Knowledge that Transforms

This paper investigates partner selection and group formation in cooperative benchmarking, a practice of information sharing among firms to improve their operations. Firms gather preliminary information about potential partners only when the choice problem is difficult, and more information is gathered when there is more uncertainty. Based on an analysis of benchmarking benefits and costs, there is a unique equilibrium group structure characterized by a segregation of firms by their stock of technological information. It is argued that today's changing business environment tends to increase group size and the number of firms participating in cooperative benchmarking.

This paper presents the results of 32 experimental markets designed to test hypotheses based on Wagenhofer's (1990) disclosure model. The model predicts the existence of multiple disclosure equilibria in cases where a manager balances the effects that disclosures can have on two sets of external agents: investors and an opponent. The experimental results support the partial-disclosure equilibrium over the full-disclosure option. Additionally, a lower level of disclosure was observed in those markets in which the discloser repeatedly interacted with information receivers. Lower disclosure reduces the level of proprietary costs which is beneficial to the information sender.

This paper examines the empirical relation between corporate ownership structure and innovation. We test the hypothesis that diffusely-held firms are less innovative than firms with either a high concentration of management ownership or a significant equity block held by an outside investor. Overall, the evidence indicates that diffusely-held firms are less innovative along the dimensions we examine: patent activity, growth by acquisition versus internal development, and timing of long-term investment spending. These results are consistent with the conjecture that concentrated ownership and shareholder monitoring are effective at alleviating the high agency and contracting costs associated with innovation.

Collusion may benefit an organization if the employees, by sharing effort, information, or risk, can enhance production or lower costs. Collusion is detrimental if it leads to less effort or to withholding of information. A contract that utilizes the agents' cooperative behavior dictates less relative performance evaluation than does a noncooperative contract or a contract that ensures the employees do not cooperate. Delegation of decision authority is beneficial for a broader range of organizations if employees collude than if they do not. The constructed contracts are incentive compatible for coalitions as well as for individuals.

The development of both brand name reputation and industry specialization by Big 8 auditors is argued to be costly and therefore to increase audit fees. For a sample of 1484 Australian publicly listed companies we estimate audit fee premia for Big 8 auditors. On average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big 8 auditors, and the Big 8 brand name premium over non-Big 8 auditors averages around 30%. These results support that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation.

Diversified corporations have been widely criticized as being inefficient innovators with an orientation to maximizing short-term profits. This study investigates this criticism by testing whether the number of new products introduced per R&D dollar is lower among more diversified firms. We find no statistically discernible effect of diversification on innovative efficiency in a sample of 706 research-intensive firms in the 1981–1988 period. This suggests that diversified organizations are rationally designed to minimize incentive and communication problems which may hinder innovation. Consistent with this view, we find that diversified firms are more likely to have separate research and development centers.

We extend Healy (1985) by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980–1990 period. Contrary to Healy, we find that when earnings before discretionary accruals fall below the lower bound, managers select income-increasing discretionary accruals (and vice versa). We believe that our results are more consistent with the income smoothing hypothesis than with Healy's bonus hypothesis. However, mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results.

For a two-stage production process, two assignments of tasks among two agents are studied: an ‘assembly line’, where each agent is responsible for one stage, vs. a ‘team’, where agents are jointly responsible for all tasks. When attention paid to quality at the initial stage affects the final-stage task, the team approach is optimal for unsophisticated production technology. As technology improves, the assembly line becomes dominating while continued improvements eventually makes it optimal to abandon the assembly line again in favor of the team approach. When such switches in job design occur, the optimal investment in technology exhibits positive jumps.

Implementation methods mandated by the FASB allow firms to report equity-increasing changes as income and equity-decreasing changes as adjustments to stockholders' equity. These findings are consistent with the argument that the FASB, to reduce its political costs, attempts to minimize firms' costs of implementation. We find that the FASB permits flexibility in timing of adoption of mandated changes. Firms experiencing lower changes in return on assets (ROA) before adoption and expecting higher adoption income effects accelerate implementation. Early adopters select the year of adoption when their change in ROA is lowest and their change in leverage is highest.

This paper explores the determinants of corporate R&D for U.S., Canadian, British, European, and Japanese firms. We find last year's debt ratio is significantly negatively correlated with current R&D expenditures for U.S. firms, and positively for Japanese firms. Second, we document a significant positive relation between two-year lagged stock return and current R&D expenditures for U.S., European, Japanese, and large-size British firms. Finally, we find a significant positive relation between last year's tax payments and current R&D expenditures for Japanese firms, and a significant negative relation for medium-size and small-size U.S. firms.