This paper reports evidence that dissident stockholders who wage a proxy contest for board seats typically site poor earnings rather than poor stock price performance as necessitating the proposed hostile management change. Consistent with this finding, sample firms' pre-contest accounting returns are systematically below-market, whereas their pre-contest stock returns are not. During an election campaign, incumbent managers apparently exercise their accounting discretion to paint a favorable picture of their own performance to voting stockholders. If elected, dissidents tend to take an immediate earnings ‘bath’ which they typically blame on the poor decisions of prior management.

This paper presents evidence that petroleum firms whose financial statements were adversely affected by Statement of Accounting Standards No. 19 (SFAS-19) increased the rate at which they changed auditors during the full cost/successful efforts controversy. Firms relatively unaffected by SFAS-19 experienced no such increase in auditor change rates. While some important theoretical and empirical limitationns are encountered, the evidence is generally inconsistent with the accounting irrelevancy view that SFAS-19 had no economic consequences for petroleum firms. Auditor-client disagreement on this accounting standard appears to be an important determinant of the decision to change auditors. However, there is no observed tendency for firms to switch to auditors with whom they agree on petroleum accounting.

Regulators and small audit firms allege that audit firm size does not affect audit quality and therefore should be irrelevant in the selection of an auditor. Contrary to this view, the current paper argues that audit quality is not independent of audit firm size, even when auditors initially possesses identical technological capabilities. In particular, when incumbent auditors earn client-specific quasi-rents, auditors with a greater number of clients have ‘more to lose’ by failing to report a discovered breach in a particular client's records. This collateral aspect increases the audit quality supplied by larger audit firms. The implications for some recent recommendations of the AICPA Special Committee on Small and Medium Sized Firms are developed.

Human resources accounting, Human capital, Hold up problem

[The proliferation of control contests for large public corporations at 50%+ premiums above market illustrates the wide divergence between open-market stock prices and equity exchange values. This paper considers equity valuation in corporate control transactions-e.g., management buyouts and hostile takeovers-that engender potentially severe manager-stockholder conflicts. These conflicts generate a demand for independent assessments of equity values by investment bankers who specialize in these appraisals. The paper provides evidence from (1) a large sample of fairness opinions on management buyouts, and (2) a small sample of investment bankers' working papers which indicates that investment bankers' valuation techniques make extensive use of accounting data. This demand for accounting information in equity valuation is distinct from that previously recognized in the capital markets or contracting literatures.]

The proliferation of control contests for large public corporations at 50% + premiums above market Illustrates the wide divergence between open-market stock prices and equity exchange values. This paper considers equity valuation in corporate control transactions-e.g., management buyouts and hostile takeovers-that engender potentially severe manager-stockholder conflicts. These conflicts generate a demand for independent assessments of equity values by investment bankers who specialize in these appraisals. The paper provides evidence from (1) a large sample of fairness opinions on management buyouts, and (2) a small sample of investment bankers' working papers which indicates that investment bankers' valuation techniques make extensive use of accounting data. This demand for accounting information in equity valuation is distinct from that previously recognized in the capital markets or contracting literatures.

[This study investigates the accounting decisions made by managers of 64 New York and American Stock Exchange firms who proposed to purchase all publicly-held common stock and "go private" during 1973-1982. These management buyouts engender potentially severe conflicts of interest for insider-managers, who both have a fiduciary duty to negotiate fair value for the publicly-held shares and are themselves the purchasers of those shares. Although managers virtually always engage an independent investment banker to evaluate the offer terms, the typical management buyout nonetheless generates litigation by public stockholders who claim their compensation is inadequate. Because the courts and investment bankers employ earnings-based valuation methods to assess fair value, managers have incentives to understate reported income in attempts to reduce the buyout compensation. However, a variety of tests that employ the recently developed accrual methodology reveal no indication that managers of sample firms systematically understated earnings in periods before a management buyout of public stockholders.]

This study investigates the accounting decisions made by managers of 64 New York and American Stock Exchange firms who proposed to purchase all publicly-held common stock and "go private" during 1973-1982. These management buyouts engender potentially severe conflicts of interest for insider-managers, who both have a fiduciary duty to negotiate fair value for the publicly-held shams and are themselves the purchasers of those shares. Although managers virtually always engage an independent investment banker to evaluate the offer terms, the typical management buyout nonetheless generates litigation by public stockholders who claim their compensation is inadequate. Because the courts and investment bankers employ earnings-based valuation methods to assess fair value, managers have incentives to understate reported income in attempts to reduce the buyout compensation. However, a variety of tests that employ the recently developed accrual methodology reveal no indication that managers of sample firms systematically understated earnings in periods before a management buyout of public stockholders.

This paper studies the dividend policy adjustments of eighty NYSE firms to protracted financial distress as evidenced by multiple losses during 1980-85. Almost all sample firms reduced dividends, and more than half apparently faced binding debt covenants in years they did so. Absent binding debt covenants, dividends are cut more often than omitted, suggesting that managerial reluctance is to the omission and not simply the reduction of dividends. Moreover, managers of firms with long dividend histories appear particularly reluctant to omit dividends. Finally, some dividend reductions seem strategically motivated, e.g., designed to enhance the firm's bargaining positions with organized labor.