This paper examines the association between one specific change in executive compensation contracts (adoption of performance plans), changes in corporate capital investment, and security market performance. The empirical results indicate that (when compared to similar non-adopting firms) firms adopting performance plans exhibit a significant growth in capital expenditures and a favorable security market reaction to the announcement of the performance plan adoption. These results provide evidence that changes in executive compensation contracts are associated with changes in managerial decisions.

[Prior work has examined models in which the reciprocal cost allocation method yields allocation rates that are equal to the marginal costs of operating service departments. We extend this work by analyzing more general production functions for service departments and by incorporating uncertainty. The results demonstrate that the allocation rates derived from the reciprocal cost allocation method are random variables that, in general, are not equal to the expected marginal costs of operating the service departments. In particular, the reciprocal cost allocation rates are biased estimates of these expected marginal costs if any of the service departments operate at a point on their production functions at which the marginal physical product is not equal to the average physical product of their inputs. We also analyze three econometric procedures that provide consistent estimates of the marginal costs. The simulation results indicate that the standard deviations of these estimators are considerably larger than those of the reciprocal cost allocation rates. Because the estimates of the marginal costs provided by the reciprocal cost allocation method have a greater degree of bias, but a lower standard deviation than the estimates provided by the other methods, none of the methods provide estimators that are unambiguously best. Factors that affect the magnitudes of the bias and relative efficiency of the reciprocal cost allocation rates are also discussed.]

David F. Larcker, Short-Term Compensation Contracts and Executive Expenditure Decisions: The Case of Commercial Banks, The Journal of Financial and Quantitative Analysis, Vol. 22, No. 1 (Mar., 1987), pp. 33-50

Abstract ABSTRACT: This study examines whether executives have similar preferences regarding information which may be used in making strategic capital budgeting decisions. Measures of perceived importance for selected information characteristics were obtained from 53 senior-level executives involved in strategic capital budgeting decisions. The results suggest that (1) executives have similar informational preferences, (2) the preferred information characteristics depend upon which stage of the decision-problem identification, alternative development, or selection--is being considered by the executive, and (3) environmental and organizational structure variables are not associated with an executive's informational preferences. The potential implications of these results for management accounting system design and for future research are discussed.

We examine the profitability of a trading strategy which is based on a logit model designed to predict the sign of subsequent twelve-month excess returns from accounting ratios. Over the 1978–1988 period, the average annual excess return produced by the trading strategy ranges between 4.3% and 9.5%, depending on the specific measure of excess return and weighting scheme involved. However, our implementation of the Ou and Penman (1989) trading strategy in the 1978–1988 period, which is based on a logit model that predicts subsequent unexpected earnings- per-share from accounting ratios, does not earn excess returns.

In order for security prices to be informationally efficient, incentives must exist for traders to engage in costly information acquisition. This paper provides empirical evidence on this proposition. We observe that risk arbitrageurs (i.e., market participants who trade in securities of firms that are involved in mergers, tender offers, and voluntary liquidations) are able to generate private information regarding the success or failure of corporate reorganizations. Moreover, risk arbitrageurs earn substantial returns on their trading activities. These results suggest that security prices are sufficiently noisy to create incentives for costly information acquisition.

Executive compensation, Electric Utility industry, Production decisions, Production efficiency

Richard A. Lambert, David F. Larcker, An Analysis of the use of Accounting and Market Measures of Performance in Executive Compensation Contracts, Journal of Accounting Research, Vol. 25, Studies on Stewardship Uses of Accounting Information (1987), pp. 85-125