I. Introduction, 472. — II. The model: assumptions and notation, 474. — III. Derivation of the model, 477. — IV. The utility of wealth, 478. — V. Borrowing constraints: an example, 480. — VI. Concluding remarks, 486.

This paper develops a sequential model of the individual's economic decision problem under risk. On the basis of this model, optimal consumption, investment, and borrowing-lending strategies are obtained in closed form for a class of utility functions. For a subset of this class the optimal consumption strategy satisfies the permanent income hypothesis precisely. The optimal investment strategies have the property that the optimal mix of risky investments is independent of wealth, noncapital income, age, and impatience to consume. Necessary and sufficient conditions for long-run capital growth are also given.

The article presents the author's opinions on an article by Karl E. Weick, published in the April 1, 1983 issue of the periodical "Accounting Review," which argued that stress is an important accompaniment of corporate accounting practices. That article by Weick was titled: "Stress in Accounting Systems." Weick's main thesis seems to be that bad times generate more questionable accounting practices than good times, the reason being that bad times create more stress, and stress has a negative effect on the soundness of accounting practices. Perhaps this is so. However, there appears to be at least one alternative and equally plausible explanation. During bad times, the set of distinct decision alternatives available to managers is more limited, both because the resource base is typically smaller and the opportunities to employ resources are usually narrower. Since one dimension of a decision alternative is the accounting treatment to be followed, the best overall alternative in bad times may well involve a more "questionable" accounting method than the accounting method associated with the best overall alternative in good times.

The article presents a review of the document "Statement on Accounting Theory and Theory Acceptance," published in the 1977 issue of the journal "The Accounting Review." Beginning with the 1930's, the American Accounting Association (AAA) has endeavored to publish at least one comprehensive statement in the area of accounting theory each decade. Logistically, this enterprise has been carried out by a series of committees drawn from the Association's more prominent members. During this same period, the Committee on Accounting Procedure, the Accounting Principles Board, and the Financial Accounting Standards Board, in turn, have formally represented the much larger practicing arm of the profession in its self-regulatory determination of standards governing accounting practice. It is clearly not that membership in academia and/or the AAA has precluded one from an active role in accounting rule making, professors of accounting have regularly been called on to serve in this capacity. A more likely reason is that the AAA, through its collective membership, is, from the inside at least, viewed as being in a unique position to give advice on practical accounting theory, whether that advice is solicited or not.'

This paper develops an (equilibrium) model of financial markets in which investors have only imperfect information about each other and hence can only make imperfect inferences (of what others know) from price changes. Search for (undisclosed) interim information about firms is time-consuming (costly); moreover, abilities to conduct fruitful search differ among investor groups. Under a "market" solution it is shown that there are clear incentives for search by those with unusual detective abilities and/or large resources. Offsetting this are strong incentives for voluntary disclosure by firms, but it is noted that these need not result in socially desirable disclosure decisions. A natural "cost-benefit" criterion for deciding whether required disclosure would be beneficial is identified which, in may cases, can be applied on the basis of very little information. The economic inefficiencies that may result from the use of "incorrect" criteria in establishing disclosure requirements, such as "full disclosure" or majority rule, are also identified.

1. SUMMARY IN two previous papers [1] [12], a family of normative models of the individual's economic decision problem under risk were presented. At the same time certain implications of these models with respect to individual behavior were deduced for a class of utility functions. In a separate article [7], it was demonstrated that these models also give rise to an induced theory of the formation and operation of firms under risk for the aforementioned class of utility functions. In the present paper, it will be shown that the same models, developed with the individual in mind, have as further off-spring an induced theory of accounting for all firms so formed. In Section 2, the basic approach of the present study to the development of normative accounting theory is discussed. This section also considers some of the relationships of the present paper to other studies concerned with the development of prescriptive theories of accounting. In Section 3, the various components of the basic decision model used in the present paper are constructed. The individual's objective is postulated to be the maximization of expected utility from consumption as long as he lives and from the bequest left upon his death; his lifetime is presumed to be a random variable. The individual's resources are assumed to consist of an initial capital position (which may be negative) and a noncapital income stream. The latter, which may possess any time-shape, is assumed to be known with certainty and to terminate upon his death. In addition to insurance available at a "fair" rate, the individual faces both financial opportunities (borrowing and lending) and an arbitrary number of productive investment opportunities. The interest rate is presumed to be known but may have any time-shape. The returns from the productive opportunities are assumed to be random variables, whose probability distributions may differ from period to period but are assumed to satisfy the...

Nils H. Hakansson, To Pay or Not to Pay Dividend, The Journal of Finance, Vol. 37, No. 2, Papers and Proceedings of the Fortieth Annual Meeting of the American Finance Association, Washington, D.C., December 28-30, 1981 (May, 1982), pp. 415-428

This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two‐period context. Previous papers have focussed on the “securities effect,” tending to essentially ignore the equally important “endowment effect” that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive.