Knowledge that Transforms

Reviews the book `Transfer Pricing in the 1990s: Tax and Management Perspectives,' by Roger Y.W. Tang.

Reviews the book `Creative and Innovative Approaches to the Science of Management,' by Yuji Ijiri.

Examines the effect Laventhol & Horwath's (L&H) disclosure of their auditor's bankruptcy and the appointment of a successor auditor on the company's stock prices. Insurance hypothesis; Investors' assignment of a value to the right to recover investment losses from the auditor; Adverse effect of bankruptcy disclosure on market prices of L&H clients.

Presents an empirical model to examine the responsiveness of budgetary allocations to public demand for services in the New York City Police Department (NYPD). Resulting outcome-generating activities in the NYPD; Not-for-profit (NRF) organization efficiency and effectiveness; Analysis of NYPD data.

Reviews the book `Event-Driven Business Solutions: Today's Revolution in Business and Information Technology,' by Eric L. Denna and colleagues.

Presents the officers and members of various committees of the American Accounting Association for 1993-1994.

Examines earnings management in the health maintenance organization (HMO) sector of the prepaid health-care industry. HMO industry evolution and regulation; HMO management strategy in the accrual of incurred but not reported expenses (IBNRs); Discretionary and nondiscretionary components of IBNR to total expenses ratio.

Measures the relative influences of efficiency and opportunism in accounting by the examination of a non-random sample that allows for the probability of finding opportunism. Efficient and opportunistic accounting choices; Effects of accounting choices on retained earnings; Firm-performance measures.

Analyzes the design of an unconditional monitoring system in agencies. Value of monitoring; Characterization of monitoring system in terms of error associated with the obedient and disobedient actions; Optimal design of the costly unconditional monitoring system.

SYNOPSIS AND INTRODUCTION: This paper demonstrates how a manager's concern for reputation can distort reports made to superiors about an investment project and hence, can affect a firm's capital budgeting decisions. In the first setting examined, a manager is assumed to know more than her superior about both her personal abilities and the prospects of a project under consideration. A manager's ability has two dimensions-ability to forecast a project's returns and productivity. A more talented manager has both better forecasting abilities and higher productivity than a less talented manager. It is shown that while a more talented manager always reports her assessment of a firm's project truthfully, a less talented manager's report depends on the magnitude of the difference in productivities between the more and less talented managers. When this productivity gap is large, the less talented manager conceals her lack of talent by claiming that the project's returns are low so as to discourage investment by the firm. Shifting blame to factors beyondhercontrol protects the manager's reputation. Such managerial misreporting results in underinvestment by the firm. In contrast, where the productivity gap between a less talented manager and a more talented manager is small, a less talented manager guards her reputation by sometimes reporting favorable prospects and sometimes unfavorable prospects. This leads the firm either to over- or underinvest its resources, respectively. Thus, managerial misreporting occurs in equilibrium because a less talented manager tries to masquerade as a more talented manager, resulting in investment distortions. Whether a manager's concern for reputation exacerbates or mitigates the incentive problem depends on the manager's type. While the labor market forces align the incentives of a more talented managerwith those of the firm, they also serve to misalign incentives for a less talented manager. In the second setting, this paper examines managerial investment distortion in the choice between short term and long term projects. Consider a scenario in which the