Jerold L. Zimmerman, Corporate Capital Investment, Accounting Methods and Earnings: A Test of the Control Hypothesis: Discussion, The Journal of Finance, Vol. 35, No. 2, Papers and Proceedings Thirty-Eighth Annual Meeting American Finance Association, Atlanta, Georgia, December 28-30, 1979 (May, 1980), pp. 565-568

This paper argues that academics, politicians, and the media have six commonly held but misguided beliefs about corporate governance. While Armstrong et al. (2010) discuss some of these misconceptions, a wider recognition that these beliefs are actually “myths” is important. They include: (1) a common definition of “corporate governance” exists; (2) a useful distinction is “internal” versus “external” governance mechanisms; (3) outside directors perform two separable roles: to advise and monitor managers; (4) research has identified “good” and “bad” governance practices; (5) a “good” governance index can be constructed; and (6) corporate governance “best practices” can be deduced from peer data.

Return models (returns regressed on scaled earnings variables) are commonly preferred to price models (stock price regressed on earnings per share). We provide a framework for choosing between these models. An economically intuitive rationale suggests that price models are better specified in that the estimated slope coefficients from price models, but not return models, are unbiased. Our empirical results confirm that price models' earnings response coefficients are less biased. However, return models have less serious econometric problems than price models. In some research contexts the combined use of both price and return models may be useful.

Executive compensation, Employee stock option, Calculation, Option pricing model

This study focuses on changes in incentives at the William E. Simon Graduate School of Business Administration in the early 1990s to redirect effort from academic research to classroom teaching. We find a substantial and almost immediate jump in teaching ratings following the changes in incentives. Longer-run learning and turnover effects are present. Evidence also suggests that research output fell. This case illustrates the power of organizational incentives to redirect effort in a multitask environment, even in the presence of apparent human–capital constraints.

Measures the relative influences of efficiency and opportunism in accounting by the examination of a non-random sample that allows for the probability of finding opportunism. Efficient and opportunistic accounting choices; Effects of accounting choices on retained earnings; Firm-performance measures.

This paper reviews and critiques the positive accounting literature following publication of Watts and Zimmerman (1978, 1979). The 1978 paper helped generate the positive accounting literature which offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in the debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.

This paper examines the hypothesis that managers reduce reported earnings during labor union contract negotiations relative to earnings released before and after contracts are negotiated. Analyzing earnings around labor negotiations provides evidence regarding when managers manipulate accounting earnings and, hence, information regarding the costs and benefits of managing earnings. We find no evidence of lower than expected earnings during negotiations. Time series of quarterly and annual unexpected earnings, using several measures of expected earnings, are examined around labor talks for a sample of 105 unionized companies over the period 1968-1981. Both random and matched samples of firms not engaged in labor negotiations also are chosen. The time series of earnings during labor talks for the unionized sample is indistinguishable from that of the random and matched samples. An analysis of these firms' quarterly earnings time-series properties and their abnormal stock returns suggests that in this sample period unionized firms had less incentive to reduce earnings because they already were performing poorly.

This paper addresses the questions of why accounting theories are predominantly normative and why no single theory is generally accepted. Accounting theories are analyzed as economic goods, produced in response to the demand for theories. The nature of the demand is examined, first in an unregulated, then in a regulated economy. Government regulation creates incentives for individuals to lobby on proposed accounting procedures, and accounting theories are useful justifications in the political lobbying. Further, government intervention produces a demand for a variety of theories, because each group affected by an accounting change demands a theory that supports its position. The diversity of positions prevents general agreement on a theory of accounting, and accounting theories are normative because they are used as excuses for political action (i.e., the political process creates a demand for theories which prescribe, rather than describe, the world). The implications of the authors' theory for the changes in the accounting literature as a result of major changes in the institutional environment are compared with observed phenomena.