The use of official funds in debt reduction packages has been widely argued to amount to a creditor bailout. We analyze this question using a case study of Mexico's 1989 Brady deal. Using an option-based pricing model, we obtain pre- and postmarket values for Mexico's commercial debt and find that the market value inclusive of official funds went up only marginally. Consequently, Mexico obtained a large share of the benefits of the official funds and struck a favorable deal. The Brady debt reduction formula thus seems to offer an efficient framework for debt workouts. Recent events in Mexico confirm that view.

Abstract. This study examines the influence of accounting and capital market measures of firm performance on the reputations of corporate chief executives (CEOs). The empirical tests rely on pooled time‐series cross‐sectional data for approximately 900 top executives in about 500 firms drawn from 36 industries over the 1975–1987 period. CEO reputation measures are derived from securities analysts' annual evaluations of executive performance as reported by Financial World magazine. The study's results document a positive incremental association between profit performance and reputation, a finding consistent with the notion that accounting earnings convey information about CEO productivity beyond that present in stock returns. However, the sensitivity of CEO reputation to stock returns and earnings performance is modest, and the earnings‐reputation relation varies considerably across industry groups. Résumé. Les auteurs s'intéressent ici à l'influence qu'exercent sur la réputation des directeurs généraux de sociétés les mesures de la performance de l'entreprise relevant de la comptabilité et du marché des capitaux. Leurs tests empiriques s'appuient sur les données transversales de séries chronologiques groupées relatives à environ 900 cadres supérieurs de quelque 500 entreprises provenant de 36 secteurs d'activité, relevées entre 1975 et 1987. Les « mesures » de la réputation des directeurs généraux de sociétés sont dérivées de l'évaluation annuelle de la performance des cadres, produite par les analystes en valeurs mobilières, dont fait état le magazine Financial World. Les résultats obtenus révèlent une association prenant la forme d'un écart marginal positif entre la performance, en termes de profits, et la réputation, constatation qui corrobore la notion selon laquelle les bénéfices comptables livrent, au sujet de la productivité des directeurs généraux de sociétés, de l'information que ne livre pas le rendement des actions. La sensibilité de la réputation des directeurs généraux de sociétés au rendement de l'action et aux bénéfices est cependant modérée, et la relation bénéfices‐réputation varie largement selon les groupes sectoriels.

Abstract Reviews the book "Doing Business in Russia and the Other Former Soviet Republics: Accounting and Joint Venture Issues," by Adolf J.H. Enthoven, Jaroslav V. Sokolov and Alexander M. Petrachkov.

Abstract A major concern in the literature is that participation by subordinates may result in the generation of slack budgets (Antle and Eppen 1985). In one of the earliest studies, Williamson (1964) concluded that subordinate managers will try to influence the budget-setting process and obtain slack budgets. In conformance with Merchant (1985a), Lukka (1988), and Young (1985), budgetary slack is defined as the express incorporation of budget amounts that make it easier to attain. Managers may build slack into budgets by strategies that understate revenues and overstate costs (Schiff and Lewin 1970). Whether budgetary slack is a likely outcome in all participatively set budgets is a matter of conjecture. Lukka (1988) argued that a high degree of participation gives subordinate managers the opportunity to contribute directly to the creation of slack, and vice versa. However, the link between participation and slack is equivocal, since Cammann (1976), Merchant (1985a), and Onsi (1973) provide evidence that participation may lead to a reduction in slack, which can be attributed to the positive communication between managers so that subordinates feel less pressure to create slack. The literature proposes a link between participation and budgetary slack through two variables: superiors' budget emphasis in their evaluation of subordinate performance, and the degree of information asymmetry between superiors and subordinates. When participation, budget emphasis, and information asymmetry are high (low), slack will be high (low). For this study, samples of managers were drawn from manufacturing organizations in the Sydney, Australia, metropolitan area. Measures of budgetary stack and information asymmetry were developed. Support was found for low (high) slack when the predictors are high (low).

Abstract Reviews the book "Financial Reporting in Japan: Regulation, Practice and Environment," by T.E. Cooke and M. Kikuya.

[A major concern in the literature is that participation by subordinates may result in the generation of slack budgets (Antle and Eppen 1985). In one of the earliest studies, Williamson (1964) concluded that subordinate managers will try to influence the budget-setting process and obtain slack budgets. In conformance with Merchant (1985a), Lukka (1988), and Young (1985), budgetary slack is defined as the express incorporation of budget amounts that make it easier to attain. Managers may build slack into budgets by strategies that understate revenues and overstate costs (Schiff and Lewin 1970). Whether budgetary slack is a likely outcome in all participatively set budgets is a matter of conjecture. Lukka (1988) argued that a high degree of participation gives subordinate managers the opportunity to contribute directly to the creation of slack, and vice versa. However, the link between participation and slack is equivocal, since Cammann (1976), Merchant (1985a), and Onsi (1973) provide evidence that participation may lead to a reduction in slack, which can be attributed to the positive communication between managers so that subordinates feel less pressure to create slack. The literature proposes a link between participation and budgetary slack through two variables: superiors' budget emphasis in their evaluation of subordinate performance, and the degree of information asymmetry between superiors and subordinates. When participation, budget emphasis, and information asymmetry are high (low), slack will be high (low). For this study, samples of managers were drawn from manufacturing organizations in the Sydney, Australia, metropolitan area. Measures of budgetary slack and information asymmetry were developed. Support was found for low (high) slack when the predictors are high (low).]

