Knowledge that Transforms

Two trade-offs arise in an agency relationship when the same accounting signal is used for both performance evaluation and investment evaluation. Using the signal for performance evaluation, (1) directly influences the informativeness of the signal for investment evaluation, (2) induces manipulation, which, in turn, lowers the informativeness of the signal for investment evaluation. The principal can increase her welfare by delegating the investment decision to the agent, setting up multiple control systems, or using the outcome of the investment for performance evaluation. We show the implications of using each alternative on incentive contracts, equilibrium effort, and manipulation levels.

I study the joint choice of responsibility assignment, performance measures, and rewards for a two-stage process where the quality of the initial stage work affects the required final stage effort. By assigning responsibilities to give the initial stage agent an incentive to sabotage the final stage, output is made informative about this agent's attention to quality. I find conditions under which it is cost-effective to create and to contractually use such information. This analysis makes formal that the value of a performance measure is determined not simply by its congruity and precision but by its influence on the optimal organisational design.

A large majority of firms employ negotiated transfer pricing, yet this method of decentralization remains largely unexplored. This study develops a model of negotiated transfer pricing incorporating private divisional information, as this is the setting where decentralization is most compelling. The firm designs a compensation system utilizing divisional performance evaluation and negotiated transfer pricing. A dynamic bargaining model is employed to capture managerial negotiations. The study demonstrates that the firm can design managerial-compensation schemes and bargaining infrastructures so that the negotiated transfer-pricing structure allows it to reach the upper bound on available profits.

Recent studies have provided theory and evidence that the contemporaneous relation between stock returns and accounting earnings is nonlinear, different for profits and losses, and different across firms. Since each factor can result from differences in earnings persistence, existing theory is ambiguous as to whether these factors are distinct or overlapping. Thus, we conduct a simultaneous examination. Our primary tests show that each factor explains a significant portion of the variance of returns after controlling for the other two factors, with firm-specific estimation providing the largest incremental explanatory power. Alternative tests produce similar conclusions. Empirically, the three factors are distinct.

In a sample of auditor change firms we find that discretionary accruals are income decreasing during the last year with the predecessor auditor and generally insignificant during the first year with the successor. In addition, the income decreasing discretionary accruals are concentrated among firms expected to have greater litigation risk. These findings are consistent with litigation risk concerns providing incentives for auditors to prefer conservative accounting choices, and with managers dismissing incumbent auditors in the hope of finding a more reasonable successor. However, we cannot rule out financial distress as a potential alternative explanation for our results.

This paper investigates the relation between levels of industry competition and managers' choices of which operations to report as business segments. One reason managers have objected to segment disclosures is that these disclosures allegedly provide commercially valuable information to competitors that is not available elsewhere. This objection might seem to imply that managers are most reluctant to provide segment disclosures for operations in highly competitive industries; however, if abnormally high earnings tend to occur in less competitive industries, managers' segment reporting discretion may be exercised to avoid reporting these operations as business segments. Using a sample of 929 firms reporting business segments in their annual reports during 1987 to 1991, I estimate a logit model of management's decision to report operations in a given industry as a segment as a function of two measures of industry competition: the four-firm concentration ratio and a measure of the speed of profit adjustment. The

Richard A. Lambert, Customer Satisfaction and Future Financial Performance Discussion of are Nonfinancial Measures Leading Indicators of Financial Performance? An Analysis of Customer Satisfaction, Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial Reporting Model (1998), pp. 37-46

Analysts, Analyst coverage, Analyst forecast, Trading commissions

57 2.5.3.5 Interaction Effects: Tax Variables 58 10

D. Eric Hirst, Patrick E. Hopkins, Comprehensive Income Reporting and Analysts' Valuation Judgments, Journal of Accounting Research, Vol. 36, Studies on Enhancing the Financial Reporting Model (1998), pp. 47-75