[Costs associated with the violation of accounting-based covenants in debt agreements are presumed to be material by both accounting regulators and researchers. The Financial Accounting Standards Board, for example, delayed the implementation of its pronouncement on pension reporting, SFAS No. 87, for two years to allow firms sufficient time to "renegotiate or to obtain waivers of provisions of some legal contracts" (FASB 1985, par. 260). Numerous studies in accounting research hypothesize that it is costly for firms to violate accounting covenants in debt agreements, and this supposition figures in research on such issues as the economic impact of mandated and voluntary accounting changes (see, e.g., Holthausen 1981; Leftwich 1981; Lys 1984) and the determinants of accounting choice (see, e.g., Trombley 1989; Zmijewski and Hagerman 1981). Although research in financial economics has studied some of the costs shareholders bear when there are debt service defaults or bankruptcy filings, the costs associated with technical violation-the violation of covenants other than debt service-have not been documented. This study investigates the costs of technical violation for a sample of 91 firms that violated accounting-based covenants in debt agreements between 1983 and 1987. The sample includes firms for which the technical violation was sufficiently material to merit disclosure. We provide direct evidence of refinancing and restructuring costs by examining changes in terms of debt agreements, and changes in investing and financing decisions. Refinancing costs arise because lenders raise interest rates on loans and notes following violation. We estimate that increased interest costs resulting from violation range between 0.84 and 1.63 percent of the market value of sample firms' equity. Restructuring costs stem from lenders' demands for partial or full repayment. Nearly half the sample firms either refinanced their debt or divested assets within one year of violation, stating that the proceeds were to reduce the outstanding balances of violated debt agreements. We estimate that the costs of restructuring debt represent an average of 0.37 percent of sample firms' market value of equity. We also present some evidence that there are costs associated with modifying operations, although we cannot estimate their magnitude; lenders' repayment demands impose restructuring costs by forcing firms to eliminate profitable investment projects. In addition to these costs, increased lender control is an important effect of technical violation. We observe that lenders add numerous new covenants. Interestingly, few of these are accounting-based, which suggests that only slight adjustments to accounting-based monitoring are required. The majority of new covenants consists of restrictions on investing and financing to prevent further dissipation of assets. We consider whether the costs of technical violation vary according to lender response. We find that the costs are lower for firms that can obtain a waiver than for those that cannot. More important, the evidence suggests that lenders often extract fees and concessions from violators in exchange for granting waivers. This is one of the first studies to substantiate that technical violation of accounting-based covenants is costly. Depending on the assumptions made, the average costs we estimate range between 1.2 and 2 percent of market value of equity; alternatively, the losses represent between 4.4 and 7.3 percent of the outstanding balances of the violated debt agreements. Evidence on the costs of technical violation is relevant to researchers who attribute economic consequences to changes in debt covenant slack and the likelihood of violating accounting-based covenants. Furthermore, by showing that leverage proxies for the magnitude of some of the costs imposed by technical violation, we justify the use of this surrogate in accounting research.]

[Recent research on cost driver analysis by Miller and Vollman (1985) and Cooper and Kaplan (1987) suggests that transactions deriving from the diversity of a firm's product line and the complexity of its production process, in addition to output volume, drive overhead costs. As a consequence, it is argued, conventional cost accounting systems based only on volume-related measures, such as units of output, direct labor hours, or machine hours, produce biased and materially misleading cost estimates for managerial decisions on price and product line (whether to continue or discontinue products, or to offer additional products). Systematic biases in cost estimates may also lead to distortions in flexible budgeting systems, variance analyses, and responsibility-accounting systems. Perhaps more important in the long run, omission of operations-based cost drivers may distort the investigation of the likely effects on costs of changes in operating strategies. Many firms have moved ahead on the basis of this perceived need for more accurate cost stimates and have designed and implemented activity-based costing systems (Schiff 1991). From an academic perspective, however, there is a need for further formal empirical research in this field. Cooper and Kaplan's (1987) evidence is based on field-study discussions with managers in a variety of manufacturing settings and experimentation with cost allocation and product-costing systems based on transactions. Foster and Gupta (1990) provide some of the first empirical evidence on the correlation of manufacturing overhead with output volume and operations-based measures that reflect characteristics of the manufacturing process. Using data obtained from 37 plants of a single manufacturing firm, Foster and Gupta found that most of the volume-related measures of output were highly correlated with manufacturing overhead (MOH), but because only a few measures of manufacturing complexity and efficiency were highly correlated with MOH, their findings leave the impression that systems based on just volume may not significantly distort information generated for managerial decision making. In contrast, we find empirical evidence in favor of incorporating operations-based cost drivers along with measures of volume in cost driver models. We draw upon previous work in cost accounting and economics to develop analogs in the airline industry for product diversity, production run volumes, and process complexity, and propose a framework for cost driver analysis in the U.S. airline industry. Using a panel of quarterly data for 1981-1985 compiled primarily from traffic and financial statistics submitted by carriers to the Civil Aeronautics Board (CAB) and Department of Transportation (DOT), we specify and estimate a multivariate system of cost functions with multiple cost drivers for the industry during the transition following deregulation. We find both volume- and operations-based cost drivers to be statistically significant. We also demonstrate the potential managerial importance of the operations-based drivers by explaining variations in marginal costs across airlines in terms of operating strategies reflected in the cost driver values. Empirical cost driver analysis is managerially significant for the industry and period that we examine. The proportion of indirect costs is large, and identification of input consumption for specific services is difficult. During the transition following deregulation, carriers adopted a rich variety of strategies to improve productivity, reduce costs, and increase market share. These strategies directly involved both volume- and operations-based cost drivers. The analytical framework and model that we have developed on the basis of prior literature concerned with the airline industry enable us to examine the differential cost effects of some of the most important strategies adopted.]

