Knowledge that Transforms

[Banker and Hughes (1994) demonstrate the economic sufficiency of normal activity-based unit cost for optimal pricing decisions. This paper provides an agency parallel to their analysis by examining how, in the presence of capacity costs, the desirable tradeoff between risk-sharing and incentives can be achieved through modification of the performance measures on which the contract is based. Similar to Banker and Hughes (1994), I find that the optimal capacity cost allocation is a function only of budgeted volume when capacity can be used to produce a single product. Analysis of a joint production setting, however, reveals the optimal allocation to be based on the joint products' estimated net realizable values.]

[This study evaluates the association between the market value of banks' common equity and fair value estimates disclosed under Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The results suggest that only the reported fair values of investment securities have incremental explanatory power relative to book value. No reliable evidence of incremental explanatory power is found for the fair value disclosures of loans, deposits, long-term debt or net off-balance sheet financial instruments. After controlling for two competing indicators of value captured by the accrual accounting system, ROE and growth in book value, the fair value of securities no longer exhibits a significant association with market value. Results from estimating a returns specification, which may implicitly control for correlated omitted variables, also exhibit no reliable evidence of significant incremental explanatory power in the fair value estimates.]

[This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.]