Journal Article The Role of Promotion in Inducing Specific Human Capital Acquisition Get access Canice Prendergast Canice Prendergast Graduate School of Business, University of Chicago Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 108, Issue 2, May 1993, Pages 523–534, https://doi.org/10.2307/2118343 Published: 01 May 1993

This paper presents a series of simple but realistic examples in which common algebraic indexing conventions are not so convenient. In particular, it analyzes the difficulties caused by the conventions that each model component must have a fixed number of indices and that the order of the indices is significant to their meaning. To deal with these difficulties compensating extensions to algebraic notation are proposed. The proposed notation is compared to existing notation in terms of the human abilities to understand, maintain and verify model descriptions.

[Positive theory hypothesizes that accounting-based debt covenants are important factors in accounting choices. According to Watts and Zimmerman's (1990) survey, this hypothesis has generally been supported by earlier studies. That is, the closer the firm is to violating accounting covenants, the more likely managers would choose income-increasing methods. Recently, research attention has shifted to the event of covenant violation itself. For example, Beneish and Press (1993) estimate debtors' costs of violations. Further, DeFond and Jiambalvo (1991) and Sweeney (1992) examine debtors' manipulative behavior before covenant violations. These latter studies find that violations of accounting covenants are costly to debtors, who generally try to manipulate accounting numbers to avoid or defer technical defaults. The present study also focuses on the event of violation, but from the perspective of creditors. It explains two aspects of creditors' decision process following covenant violations. First, we find that creditors react to actual violations in two distinct ways: they could either waive the violations or could demand certain conditions such as early payment, increase of interest rate, reduction of borrowing base, and so forth. Second, we also model creditors' decisions either to waive or to call the debt using the option-pricing framework. We hypothesize that the determinants of waiver decisions include the firm's bankruptcy probability and leverage ratio. Moreover, maturity, size, and security of the debt issue involved should also be important factors in the waiver decisions. Empirically, we find that creditors are more likely to grant a waiver to the firm with a lower estimated probability of bankruptcy and a lower leverage ratio. Further, debt issues that are secured or smaller in size are more likely to have violations waived than unsecured or larger issues. The maturity variable, however, is not found a significant determinant of the waiver decisions. Using the factors identified in this study, managers can assess the probability of receiving a waiver and prepare necessary strategies to ensure the firm's survival. Auditors also can use those factors to assess the possibility of the client's receiving a waiver of covenant violation as part of their evaluation of the firm's ability to continue as a going concern. Moreover, since debtors prefer waivers to nonwaivers, the prospect of receiving a waiver is likely to influence managerial behavior, including the choice of accounting alternatives. Managers expecting a nonwaiver from creditors would have more incentive to select accounting methods to avoid covenant violations.]

This study examines the ten U.S. provinces of the largest religious order of Catholic priests and brothers, the Jesuits, and explores the structural/organizational adaptations which these ten provinces employed to accommodate dramatic reductions in membership. The organizational placement of roughly 11,000 individual members of these provinces is traced between the years 1965 and 1979. The research indicates that, by increasing interorganizational cooperation and exchange of information and by enhancing the administrative component, these organizations were able to reduce slack resource requirements and were largely able to protect their core operations from the impact of decline. These observations differ dramatically from those reported in typical, for-profit organizations (e.g., Harrigan 1980). Finally, to the extent that cutback did reach the core, an attempt is made to examine the width and depth of retrenchment at both the divisional and departmental levels and to determine whether the mode of retrenchment affected individuals' willingness to subsequently invest in the organization. The analysis suggests that narrower, deeper cuts at the departmental level may have had a positive effect on members' willingness to invest in the organizations, while narrower, deeper cuts at the division level may have contributed to more members deciding to leave the organizations.

The advantages of the Geometric Mean or Log Strategy have been well documented and recommended by many because a follower of this strategy will ultimately outperform in the long-run any other significantly different strategy, almost surely. This paper provides both theory and evidence to indicate that the “long-run” can be quite long in risky situations. These cases are typified by many business ventures and undiversified speculative investments in OTC securities. On the other hand, it is shown that the Log Strategy can “virtually dominate” in a moderate number of plays in cases when risk is low.

Abstract One of the most common decisions facing an internal auditor is choosing which line items to investigate. An extensive literature (Dworin and Grimlund 1984; Leslie et al. 1980; Menz& fricke 1984; Teitlebaum and Robinson 1975) deals with the statistical and decision-theoretic aspects of his choice. This paper expands on previous work by adding a strategic source of errors: dishonest employees. It addresses the question of how the presence of strategic errors affects the relationship between the auditor's testing strategy and item value. I show that incorporating strategic errors can lead to audit strategies similar to Physical Units and Dollar Units Sampling. I highlight the assumptions driving the results by contrasting a firm's (or internal auditor's) use of an optional test in four stylized models of accounts receivable. The first model examines the firm's behavior when faced with nonstrategic (statistical) billing errors. In this model the accounting system generates random errors that result in over- or underbilling customers. The firm can use a costly, imperfect test to remove errors before the bills are sent out. In this nonstrategic model the firm randomizes and tests an item if and only if the benefit is greater than the cost. Because the amount of billing error is unrelated to the item value, there is no clear link between the firm's testing decision and the value of the line item. The second billing model adds the possible existence of dishonest employees who can steal from line items. A dishonest employee makes two decisions. He decides whether to steal from the line item, and, if he steals, he chooses the amount of the theft. A dishonest employee would steal the entire item if he were certain that the firm would never test that item. The dishonest employee's behavior forces the firm to consider the value of the item in determining the region of untested items. Specifically, low value items are never tested. As in many strategic models, the interaction with dishonest employees may lead to randomization. In particular, the randomized testing strategy can look like Stratified Physical Units Attributes Sampling (Leslie et alt 1980). The firm sorts items into different groups and each item in a group has the same probability of being tested. The third model contains only the statistical errors of incorrectly adding or deleting a sales discount, a percentage of the item value. Since the testing gain is directly related to the value of the line item, the firm's strategy depends on an item's value. The firm always tests high value items, and never tests low value items. The fourth model adds potentially dishonest employees who can pros vide unearned sales discounts to their confederates. In this model the firm stratifies items into three groups. It never investigates small items, always investigates large items, and randomizes over intermediate value items with probabilities roughly proportionate to the value of the item. This procedure is similar to a common audit procedure, Dollar Unit Cell Width Sampling (Leslie et al. 1980).

I examine the anomalous behavior of the taxable and tax-exempt yield curves. Long municipal yields appear too high relative to the equivalent after-tax yield that can be earned in Treasury or corporate bonds. I discuss existing explanations of the problem and propose a simple model that relates the yields of taxable bonds to the yield curve for par tax exempts. The ratio of the tax-exempt yield to the taxable yield increases with maturity in the model, so it is consistent with observed phenomena such as inverted yield curves for taxables and contemporaneous rising yield curves for tax exempts. Statistical and descriptive comparisons between the yields predicted.by the model and observed yields on par bonds that the model has some promise in explaining the apparent anomalies in the behaviors of the two yield curves. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.