Reviews the book "The Hidden Dimensions of Annual Reports: Sixty Years of Social Conflict at General Motors," by Marilyn Kleinberg Neimark.

Presents the reaction of the author of a study by Mensah and Li concerning the production efficiency in a nonprofit organization published in the January 1993 issue of the `The Accounting Review' periodical. Clarifications of the author on the perceived flaws of their study; Cross-sectional constancy of cost shares; Difference in the methodology used by the two studies.

[We formulate and test the hypothesis that nonearnings disclosures of small, but not large, firms generally are "good news." Nonearnings disclosures are defined as disclosures by managers and outsiders about news other than earnings (e.g., stock splits, takeovers, new orders). "Good news" is defined as a positive stock price reaction at the time of the information disclosure. Our hypothesis is motivated by two lines of prior research. First, managers have incentives to disclose their private information voluntarily when they expect the effects of the information on firm value to exceed the disclosure costs (Verrecchia 1983). Second, the "firm-size differential information hypothesis," advanced by Atiase (1980, 1985) and the corroborating empirical evidence of Atiase (1985, 1987), Freeman (1987), and Bhushan (1989) suggest that incentives for information production and dissemination by outsiders are an increasing function of firm size. Thus, assuming that nonearnings disclosures concerning small firms are initiated primarily by managers, whereas those of large firms are not, small (but not large) firms' nonearnings disclosures are more likely to be good rather than bad news. Using firm-specific nonearnings disclosures, identified from the Dow Jones News Retrieval Service data base over the 1982 to 1987 period, we show that small firms' nonearnings disclosures, on average, are associated with significant stock price increases, whereas large firms' nonearnings disclosures, on average, are valuation-neutral. Given these results and the evidence that nonearnings disclosures are often made around the time of earnings announcements (Hoskin et al. 1986; Thompson et al. 1987), we reexamine the puzzling result of Chari et al. (1988) that on-time earnings announcements of small, but not large, firms are associated with positive abnormal returns, unconditional upon the nature of the earnings news. We hypothesize that this phenomenon is attributable to nonearnings disclosures of good news around the time of small firms' earnings announcements. We show that small and large firms' "pure" on-time earnings announcements are not associated with positive abnormal returns, and that small (but not large) firms' "contaminated" on-time earnings announcements are associated with positive abnormal returns. We conclude tht the Chari et al. (1988) results do not pertain to small firms' on-time earnings announcements per se, but to those that are accompanied by nonearnings news.]

[We present empirical evidence that prior accounting information, such as capital expenditure, retained earnings, funds from operations, and dividend history, is useful in explaining cross-sectional variations in the market response to stock dividend announcements. An important accounting issue concerns the information content of disclosures and their usefulness to the investor. We demonstrate the complementary role of previously disclosed firm-specific accounting information in the market's assessment of subsequently disclosed information. Thus, two firms declaring the same amount of stock dividend may experience predictably different market reactions to the announcement when it is conditioned by prior information about the firms. Comparable research by Kane et al. (1984) has shown that changes in earnings and dividends either corroborate or contradict prior information. A broader approach by Gonedes (1978) and Antle et al. (1991) shows that the sequence and history of information arrival are relevant in interpreting the information content of accounting signals. Ou and Penman (1989) demonstrate the role of prior accounting information in predicting earnings changes in subsequent periods, and John and Lang (1991) have shown, both theoretically and empirically, that the market uses information about prior insider trading to interpret the information content of dividend changes. Stock dividends are appropriate for an investigation of the complementary role of prior accounting information because their issuance is largely a paper transaction, and because they have been interpreted as a signal of better future prospects. Although significant positive abnormal returns usually accompany stock dividend announcements, alternative (and more credible) instruments could signal future prospects (such as an increase in cash dividends). The uncertainty about how investors interpret stock dividend distributions suggests a role for previously disclosed accounting information as a conditioning factor. A survey of managers of firms declaring stock dividends (Eisemann and Moses 1978) indicates that such distributions are intended either to conserve cash in difficult times or to express confidence in the firm, two diametrically opposed motivations. So one firm may declare stock rather than cash dividends in order to invest in more profitable ventures, and another may do so because it faces operating losses and a severe cash crunch. Absent other information, it is likely that the market will respond negatively when cash dividends are discontinued or decreased and replaced by stock dividends (Shefrin and Statman 1984). Other firm-specific accounting information, however, such as capital expenditure (which reflects new investments) and funds from operations (which reflect cash availability), may also influence investor responses when considered in conjunction with dividend history.]

