate that there is incremental information in cash flow over that conveyed by alternative measures of constant dollar and current cost operating income. However, incremental information in SFAS No. 33 measures and of cash flow is observed only for a subset of the industries examined.]

[We present evidence on inter-firm differences in the predictive ability of quarterly earnings data for a sample of 109 New York Stock Exchange firms. The sample consisted of large, medium, and small firms after deletion of nonseasonal and volatile growth and inconsistent strata membership firms. Although the structure of the best fitting time-series models was constant across firm-size strata, we did find significant differences in the autoregressive parameters of the Foster and Brown and Rozeff ARIMA models across firm-size strata. One-step-ahead quarterly earnings forecasts were generated by a set of best fitting time-series models. A repeated measure multivariate analysis of variance design indicated that predictive ability differed on the basis of size at the.012 level. Tests also indicated that large-and medium-size firms generated one-step-ahead forecasts that were significantly more accurate than smaller firms at the.05 level. We obtained similar predictive findings on the significance of the size-effect in a supplementary analysis of the nonseasonal and volatile growth and inconsistent strata membership firms.]

[This study examines the choice of a regulatory accounting principle (RAP) in contrast to generally accepted accounting principles (GAAP) with respect to loan loss recognition in the savings and loan industry. RAP was permitted by the Federal Home Loan Bank Board for Savings and Loans (S&Ls) in the early 1980s. Many S&Ls selected this alternative to GAAP. We examine four factors, conditioned by accounting regulations in the S&L industry setting, hypothesized to explain the accounting choice. All of the factors are significant in logistic regression tests in which the choice of RAP or GAAP was the dependent variable. The results are consistent with the conclusion that S&Ls chose to violate GAAP when regulatory constraints induced a conflict between GAAP requirements and the economic welfare of the firm.]

[Several studies have hypothesized that economic consequences of mandated accounting procedures arise through impacts on firms' accounting-based loan covenants. However, this research has involved very little direct examination of the loan contracts. This study directly examines how public and private loan agreements were affected by an accounting procedure mandated by the SEC. It analyzes 24 loan agreements of 18 oil and gas firms that, as a result of an SEC requirement announced on May 6, 1986, recorded writeoffs of exploration costs for the first quarter of 1986. The principal finding is that, even for a mandated accounting procedure that caused both large financial statement differences and some technical violations of loan covenants, there were no observable economic consequences for the affected firms. This result casts doubt on the importance of economic consequences of other mandated accounting procedures that might operate through effects on debt covenants.]

[A substantial accounting research literature seeks to explain the existence of alternative accounting methods and management's willingness to expend efforts lobbying to defend alternate methods. This paper investigates the association between management lobbying on accounting for oil and gas producing activities and the effect that the method may have on firm cash flows and on accounting numbers that are restricted by the terms of firm contracts. Full cost companies that lobbied at different stages of the deliberations on oil and gas accounting are compared with those that did not. The models and their classificatory success rates were statistically significant. Also, the models developed at each stage of the rule-making process provided statistically significant predictions for the other stages. This suggests that the contract and cash flow effects were stable predictors of lobbying by managers.]

[This paper reports the results of an experiment in which subjects assumed the role of division managers in a decentralized firm and made subjective information system choices. Existing subjective information evaluation research is extended by incorporating a two-person competitive environment and investigating the effects of context and task variables on information system choice. Consistent with previous studies, subjects' information system choices indicated misperception of information values, with overvaluation of information indicated more frequently than undervaluation. Deviations from predictions of a game-theoretic model occurred under conditions of state uncertainty. Choices of subjects playing a game with equivalent payoffs, but without state uncertainty, conformed to the model, for the most part. In addition, context did not have an aggregate effect on subjects' information system choices. However, alternative presentation modes for information system costs had differing effects on choices across contexts.]

[The ability of Einhorn's [1972] "expert measurement and mechanical combination" to eliminate bias and increase consensus in control reliance decisions was examined. This method uses the human to measure cue values and then combines these component judgments with a mathematical model to form global control reliance decisions. Its aim is to eliminate error induced when the human aggregates information into a global judgment. Two groups of senior auditors evaluated a series of cases by either making global control reliance decisions or making component judgments of the strength of the individual controls and compliance tests. Component judgments of the latter group were combined mechanically into an overall judgment. The mechanically combined component judgments were, on average, more like those provided by a group of firm experts and were more consensual than the global judgments. These results are compared to those of prior studies which examined similar aids.]

[The purpose of this study is to determine whether funds and cash flows possess incremental information beyond accrual earnings in the context of explaining market risk. The results indicate that funds and cash flow risk measures (betas) provide significant incremental explanatory power over that provided by the earnings risk measure (beta) in explaining the variability in market betas. Additionally, the results reveal that an earnings beta does not possess additional explanatory power beyond that provided by either funds or cash flow betas. The major implication of the results is that with respect to the explanation of market risk, the information in accrual earnings appears to be a subset of the broader set of information contained in cash flows.]

[This study examines the effects of uncertainty on taxpayers' reporting decisions in conjunction with economic factors. Previous research is extended by (1) simultaneously modelling taxpayers' reporting decisions and the tax agency's audit policies, (2) incorporating taxpayers' uncertainty about the tax agency's audit costs and uncertainty about their tax liabilities, and (3) investigating the effects of both transferable monetary and nontransferable penalties for underpayment of taxes. The analysis shows that tax liability uncertainty can have different effects upon taxpayers' reporting decisions than uncertainty about the audit cutoff point. Furthermore, these specific effects will depend upon the presence or absence of monetary penalties and the anticipated audit probability in the initial equilibrium which, in turn, depends upon the penalty and tax rates. Specifically, increased tax liability uncertainty will induce more taxpayers to report a high level of income under proportional monetary penalties, but sometimes can have the opposite consequences under fixed, nontransferable penalties. Similar results also hold with respect to tax rate changes. The findings have direct implications for experimental studies of taxpayers' reporting behavior and potential policy implications for the effects of changes in the tax laws and reduction in tax and penalty complexity both of which would likely affect taxpayers' uncertainty.]

[The trend towards more structure in some of the largest accounting firms' audit methodologies has generated considerable interest, but little empirical evidence. This study provides evidence on the role conflict and role ambiguity perceived by audit seniors in structured versus unstructured accounting firms. Role theory provides a basis for analyzing the effects of audit structure on the organizational characteristics which are potential sources of role conflict and ambiguity. The results are based on a sample of 67 seniors from structured and 54 seniors from unstructured firms. The seniors' perceptions of their firms' organizational characteristics and their perceived role stress differed systematically across structured versus unstructured firms. No evidence is found of the concenrs (such as inflexibility in atypical audit environments) that have been raised regarding the trend towards increasing audit structure.]