Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggregation leads to three findings: First, a 1981 tax law altered the frequency of estimate revisions and method changes. Second, firms adopting income-increasing method changes for all assets experience worse performance than those adopting such changes only for new assets. Finally, non-income-increasing policy changes are associated with changes in investment opportunities.

The empirical managerial accounting literature has failed to produce a substantive cumulative body of knowledge. This literature has not matured beyond describing practice to developing and testing theories explaining observed practice, like other areas of accounting research. While the lack of publicly available data is a popular reason for this literature's underdeveloped state, it is not the only one. Other conjectures include: its inductive approach, researchers’ incentives, its use of non-economics-based frameworks, the lack of empirically testable theories, and its emphasis on decision making, not control.

Firm size has been used as a proxy for the firm's political costs and hence managers' proclivity to choose income reducing accounting procedures. This study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates. The latter are one component of a firm's political costs. The roughly fifty largest U.S. exchange-listed firms, in particular oil and gas companies and manufacturing firms, have significantly higher worldwide tax rates than other firms. These higher tax rates are observed primarily after the implementation of the U.S. 1969 Tax Reform Act and after the OPEC countries raised their tax rates on U.S. oil producers. The findings, which are insensitive to alternative sources of data, alternative measures of firm size, and alternative measures of effective tax rates, are consistent with the use in previous studies of firm size as a proxy for the firm's political costs.

Governmental accounting, Municipal budgeting, Consolidation, Municipal accounting system

Budgeting, Uncertainty, Non profits, Fixed budgets

[Accounting numbers are an integral part of the firm's formal and informal contracts (Watts 1974; Holthausen and Leftwich 1983; Watts and Zimmerman 1986; Ball 1989; Christie 1990). This contracting-based theory of accounting is based on the premise that managers choose particular accounting procedures either efficiently to maximize the value of the firm, or opportunistically to make the manager better off at the expense of some other contracting party (Holthausen 1990). The relative amounts of efficiency and opportunism depend on controls on managers' accounting discretion. Such controls include monitoring by the board of directors, competition from the product markets and from within the firm by other managers, and the discipline of the market for corporate control. It is difficult to determine whether managers make accounting choices to maximize firm-value. Empirical tests often assume opportunism and usually reject the null hypothesis of no association between accounting choice and firm-specific variables such as leverage (Christie 1990). However, many of the empirical regularities interpreted as evidence of opportunism can also be interpreted as occurring for efficiency reasons, which serves to confound these findings (Watts and Zimmerman 1986; Watts and Zimmerman 1990; Sweeney 1994). The few tests based on efficiency rationales find an association between the contracting variables and accounting choice (Zimmer 1986; Whittred 1987; Malmquist 1990; Mian and Smith 1990a). This paper measures the relative influences of efficiency and opportunism in accounting choice by examining a non-random sample that maximizes the probability of finding opportunism. Economics and finance studies document that corporate control actions such as tender offers and proxy fights discipline opportunistic managers. Therefore, we select a sample of takeover targets and examine this sample for evidence of managerial opportunism in choice of accounting procedures. A key assumption of our tests is that, prior to the control action, corporate control targets contain more non-value-maximizing managers than surviving firms in the same industry that were not targets of corporate control actions. This assumption allows us to use surviving firms' accounting procedures as the benchmark for the efficient accounting choice. In this application of Alchian's (1950) "economic Darwinism," surviving firms on average are more efficient than non-surviving firms. An unbiased estimate of accounting opportunism in this sample is an estimate of the upper bound on the amount of accounting opportunism in a random sample of firms. If there is little or no opportunism in our non-random sample, then for firms generally we can discount opportunism as an explanation for choice of the three accounting methods we study. Efforts to explain choice of accounting methods could then be redirected towards efficiency explanations. We measure opportunism by comparing the frequency of choice of income-increasing procedures by takeover targets with the corresponding frequency of their surviving industry peers. We find that takeover targets select income-increasing depreciation, inventory, and investment tax credit (ITC) accounting methods more frequently than their surviving industry peers in up to 11 years preceding the control action. Our analysis includes a multiple regression that controls for efficient choice of accounting methods. Our estimate of the upper bound on the frequency of opportunism is small relative to the mean choices of surviving firms. We conclude that some accounting opportunism exists in the takeover targets, but that efficiency is the more important explanation of accounting choice. However, while the frequency of opportunism is relatively small, the dollar effect on retained earnings of selecting an income-increasing method is large. For the median target firm, the after-tax effect on retained earnings if the firm had been on the alternative method is about 26 percent for depreciation, 9 percent for inventory, and around 5 percent for the ITC.]

[This paper reviews and critiques the positive accounting literature following publication of Watts and Zimmerman (1978, 1979). The 1978 paper helped generate the positive accounting literature which offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in the debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.]

[This paper examines the hypothesis that managers reduce reported earnings during labor union contract negotiations relative to earnings released before and after contracts are negotiated. Analyzing earnings around labor negotiations provides evidence regarding when managers manipulate accounting earnings and, hence, information regarding the costs and benefits of managing earnings. We find no evidence of lower than expected earnings during negotiations. Time series of quarterly and annual unexpected earnings, using several measures of expected earnings, are examined around labor talks for a sample of 105 unionized companies over the period 1968-1981. Both random and matched samples of firms not engaged in labor negotiations also are chosen. The time series of earnings during labor talks for the unionized sample is indistinguishable from that of the random and matched samples. An analysis of these firms' quarterly earnings time-series properties and their abnormal stock returns suggests that in this sample period unionized firms had less incentive to reduce earnings because they already were performing poorly.]

This paper raises the often-ignored, positive question of why firms con allocations can act as a lump-sum tax which reduce the manager's consumption of perquisites and that cost allocations can serve as useful proxy variables for certain difficult-to-observe costs. These examples suggest that cost allocations might be useful devices for controlling and motivating managers.