Presents empirical evidence that prior accounting information such as capital expenditure, retained earnings, funds from operations and dividend history is useful in explaining cross-sectional variations in the market response to stock dividend announcements. Information content of disclosures and their usefulness to the investor.

We formulate and test the hypothesis that nonearnings disclosures of small, but not large, firms generally are "good news." Nonearnings disclosures are defined as disclosures by managers and outsiders about news other than earnings (e.g., stock splits, takeovers, new orders). "Good news" is defined as a positive stock price reaction at the time of the information disclosure. Our hypothesis is motivated by two lines of prior research. First, managers have incentives to disclose their private information voluntarily when they expect the effects of the information on firm value to exceed the disclosure costs (Verrecchia 19831. Second, the "firm-size differential information hypothesis," advanced by Atiase (1980, 1985) and the corroborating empirical evidence of Atiase (1985, 1987), Freeman (1987), and Bhushan (1989) suggest that incentives for information production and dissemination by outsiders are an increasing function of firm size. Thus, assuming that nonearnings disclosures concerning small firms are initiated primarily by managers, whereas those of large firms are not, small (but not large) firms' nonearnings disclosures are more likely to be good rather than bad news. Using firm-specific nonearnings disclosures, identified from the Dow Jones News Retrieval Service data base over the 1982 to 1987 period, we show that small firms' nonearnings disclosures, on average, are associated with significant stock price increases, whereas large firms' nonearnings disclosures, on average, are valuation-neutral. Given these results and the evidence that nonearnings disclosures are often made around the time of earnings announcements (Hoskin et al. 1986; Thompson et al. 1987), we reexamine the puzzling result of Chari et al. (1988) that on-time earnings announcements of small, but not large, firms are associated with positive abnormal returns, unconditional upon the nature of the earnings news. We hypothesize that this phenomenon is attributable to nonearnings disclosures of good news around the time of small firms' earnings announcements. We show that small and large firms' "pure" on-time earnings announcements are not associated with positive abnormal returns, and that small (but not large) firms' "contaminated" on-time earnings announcements are associated with positive abnormal returns. We conclude that the Chari et al. (1988) results do not pertain to small firms' on-time earnings announcements per se, but to those that are accompanied by nonearnings news.

Recent research on cost driver analysis by Miller and Vollman (1985) and Cooper and Kaplan (1987) suggests that transactions deriving from the diversity of a firm's product line and the complexity of its production process, in addition to output volume, drive overhead costs. As a consequence, it is argued, conventional cost accounting systems based only on volume-related measures, such as units of output, direct labor hours, or machine hours, produce biased and materially misleading cost estimates for managerial decisions on price and product line (whether to continue or discontinue products, or to offer additional products). Systematic biases in cost estimates may also lead to distortions in flexible budgeting systems, variance analyses, and responsibility-accounting systems. Perhaps more important in the long run, omission of operations-based cost drivers may distort the investigation of the likely effects on costs of changes in operating strategies. Many firms have moved ahead on the basis of this perceived need for more accurate cost estimates and have designed and implemented activity-based costing systems (Schiff 1991). From an academic perspective, however, there is a need for further formal empirical research in this field. Cooper and Kaplan's (1987) evidence is based on field-study discussions with managers in a variety of manufacturing settings and experimentation with cost allocation and product-costing systems based on transactions. Foster and Gupta (1990) provide some of the first empirical evidence on the correlation of manufacturing overhead with output volume and operations- based measures that reflect characteristics of the manufacturing process. Using data obtained from 37 plants of a single manufacturing firm, Foster and Gupta found that most of the volume-related measures of output were highly correlated with manufacturing overhead (MOH), but because only a few measures of manufacturing complexity and efficiency were highly correlated with MOH, their findings leave the impression that systems based on just volume may not significantly distort information generated for managerial decision making. In contrast, we find empirical evidence in favor of incorporating operations-based cost drivers along with measures of volume in cost driver models. We draw upon previous work in cost accounting and economics to develop analogs in the airline industry for product diversity, production run volumes, and process complexity, and propose a framework for cost driver analysis in the U.S. airline industry. Using a panel of quarterly data for 1981-1985 compiled primarily from traffic and financial statistics submitted by carriers to the Civil Aeronautics Board (CAB) and Department of Transportation (DOT), we specify and estimate a multivariate system of cost functions with multiple cost drivers for the industry during the transition following deregulation. We find both volume- and operations-based cost drivers to be statistically significant. We also demonstrate the potential managerial importance of the operations-based drivers by explaining variations in marginal costs across airlines in terms of operating strategies reflected in the cost driver values. Empirical cost driver analysis is managerially significant for the industry and period that we examine. The proportion of indirect costs is large, and identification of input consumption for specific services is difficult. During the transition following deregulation, carriers adopted a rich variety of strategies to improve productivity, reduce costs, and increase market share. These strategies directly involved both volume- and operations-based cost drivers. The analytical framework and model that we have developed on the basis of prior literature concerned with the airline industry enable us to examine the differential cost effects of some of the most important strategies adopted.