Knowledge that Transforms

After 1983, Medicare paid hospitals for inpatient services at fixed rates, but continued to reimburse outpatient services based on reported cost. Using data from Washington State we find that hospitals responded by increasing outpatient services to Medicare patients compared to non-Medicare patients-the ratio of Medicare outpatient revenues as a percentage of total Medicare revenues increased after 1983 to a significantly greater extent than for non-Medicare patients. We also find that allocations of overhead costs to outpatient departments increased after 1983. These findings suggest that hospitals change their patient mix and cost allocations to maximize hospital cash flows.

This paper provides evidence on whether managers can reduce stockholder litigation costs by disclosing adverse earnings news ‘early’. Inconsistent with this idea, I find that voluntary disclosures occur more frequently in quarters that result in litigation than in quarters that do not. However, this result occurs because managers' incentives to predisclose earnings news increase as the news becomes more adverse, presumably because this reduces the cost of resolving litigation that inevitably follows in bad news quarters. After controlling for these incentives using estimated stockholder damages, I find some evidence that more timely disclosure is associated with lower settlement amounts.

This study tests political costs theory by examining the cable television industry during periods of Congressional scrutiny. Earnings management is measured using discretionary accruals, and data are consistent with managerial incentives to mitigate the effects of political scrutiny and potential industry reregulation. Tests are also done using within-sample comparisons of firms. Firms for which proposed regulations are expected to be more harmful have greater income-decreasing accruals, and for some tests, firms for which cable television operations are more important have greater income-decreasing accruals. Test results are robust to the inclusion of control variables for firm performance and size.

I investigate stock price behavior associated with the allowance of LIFO for tax purposes. The analysis is structured as an event study of the Revenue Acts of 1938 and 1939. The results indicate a positive net market reaction to legislative events leading to LIFO's incorporation into the US tax code for the sample firms having the largest estimated LIFO tax benefits. I conclude the market revised its probabilities that firms most likely to benefit would avail themselves of the opportunity to use LIFO and defer taxes on inventory profits.

This study uses experimental methods to assess how different legal regimes affect the frequency and amounts of settlements in a three person setting (one plaintiff and two defendants). The four legal regimes investigated differ along two dimensions: (1) allocation of liability, either ‘joint and several’ or proportionate liability, and (2) liability mappings, either unconditional or conditional mappings. We find that the lowest settlement frequencies occur in regimes with joint and several allocation rules. In addition, joint and several rules have the most adverse effects on the defendants' wealth.

This paper investigates systematic changes in the value-relevance of earnings and book values over time. We report three primary findings. First, contrary to claims in the professional literature, the combined value-relevance of earnings and book values has not declined over the past forty years and, in fact, appears to have increased slightly. Second, while the incremental value-relevance of ‘bottom line’ earnings has declined, it has been replaced by increasing value-relevance of book values. Finally, much of the shift in value-relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one-time items, the increasing frequency of negative earnings, and changes in average firm size and intangible intensity across time.

This research studies how Chinese tax authorities implement international transfer pricing legislation. The analysis indicates that tax audits on transfer pricing are confined mainly to medium- and small-sized foreign investments, lower-technology companies and transfer of tangible goods, and tend to focus on certain nationality and forms of foreign investment. Persistent losses, low profitability and lack of local partners in joint venture management most often trigger tax audits. The authorities focus on profit results rather than prices, and often use comparable profit method to adjust income. Tax differentials do not appear to be the most important inducement to transfer pricing manipulations.

We exploit a unique experimental setting within the life insurance industry to examine the effects of taxes, regulation, earnings, and organizational form on life insurers' investment portfolio realizations. A unique equity tax levied on mutual life insurers, as well as the statutory rate variation that occurred during our sample period, allow us to disentangle the effects of taxes from earnings or profitability. Consistent with some policymakers' claims, we find mutual insurers' capital gain realizations are affected by company-specific equity tax rate variation. In addition, we find capital regulation and earnings considerations affect both stocks' and mutuals' realizations.

I interpret conservatism as resulting in earnings reflecting ‘bad news’ more quickly than ‘good news’. This interpretation implies systematic differences between bad news and good news periods in the timeliness and persistence of earnings. Using firms’ stock returns to measure news, the contemporaneous sensitivity of earnings to negative returns is two to six times that of earnings to positive returns. I also predict and find that negative earnings changes are less persistent than positive earnings changes. Earnings response coefficients (ERCs) are higher for positive earnings changes than for negative earnings changes, consistent with this asymmetric persistence. ¢ 1997 Elsevier Science B.V. All rights reserved.

Managers, consultants, and the financial press assert that compensation plans based on residual income change managers' behavior. This assertion is empirically tested by selecting a sample of firms that began using a residual income performance measure in their compensation plans and comparing their performance to a control sample of firms that continue to use traditional accounting earnings-based incentives. The results generally support the adage `you get what you measure and reward'. The results also support many hypothesized managerial actions associated with residual income-based performance measure incentives.