The theoretical public-choice literature suggests that vote trading is an important determinant of congressional voting behavior. Yet empirical voting models do not allow for vote trading. These models recognize that observed ideology may influence legislative behavior but do not correct for unobserved ideology. This study devises new tests for logrolling and ideology. The empirical model controls for logroll agreements and unobserved ideological interest via the correlation of unobserved variables. The results reflect the presence of vote-trading coalitions on some votes but not on others. The results cast doubt on the importance of personal ideological interests of legislators.
[In recent years, the agency paradigm has become central to theoretical research in managerial accounting. Empirical research in the area of executive compensation has tested the consistency of agency model predictions with observed compensation data. However, it seems difficult to trace specific instances where results and insights obtained from agency models have affected actual management practice. This article describes one such instance in the context of government contracting, showing how agency theory was used to design incentive contracts. The research reported here was initiated by the German Department of Defense (GDOD). The Department commissioned a study to examine the applicability of a class of incentive schemes subsequently referred to as budgeted-based schemes. To implement these schemes, the GDOD expressed interest in a constructive procedure that would derive suitable budget-based schemes for specific procurement projects. I describe such a procedure and discuss a number of institutional factors that affected the way the budget-based schemes were applied to two pilot projects in Germany. Traditionally, government contracts under sole-source conditions have been awarded either as fixed-price or cost-plus contracts. The use of fixed-price contracts has been confined to projects with relatively few technological and economic uncertainties. With such uncertainties, fixed-price contracts are unattractive from a risk-sharing perspective. Yet, even with a risk-neutral contractor (because of size and diversification) governments are typically reluctant to sign fixed-price contracts when there are major informational asymmetries. If the government is relatively ignorant about inputs and resources required for the project, it will have difficulties disputing the firm's ex ante cost calculation. As a consequence, the firm earns an informational rent; that is, the firm will extract a higher price than it would have if the government had shared the firm's knowledge and expertise. Cost-plus contracts avoid the problem of overpayment, but, as has been well documented, the government subjects itself to the problem of cost padding. To limit the negative incentives of cost-plus contracts, it has become common practice in the United States to replace standard cost-plus contracts with cost-plus-fixed-fee contracts, so that the firm's profit allowance is fixed rather than being proportional to actual project costs. In recent years, there has been an increasing trend in the United States to provide positive incentives for cost control by using cost-plus-incentive-fee contracts. At the outset of a project, the parties negotiate a cost target, and the firm's profit increases proportionally with cost underruns relative to the cost target. Conversely, the incentive profit decreases at the same rate with cost overruns. In effect, the firm thus bears a share of actual project costs. A recent survey by the U.S. General Accounting Office (GAO 1987) shows that for the period 1978-84 firms' cost-share parameters typically varied between 15 and 25 percent, but were as high as 50 percent in unusual cases. A major concern voiced repeatedly in connection with cost-plus-incentive-fee contracts is that the government is unable to formulate realistic cost targets for many projects. If the target is set unrealistically low, the firm is likely to suffer a financial penalty. Conversely, an unrealistically high cost target leads to additional "undeserved" profits. For this reason, the GAO states that cost-plus-incentive-fee contracts are confined to procurement projects where "the government has a sound basis to estimate contract costs, but where uncertainties exist that make a fixed-price contract impractical" (GAO 1987, 1). The relatively low cost-share parameters currently used (15 to 25 percent) may reflect the government's desire to mitigate the effects of unrealistic cost targets. The budget-based schemes considered in this study can be viewed as a refinement of cost-plus-incentive-fee contracts. In addition to actual cost, the incentive fee now depends as well on a cost estimate that the firm submits, typically at the start of the project. In effect, the firm selects a budget (target cost), and the incentive profit is proportional to the budget variance. Previous modeling analysis has shown that the budget-based schemes create desirable reporting and performance incentives (see Kirby et al. 1991). The government receives information that is useful for its budget planning process, since the contracting firm is induced to submit an unbiased cost estimate. Specifically, the firm has an incentive to reveal truthfully its own assessment of expected project costs. To some extent, the budget-based schemes therefore avoid the issue faced by cost-plus-incentive-fee contracts described above. Instead of having the government formulate a realistic cost target, this task is now left to the better informed firm. From a cost-control perspective, the budget-based schemes have been shown to be optimal incentive mechanisms. By offering a menu of contracts, the government can tailor performance incentives to the firm's privately observed cost information. Specifically, the firm chooses a high target profit in return for a high cost-share parameter, provided its cost information is relatively favorable. A high cost-share parameter will induce the firm to conduct the project in a more efficient way. The resulting cost savings are effectively split since the firm receives a large incentive profit. As a consequence, both sides will be better off.]
