Knowledge that Transforms

This study reports a preliminary empirical investigation into the relation between the choice of investment accounting method used by colleges and universities and factors such as type of institution, endowment size and returns, and debt. Because these institutions use fund accounting, the effects of the choice of investment accounting method can reasonably be isolated from other accounting decisions. The results indicate that the selection of investment accounting method is influenced by type of institution, endowment size and returns, but not by debt covenants.

This paper examines the valuation of employee stock options (ESOs). Because ESOs are inalienable, the employee's optimal exercise policy differs from the policy a naive reading of the finance literature would suggest. The employee prefers to exercise options before maturity under certain conditions on risk aversion, investment opportunities, and wealth. Since the ESOs' cost to the employer depends on the employee's exercise policy, this finding has implications for changes to the accounting treatment of ESOs under this finding has implications for changes to the accounting treatment of ESOs under consideration by the Financial Accounting Standards Board. Numerical examples suggest the employer's cost is much less than the options' Black-Scholes value.

This paper analyzes the repricing of employee stock options after market-wide crash. The model identifies sufficient conditions for renegotiation to be optimal and for optimal compensation to be a fixed salary plus stock options. Empirical results support the renegotiation prediction. Stock opition grants increase in both number and value after the 1987 crash. Firms with underwater options grant significantly more options post-crash than pre-crash, whereas firm with in-the-money options don't. Furthermore, firms suffering the largest impact from the crash are the most likely to increase grants after the crash.

This study shows real estate investment trusts' (REITs) characteristics and compensation incentives vary with compensation method. Formula-based compensation encourages advisors to generate cash from their assets, whereas discretion-based compensation encourages cash conservation. Consequently, dividend yields are 82 percent of formula REITs' total returns, but only 33 percent of discretion REITs'. Partly due to REITs switching from formula-based to discretion-based compensation, the number of discretion REITs has grown while the number of formula REITs has declined. Average formula REIT return performance is inferior and switches tend to follow a period of poor financial performance; performance improves after such changeovers.

LIFO Liquidation, Tax incentives, Debt covenants, Inventory valuation

Auditing, Auditor litigation, Rule 10b-5, Auditor liability

Financial ratios, Valuation, Cross-country differences, Comparability

Disclosures, Litigation risk, Rule 10b-5, Discretionary disclosures

Value relevance, Equity investment, Predictive ability, Future earnings

Terrence B. O'Keefe, Dan A. Simunic, Michael T. Stein, The Production of Audit Services: Evidence from a Major Public Accounting Firm, Journal of Accounting Research, Vol. 32, No. 2 (Autumn, 1994), pp. 241-261