Knowledge that Transforms

[This study investigates whether firms that expect increases in earnings resulting from sudden product price increases use accounting accruals to reduce earnings and, thus, political sensitivity. Specifically, oil firms' accruals are analyzed in a period of rapid gasoline price increases during the 1990 Persian Gulf crisis. Our results show that oil firms that expected to profit from the crisis used accruals to reduce their reported quarterly earnings during the Gulf crisis. In contrast to previous research, we find that the tendency to release good earnings news early, documented in prior research, is reversed for oil firms during the Gulf crisis. This finding suggests that the benefit of disclosing "good news" (i.e., earnings increases) early may have been out-weighed by the political costs associated with timely releases of the information.]

[This study investigates whether the net deferred tax liabilities disclosed under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109) provides additional value-relevant information over the disclosure required by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes (APB No. 11). Evidence suggests that SFAS No. 109 data represent value-relevant information above and beyond APB No. 11. Additionally, evidence indicates that the changes made by SFAS No. 109-the separate recognition of deferred tax assets, the creation of valuation allowances for deferred tax assets and the adjustment of deferred tax accounts for enacted tax rate changes-each provide value-relevant firm data. These results suggest that SFAS No. 109 increased the value-relevance of deferred tax amounts in financial statements.]

[This paper investigates the reporting and contracting responses of electric utilities to SFAS No. 106. Expense-increasing accounting standards generally have no direct cash flow consequences for nonregulated firms, but they reduce these firms' reported net income and increase their reported liabilities. Past research documents that managers of nonregulated firms seek to avert potential contracting costs associated with such mandated accounting changes through operating, financing or reporting decisions that mitigate the financial statement impact of the accounting change. In contrast, expense-increasing accounting standards do not usually affect rate-regulated firms' net income, but do have a positive effect on their cash flows because the rate recovery mechanism is based on accounting numbers. Managers of rate-regulated firms therefore have incentives to respond to expense-increasing accounting standards in ways that enhance the financial statement impact of the accounting change. This study documents that managers of rate-regulated firms that face greater uncertainties about future rate recoveries have greater incentives to use discretionary choices that intensify the impact of expense-increasing accounting changes on current financial statements.]

[Economic theory stresses that opportunity costs are relevant to resource allocation decisions, while prior empirical accounting research finds that decision makers tend to ignore or underweight opportunity cost information. This study examines whether accounting knowledge is associated with a decision maker's tendency to ignore opportunity costs in business decisions. The experiment's results indicate that the number of opportunity costs ignored by subjects in a business resource allocation decision is greater for subjects with high-accounting knowledge than for subjects with low-accounting knowledge. The experiment also indicates that subjects with high-accounting knowledge ignore a greater number of opportunity costs when the decision is posed in a business context than when it is posed in a personal context.]

[The performance goal for a unit is commonly created by consolidating the goals of its subunits. This paper shows that if it is difficult (easy) for the subunits to achieve their goals, it is almost always even more difficult (easier) for the unit to achieve the consolidated goal. This means, for example, that the firm as a whole will almost certainly not meet a goal to cut its costs by a certain percentage if the degree of cost cutting is difficult to achieve at the individual subunit levels.]

[We construct a dynamic multi-agent moral hazard model to analyze the interactions among the firm owner, the manager and the auditor. Moral hazard may arise in hierarchical agency because a rational monitoring agent may accept a side payment from the monitored agent for misrepresenting information to the principal. This multi-agent moral hazard problem is the essence of the concern for auditor independence. We show that a "low-balling" compensation scheme and the auditor's legal liability constitute an efficient dynamic contracting mechanism for hierarchical agency. In particular, low balling serves as a substitute for legal liabilities for maintaining auditor independence. Low balling reduces the transaction costs associated with the audit engagement relative to the flat-fee structure and can actually improve auditor independence.]