[The recognition of economic events in accounting earnings tends to lag that of the market. An informed market recognizes the effects of economic events when they occur, but earnings recognition must await compliance with formal accounting recognition criteria. The application of these criteria involves such basic concepts as reliability, objectivity, conservatism, and verifiability, and affects earnings in two ways: (1) current earnings will include recognition of certain prior periods' economic events, and (2) current earnings does not recognize all of the current period's economic events until future periods (see also Easton et al. 1992). Economic events for which accounting recognition tends to lag market recognition include purchase and sale commitments, contingencies, post-employment employee obligations, investments in human capital, and variations in the market values of assets and liabilities. The purpose of this article is to investigate accounting recognition as a major determinant of earnings' explanatory power for returns. Our hypotheses are threefold. First, if accounting recognition lags that of the market, then its effect is predictably greater in shorter reporting periods. The shorter the reporting period, the lower the percentage of economic events recognized in both earnings and returns. For example, if all economic events that are immediately recognized in returns are recognized in earnings one quarter hence, then the current quarterly earnings' explanatory power would be zero, whereas annual earnings would reflect the recognition of three-fourths of all the economic events recognized in returns. Second, if the criteria for accounting recognition yield a multiperiod lag in earnings recognition of economic phenomena, then future periods' earnings possess explanatory power for current returns. A corollary hypothesis predicts that the incremental explanatory power of future periods' earnings varies inversely with the length of the reporting period. Third, if the influence of accounting recognition criteria for earnings measurement differs by companies' economic circumstances, then cross-sectional differences in these circumstances are predictably linked with earnings' explanatory power for returns. Economic circumstances that affect earnings recognition include companies' operating cycles, riskiness of cash flows, and the reliability, objectivity, availability, and verifiability of accounting and market data. We document evidence consistent with a substantial lag in earnings recognition. Findings reveal an inverse relation between earnings' explanatory power for returns and the length of the reporting period, which is consistent with a lag in earnings recognition that deteriorates in longer reporting periods. Specifically, the explanatory power of earnings for returns in quarterly periods is about one-fourth that for semiannual periods, less than one-tenth that for annual periods, and less than one-thirtieth that for two-year periods. Moreover, the explanatory power of the regression (adjusted R2 when using quarterly earnings is less than 1 percent, but exceeds 39 percent when using four-year earnings and returns. We attribute this phenomenon to accounting criteria that recognize economic events with a lag and to the disaggregation of earnings (through time), which accentuates this lag. Easton et al. (1992) offer some evidence consistent with the first hypothesis, but their evidence is limited to reporting periods of one to ten years in length. This is the first evidence we are aware of for reporting periods of less than one year. We also present evidence that earnings lag current returns for several future periods. In certain instances, the recognition lag is of such magnitude that the explanatory power of future periods' earnings for current returns more than triples that of current earnings. For example, with quarterly reporting periods, the inclusion of future periods' quarterly earnings increases the adjusted R2 of the returns-earnings relation by more than 400 percent. This evidence is consistent with a substantial lag in accounting recognition of economic events that spans a number of reporting periods. To the extent that accounting regulatory agencies want earnings to reflect current changes in the market values of companies, this evidence implies significant potential for enhancing earnings' usefulness. Finally, we show that, when earnings measurements are less sensitive to accounting recognition criteria, earnings have greater explanatory power for returns. For example, with biennial reporting periods, current earnings' explanatory power for current returns exceeds 50 percent for companies whose earnings measurements are less sensitive to accounting recognition criteria, but is less than 20 percent for companies more sensitive to these criteria. This result is consistent with a joint relation between (1) the application of accounting principles in practice and (2) the explanatory power of earnings for returns. Evidence of systematic cross-sectional differences in accounting recognition suggests that deliberations on accounting policy must consider characteristics of the reporting and operating environments; for example, the desire for verification, reliability, or conservatism might explain the accounting practices observed. The evidence reported emphasizes the significant role that accounting recognition plays in determining earnings' explanatory power for returns. The evidence also relates the lag in accounting recognition of economic events to cross-sectional differences in fundamental economic determinants of earnings recognition. This evidence of a link between earnings' explanatory power and basic concepts of accounting recognition and measurement should encourage further efforts at mapping the complex accounting structure that determines the usefulness of earnings. In light of the Securities and Exchange Commission's recent emphasis on market-based measures of performance, which is referred to as "possibly the most significant initiative in accounting principles development in over 50 years" (Wyatt 1991, 80), our results highlight the potential for substantial improvement in earnings' explanatory power. Evidence on the reporting lag inherent in the application of accounting recognition criteria, and its cross-sectional determinants, is relevant for these policy deliberations.]
[Previous research demonstrates that "brand name" (e.g., Big Eight versus non-Big Eight) is a factor affecting audit prices and auditor selection. As a quality surrogate, brand name reflects differences between auditor size categories in concern for reputation (DeAngelo 1981b) and the ability to withstand client pressure (Goldman and Barlev 1974). It has not, however, been demonstrated that these features characterize quality differences within an auditor size category. Although tests are difficult without a direct measure of quality, recent announcements by the General Accounting Office on CPA quality in governmental audits indicate a need to determine the factors that affect quality differences within auditor size categories, which is the subject of this study. Audit quality is defined as the probability that the auditor will both discover and report a breach in the client's accounting system (DeAngelo 1981a). Two explanations for variations in audit quality involve reputation and power conflict. Because an incumbent auditor captures client-specific quasi-rents, there is incentive to lower audit quality to retain the client. However, audit firm size is a moderating effect since a large client base allows a concern for reputation to remain more important than retention of any given client. The expectations are that (1) audit quality decreases as auditor tenure increases and (2) audit quality increases with the number of clients. In power conflicts, the client can exert pressure on the auditor to violate professional standards, and a large, financially healthy client can exert greater pressure with a threat of replacing the auditor. However, the established review of audit results or audit working papers by third parties can increase the auditor's ability to withstand client pressure. The expectations are that (3) audit quality is negatively related to the size and financial health of the firm and (4) audit quality improves when the auditor knows work will be subject to review by third parties and that sanctions for poor quality work will occur. This article presents the results of an investigation into the determinants of audit quality provided by small, independent CPA firms in Texas on audits of independent school districts. The study analyzes quality control review (QCR) findings to obtain a relatively more direct measure of audit quality. Between 1984 and 1989 the Audit Division of the Texas Education Agency (TEA) conducted 308 QCRs. Numerical scoring of 232 QCR letters of findings represents the measure of minimum audit quality and the dependent variable in the regression analysis. Explanatory variables associated with reputation effects, power conflict effects, report timeliness, audit hours, and reported breaches were obtained from TEA sources. The major finding of the study is that audit quality definitions (DeAngelo 1981b; Goldman and Barlev 1974) considered descriptive among audit size categories are sufficiently robust to explain quality variations within an audit size group. The results also confirm earlier studies relating audit quality to audit report timeliness (Dwyer and Wilson 1989) and actual audit hours (Palmrose 1986, 1989). We conclude that audit hours is a suitable surrogate for audit quality when direct measures are unavailable.]
[Research (see Wright 1988 and Bedard 1989 for reviews) has examined how experience affects the auditor's ability to perform audit tasks successfully. A plausible explanation (see, e.g., Schmidt et al. 1986) for the failure to obtain a significant positive relationship between experience and performance with regularity is that these constructs are indirectly related (for other reasons see Bonner 1990). Few studies have attempted to explicate this indirect relationship by examining the knowledge and skills that develop with audit experience and may lead to improved task performance (cf. Alba and Hutchinson 1987). The current study focuses on the manner in which experience affects knowledge structure for several reasons. First, identification of "systematic differences in content and structure of (domain-specific) knowledge... can be used to facilitate investigating the relationship [between experience and performance]" (Davis and Solomon 1989, 160). For example, when systematic differences are identified, the relationship between these differences and expert performance can be examined empirically. Second, a more refined knowledge structure is considered by many (e.g., Chi et al. 1982) to have a significant influence on skilled performance. Substantiating this point, Schmidt et al. (1986) found that job knowledge was the strongest determinant of job performance (and that experience was the strongest determinant of job knowledge). In accounting, many researchers (e.g., Frederick and Libby 1986; Biggs et al. 1988) have attributed differences in behavior to differences in knowledge, but only Bonner and Lewis (1990) and Bonner et al. (1992) have reported results consistent with this relationship. This article investigates the nature of changes in the auditor's knowledge about errors and irregularities as experience is acquired. Knowledge of errors is examined for three reasons. First, identification of errors is important to auditors; Statement on Auditing Standards (SAS) No. 53 (AICPA 1988a) specifically makes the auditor responsible for detecting errors. Second, understanding the characteristics of errors and their interaction is important when designing and performing appropriate audit procedures and evaluating the results of those procedures (AICPA 1988a, 3). Since such an understanding appears to be complex, the auditor's knowledge of errors is likely to be a meaningful area for studying the effects of experience. Third, sparse research (Libby 1985; Libby and Frederick 1990) has examined the structure of auditors' knowledge of errors. Identifying differences in knowledge between inexperienced and experienced auditors is of potential practical benefit for the training of auditors (cf. Brown and Stanners 1983). Furthermore, identification of knowledge differences can assist in more effective assignment of auditors to tasks for which they have the appropriate level of knowledge. Finally, the development of decision aids and expert systems in auditing (see Brown and Murphy 1990; Messier and Hansen 1987) can be improved. Earlier research suggests that, as auditors gain experience: (1) they know more errors, (2) they have more accurate error knowledge, (3) they know more atypical errors, and (4) the causally-related features of errors (where the errors occurred and the internal control objectives violated) become relatively more salient. Ninety-five subjects at four levels of experience performed two tasks. In task 1, subjects were given 15 minutes to list as many errors as possible that would occur in the sales-receivables-cash receipts cycle of a typical wholesaling or manufacturing company. This task was expected to facilitate examination of the relationship between experience and the quantity, quality, and typicality of knowledge of errors in an unobtrusive manner. Task 2, a conditional prediction task, was employed to produce evidence on the extent to which certain causally-related features of errors become relatively more salient with experience. Consistent with previous audit research, subjects with greater auditing experience recalled more errors and fewer incorrect items. In addition, subjects with greater auditing experience recalled more atypical errors. Two features of errors that are related to causal explanation, the violated internal control objective and the department in which the error occurred, were found to be salient. However, only the violated internal control objective appeared to increase in salience with experience.]