Fischer and Verrecchia (J. Account. Econom. (2004), forthcoming) studies a model of imperfect competition in which firms’ disclosures are affected by biased information processing. They find that optimism can add punch to a firm's actions. When facing an optimist, a rival is forced to soften its competitive posture, thereby rendering such biases viable. Although the setting provides a cogent explanation for disclosure bias, its reliance on imperfect information processing introduces some questions. One concern is the ease with which polar results can be obtained when the rules-of-the-game are sufficiently relaxed. The discussion provides examples illustrating this and related issues.

We study a principal‐agent model in which there is an option to defer a capital project approval decision. A control (incentive) problem makes the option to wait valuable when it would not have been valuable otherwise. Deferring the project approval decision has both a cost and a benefit. The cost of waiting is that the agent’s uncertainty regarding future project cost realizations cannot be exploited. However, by delaying the first project’s approval decision, the principal can condition its approval on the agent’s cost report of the second project. Such conditioning can be valuable in the provision of incentives because of a diversification effect.

A CEO's short horizon and associated myopic actions are typically viewed as detrimental to the firm. In contrast, studying a voluntary disclosure model wherein capital market and product market strategic considerations are in play, we show that the CEO's myopic behavior can improve a firm's long-term value. In particular, the disclosures of a long-horizon CEO are seen as being entirely focused on the firm's interests and thus as being exploitative of customers. A short-horizon CEO myopically focused on short-term stock price is less aligned with the firm and, consequently, her disclosures are more customer friendly. As a corollary, when no disclosure is forthcoming, customers are less skeptical that the myopic CEO is withholding information to exploit them. This improves customers' willingness to pay with a myopic CEO, leading to higher firm profitability. The paper also layers in compensation design to derive the optimal degree of managerial short-term focus to induce.

In a team setting, wherein only group performance is tracked, we show that muted incentive contracts may be sufficient to motivate team members. By having the team repeat a task, explicit (contractual) incentives can be substituted by implicit incentives team members provide to each other. We also study an example in which, despite uncorrelated individual performance measures being available, it is optimal to condition each manager's pay on both managers' performance. This can be viewed as creating a group performance measure. Using a group performance measure provides each manager with incentives to monitor and a means of punishing other managers.

The centrality of private information in the design of accounting institutions has been explored via agency models that address control concerns as well as disclosure models that amplify valuation issues. This paper derives disclosures by an entrepreneur‐owner when both control and valuation concerns are in play. In particular, the disclosures influence stock price not only via a direct impact on valuation of the firm's revenue but also via an indirect impact on the firm's cost of procuring inputs from a self‐interested and privately informed upstream supplier. In this setting, disclosures are judiciously designed to influence the supplier's decision to share cost information and to control information rents embedded in the procurement contract within the supply chain. Specifically, in order to convey that information rents are not in the offing and, thus, motivate information sharing by the supplier, the owner has incentives to convey a less “rosy” picture. In effect, when controlling supplier actions also becomes important, the owner discloses some unfavorable revenue news that she would have otherwise withheld and conceals some favorable revenue news that she would have otherwise revealed. Consequently, in our model, the disclosure region is either two‐tailed or intermediate, in contrast to the single‐tailed disclosure region implied by familiar valuation considerations alone.

Recent years have seen an increased emphasis on developing more precise accounting measures of market- and customer-level profitability. By their very nature, such segment profitability measures may unwittingly neglect complementarities. Such complementarities have been widely recognized on the demand side due to brand recognition, predatory pricing, or interdependent products. We develop a model showing that important supply-side complementarities can also be prevalent. In particular, when a firm relies on a self-interested supplier for inputs used across multiple segments, the wholesale price it pays depends on the average profitability of its segments. Taking such interaction between upstream pricing and the firm’s downstream reach into account, the model shows that: (1) segment profit calculations can understate or overstate the value added by the segment depending on the segment’s relative contribution margin, and (2) the firm sometimes benefits from devoting resources to less profitable segments and perhaps even from serving seemingly unprofitable markets and/or customers.

This paper examines the impact of distortions wrought by transfer pricing when a firm is engaged in both internal production and external procurement of inputs. In particular, we demonstrate that a firm can actually glean benefits from often-discussed transfer-pricing problems in dealing with an external supplier. Though transfer prices above marginal cost introduce inter-division coordination problems, they also introduce a lower willingness to pay to outside suppliers. Knowing that costly internal transfers will eat into demand, the supplier is more willing to set lower prices. Such supplier discounts can make decentralization worthwhile for the firm. This benefit of decentralization is shown to be robust to variations in both downstream and upstream competition.

Studies a stylized model in which a division manager's historical cost reports are verified. Verification in one-period setting; Full-information solution; Solution in the presence of unverified cost reports; Solution in the presence of verification; Verification in two-period setting; Role of historical information.