[Current policy on how auditors should limit uncertainty about misstatements in auditee assertions is based on the audit risk model (AICPA 1992) that decomposes the components of audit risk as inherent risk (IR), control risk (CR), and detection risk (DR). The literature on the audit risk model has focused on a priori analyses of the model's assumptions and implications (see, e.g., Cushing and Loebbecke 1983; Kinney 1983, 1989, 1992; Leslie 1984), and auditors' risk assessments in experimental settings (see, e.g., Colbert 1988; Daniel 1988; Jiambalvo and Waller 1984; Libby et al. 1985). Absent are empirical studies that examine applications of the model in field settings. This article reports empirical evidence on auditors' IR and CR assessments in field settings by analyzing archival data drawn from the audit workpapers of KPMG Peat Marwick. As a part of audit planning, the firm requires its auditors to make and document IR and CR assessments for each assertion of each significant account.1 The assessments are made with respect to tolerable error, an algorithm-based measure of planning materiality at the assertion level.2 The data include approximately 5,000 risk assessments at the assertion level for trade accounts receivable, inventory, and trade accounts payable, on a total of 215 audit engagements. The data also indicate, for each assertion, whether a misstatement exceeding tolerable error was detected by the auditor. The data analysis considers four issues, the first of which is whether there is a statistical association between auditors' IR and CR assessments. A priori researchers (e.g., Cushing and Loebbecke 1983) argue that the audit risk model's multiplicative combination of IR and CR suggests independence between risk components, which contradicts auditors' conventional wisdom of dependence. The analysis in this study concludes that the dependence problem arises because (1) its event structure is ill-defined and (2) it fails to recognize that an auditor's assessments are conditional on his or her knowledge. A knowledge-based dependence may produce a statistical association between IR and CR. Contrary to expectation, the empirical evidence supports the conclusion of an insignificant association between IR and CR; however, in a predominance of cases, CR is assessed at the maximum probably for reasons of efficiency. The remaining issues pertain to the policy requirement of assertion-level risk assessments. Viewed generally over many audit engagements, current policy depends on the following premises: (1) the rate of misstatements varies over assertions, (2) auditors' risk assessments vary over assertions, and (3) the association between the rate of misstatements and auditors' risk assessments is positive (i.e., the assessments are accurate). The data analysis examines the empirical validity of each premise, and supports the first inasmuch as there are significant differences in the rate of detected misstatements over assertions for each account. However, auditors typically assess IR and CR at the same value for all assertions for an account, which is inconsistent with the second premise. When the data pertaining to all assertions for an account are included in the analysis, the association between IR and the rate of detected misstatements (after controlling for CR and DR) tends to be positive but low, which indicates modest support for the third premise. When the analysis includes only the "most important" assertion for each account, the association is considerably stronger. In general, auditors' risk assessments are consistent with a heuristic that deliberately assesses risk for an account's "most important" assertion but does so mechanically for other assertions. Taken as a whole, the results indicate a need either to reconsider the policy of multiple risk assessments for an account or to enhance auditors' ability to assess assertion-specific risk.]

Sourcing, Make-or-Buy decisions, Product quality, Unverifiable information

This study examines whether earnings changes convey information in bond markets and finds a significant positive (negative) reaction to unexpected earnings increases (decreases). The results are consistent whether earnings announcements precede or follow dividend announcements. Thus, earnings surprises convey information to bond markets and changes in firm value are split among bondholders and stockholders. This is in contrast to evidence from studies examining unexpected dividend announcements where bond price reaction is asymmetric. Cross-sectional analysis reveals that bond excess returns are positively related to earnings surprises.

We examine changes in the pricing and financial structure of large management buyouts in the 1980s. Over time, (1) buyout price to cash flow ratios rose in absolute terms (particularly in deals financed using public junk bonds); (2) required bank principal repayments accelerated, leading to sharply lower ratios of cash flow to total debt obligations; (3) private subordinated and bank debt were replaced by public junk debt; and (4) management teams and dealmakers took more money out of transactions up front. These patterns are consistent with an “overheating” phenomenon in the buyout market. Preliminary post-buyout evidence lends some support to this interpretation.