Aggregation, Costs, Information economics

Abstract The article comments on the analysis of two researchers on in-process inventories and multiproduct production systems. In a previous article, the author assumed that the in-process inventories are constant from period to period. He explains that the researchers' analysis did not define what the level of activity represents in this context. They also implicitly assumed that the units of in-process inventory are complete with regard to the internal inputs used in producing them. In an analysis designed to consider in-process inventories, such assumption is considered odd.

Abstract In recent years accountants have increased the emphasis on their role as suppliers of information for management decisions. This is partly a broadening of the scope of accounting and partly a recognition that more and better information can be produced. Accountants and other information producers must play a key role in deciding which information should be produced. However, the methodology for making these decisions is lacking. This article assumes that the criterion for designing information systems is that value should exceed cost. The purpose of the article is to provide a framework for determining the value of a change in the information system. In order to achieve this, the article formally develops individual components that are required to calculate the expected payoff for a particular information system. Relevance has been suggested as an important criterion for selecting information. In fact, many authors consider that a signal can only be called information if it is relevant to some decision by the receiver, i.e., relevant information is a redundant term. These discussions usually imply that a signal is relevant if its receipt changes the decision. Thus, relevance requires specification of both a decision maker and a decision.

Prior research on the factors influencing the use of debt covenants restricting dividends and additional borrowing is extended by considering management incentives. When alternative incentive variables are considered separately, we find covenants have a significant, negative relation to CEO cash compensation, an insignificant relation to the value of CEO equity held, and significant positive relations to both the ratio of the value of CEO equity holdings to cash compensation and the fraction of equity held by the CEO. In two-stage simultaneous equations models, only the latter is significant when jointly considered with each of the other incentive variables.

Recently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one- and two-period-ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one- and two-period-ahead residual income, current capital investment, and start-of-period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one-period-ahead residual income forecast and a positive coefficient on the two-period-ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.

Abstract Recently, much of the research into the relation between market values and accounting numbers has used, or at least made reference to, the residual income model (RIM). Two basic types of empirical research have developed. The “historical” type explores the relation between market values and reported accounting numbers, often using the linear dynamics in Ohlson 1995 and Feltham and Ohlson 1995 and 1996. The “forecast” type explores the relation between market value and the present value of the book value of equity, a truncated sequence of residual income forecasts, and an estimate of the terminal value at the truncation date. The analysis in this paper integrates these two approaches. We expand the Feltham and Ohlson 1996 model by including one‐ and two‐period‐ahead residual income forecasts to infer “other” information regarding future revenues from past investments and future growth opportunities. This approach results in a model in which the difference between market value and book value of equity is a function of current residual income, one‐ and two‐period‐ahead residual income, current capital investment, and start‐of‐period operating assets. The existence of both persistence in revenues from current and prior investments and growth in future positive net present value investment opportunities leads us to hypothesize a negative coefficient on the one‐period‐ahead residual income forecast and a positive coefficient on the two‐period‐ahead residual income forecast. Our empirical results strongly support our hypotheses with respect to the forecast coefficients.

A two-date rational expectations model is analyzed. At the first date, traders can privately acquire a costly signal that provides imperfect information about a public report that will be issued at the second date. Equilibrium characterizations are provided for the fraction of traders that become informed and the informativeness of the first-date price, as well as the price change variance and the expected trading volume at the second date. Comparative statics identify how the above variables are influenced by changes in the information content of the public report, and in particular how market phenomena at the public release date are influenced by endogenous prior information acquisition and trading in response to the forthcoming public release.

Abstract. This paper examines a two‐consumption date principal/agent model in which the manager receives private information at the first date. After observing his private information, the manager (agent) selects both the capital and personal effort he will invest in production. Operating cash flows are realized at both dates and any uninvested funds at the initial date are either paid out as a dividend to the equityholders (principal) or invested in zero net present value investments that require no effort. The aggregate cash flow at the second date is paid out as a dividend to the equityholders. The compensation contract specifies the manager's compensation as a function of the information available at the two dates. The key issue is whether it is valuable to have the contract based on the agent's communication of his private information. As in a single‐consumption date model, communication may permit the implementation of more efficient incentives with respect to the manager's action choices. In addition, communication can facilitate the smoothing of the manager's consumption over the two dates. Direct communication can have positive value, but the analysis identifies a number of factors that can result in communication having no value. These factors include no direct preference for effort, public reporting of the private information at the second date, access to personal investments, and access to a dividend policy that will costlessly convey the private information through first‐date dividends. Although access to personal investments may make communication redundant (since it is an alternative means of smoothing consumption), the analysis identifies conditions under which the equityholders would prefer to use communication and restrict the manager's access to personal investments (since it can have a negative effect on incentives). Résumé. Les auteurs examinent un modèle mandant‐mandataire à deux dates de consommation dans lequel le gestionnaire reçoit de l'information privilégiée à la première des deux dates. Après avoir observé l'information privilégiée, le gestionnaire (c'est‐à‐dire le mandataire) sélectionne le capital et l'effort personnel qu'il investira dans la production. Les flux monétaires provenant de l'exploitation sont réalisés aux deux dates, et tous les fonds qui ne sont pas investis à la date initiale sont soit versés sous forme de dividendes aus. actionnaires (c'est‐à‐dire les mandants), soit investis dans des placements à valeur actualisée nette nulle et qui n'exigent aucun effort. Les flux monétaires totaux à la seconde date sont versés sous forme de dividendes aux actionnaires. Selon le contrat de rémunération, la rétribution des gestionnaires est fonction de l'information disponible aux deux dates. Le principal problème consiste à déterminer si le fait de baser le contrat sur la communication par le mandataire de l'information privilégiée dont il dispose présente un intérêt. Comme dans un modèle à une seule date de consommation, la communication peut permettre la mise en place de stimulants plus efficients en ce qui a trait au choix du gestionnaire concernant son plan d'action. En outre, la communication peut faciliter le nivellement de la consommation du gestionnaire entre les deux dates. La communication directe peut avoir une valeur positive, mais l'analyse permet de cerner plusieurs facteurs qui peuvent retirer toute valeur à une communication. Au nombre de ces facteurs figurent: l'absence de préférence directe pour l'effort, la communication publique de l'information privilégiée à la seconde date, l'accès aux placements personnels et l'accès à une politique de dividendes qui livrera sans frais l'information privilégiée par le truchement du versement de dividendes de la première date. Bien que l'accès aux placement personnels puisse rendre la communication redondante (puisqu'il s'agit d'un moyen de rechange de niveler la consommation), les auteurs définissent les conditions dans lesquelles les actionnaires préféreraient utiliser la communication et restreindre l'accès du gestionnaire aux placements personnels (puisqu'ils peuvent avoir un effet négatif sur les stimulants).