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 Barley 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 Barley 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.

Reviews the book "New Introduction to Financial Accounting," 2nd ed., by Robert G. May, Gerhard G. Mueller and Thomas H. Williams.

Reviews the book "Accounting Information Systems and Business Organizations," 2nd ed, by Barry E. Cushing.

This paper studies the extent to which qualitative features of Walrasian equilibria are refutable given a nite data set. In particular, we consider the hypothesis that the observed data are Walrasian equilibria in which each price vector is locally stable under t^atonnement. Our main result shows that a nite set of observations of prices, individual incomes and aggregate consumption vectors is rationalizable in an economy with smooth characteristics if and only if it is rationalizable in an economy in which each observed price vector is locally unique and stable under t^atonnement. Moreover, the equilibrium correspondence is locally monotone in a neighborhood of each observed equilibrium in these economies. Thus the hypotheses that equilibria are locally stable under t^atonnement, equilibrium prices are locally unique and equilibrium comparative statics are locally monotone are not refutable with a nite data set. 1

Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. The authors show that this discontinuity disappears if they allow an agent in the economy to introduce a new asset when such redundancies occur. This enables them to prove generic existence with incomplete markets using a standard path-following argument. Moreover, the authors' approach suggests a simple algorithm for computing equilibria when markets are incomplete. They demonstrate this by computing equilibrium for a numerical example.

Using Moody’s Ultimate Recovery Database, we estimate a model for bank loan recoveries using variables reflecting loan and borrower characteristics, industry and macroeconomic conditions, and several recovery process variables. We find that loan characteristics are more significant determinants of recovery rates than are borrower characteristics prior to default. Industry and macroeconomic conditions are relevant, as are prepackaged bankruptcy arrangements. We examine whether a commonly used proxy for recovery rates, the 30-day post-default trading price of the loan, represents an efficient estimate of actual recoveries and find that such a proxy is biased and inefficient.

We provide evidence on the potential for bidder wealth gains in bancassurance mergers by examining a sample of such mergers in the United States and abroad. These combinations are expected to produce positive wealth gains if there are synergies between these two types of financial firms. We find positive bidder wealth effects that are significantly related to economies of scale (as measured by the size of the target relative to the bidder), potential economies of scope, and the locations of the bidders and targets. These results suggest that the bancassurance architectural structure for financial firms does offer some benefits and thus may become more prominent in future years.

We explore the impact of the child care tax credit in the U.S. income tax system on the labor supply decisions of married women with young children by incorporating the cost of child care into a structural labor supply model. Using data from the 1986 NLSY, we find that government subsidies to child care increase labor supply substantially. Our policy simulations show that an increase in the value of the child care tax credit (i.e., percent of expenditures subsidized) would have a much larger effect on labor supply than an increase in the annual expenditure limits of the subsidy or making the subsidy refundable.

Firms have increasingly adopted open work environments. Although openness is thought to have benefits, it could also expose firms to an unanticipated cost. An open (closed) internal reporting environment makes it more (less) likely that managers will observe a colleague's communications with senior executives. This increase in what one manager knows about another manager's communication to senior executives could facilitate employee collusion to extract resources from the firm. To test whether internal reporting openness results in more collusion, we conduct an experiment in which two managers each make separate reports to the firm about cost information they know in common but that remains unknown by the firm. Because both managers face the same truth‐inducing contract, conventional economic theory predicts that they will not collude to misreport costs regardless of reporting openness. However, using behavioral theory involving trust and reciprocity, we predict and find that managers honor their nonbinding collusive agreements and successfully collude more often in an open versus closed internal reporting environment, leading to lower firm welfare in the open environment. These results suggest that firms should consider how the cost of collusion compares to the benefits of openness.