In this study we report the results of an experiment that examines how relatively sophisticated financial statement users interpret management stock option compensation disclosures under SFAS No. 123 and SFAS No. 123R. We predict and find that mandated income statement recognition, as required under SFAS No. 123R, leads to higher user assessments of reliability than either voluntary income statement recognition or voluntary footnote disclosure, options allowed under SFAS No. 123. Users view voluntary footnote disclosure as the least reliable reporting alternative. We also examine the amount users invest in response to these accounting treatments, and find that users invest more in a firm when management chooses income statement recognition than when management chooses footnote disclosure. We find no difference in investment amounts between mandated recognition and either voluntary recognition or footnote disclosure. Finally, although we find that these results are insensitive to whether management explicitly disavows the reliability of stock option expense, we present evidence that, in side-by-side comparisons, where one firm disavows and the other does not, disavowals may affect user judgments and decisions.

We examine whether nonprofit organizations understate fundraising expenses in their publicly available financial statements. A large body of anecdotal evidence notes that an inexplicable number of nonprofits report zero fundraising expenses. We provide empirical evidence that the zero fundraising expense phenomenon is at least partly due to inappropriate reporting. We then examine to what extent these misreported expenses are the result of managerial incentives. Prior research finds an association between reported expenses and managerial compensation as well as the level of donations received. Using these findings we construct two incentive variables and find a positive association between misreporting behavior and managerial incentives. Our results also suggest that the use of an outside accountant reduces the probability that a nonprofit will misreport expenses, consistent with the use of an outside paid accountant increasing the reliability and usefulness of nonprofit financial reports. Finally, we find that SOP 98-2 reduced the probability that a nonprofit will misreport fundraising expenses.

To address agents' moral hazard over effort, incentive contracts impose risk on the agents. As performance measures become noisier, the conventional agency analysis predicts that principals will reduce the incentive weights assigned to such measures. However, prior empirical results (Prendergast 2002) frequently find the opposite, i.e., incentive weights are larger (agents bear more risk) in more uncertain environments. This paper provides new evidence on the association between the extent of uncertainty and the level of risk imposed on agents. In the context of contracts between managed care organizations and physicians, we examine the effect of task characteristics and the legal liability environment on the extent of risk that physicians bear. We derive the optimal weighting of multiple performance measures in a model of a physician's choice of revenue-generating and cost-control efforts. The model predicts that physicians who face less task uncertainty bear more cost risk in their contracts, as predicted by the conventional moral hazard model. Likewise, the model predicts that as the association between task uncertainty and legal liability uncertainty becomes stronger, physicians bear less cost risk in their contracts. Our empirical results generally support these predictions. We offer an explanation for why these results tend to be consistent with the conventional moral hazard analysis, contrary to empirical results in a number of previous studies.