Auditing, Auditor size, Audit fees, Audit partnerships

Bala V. Balachandran, Ram T. S. Ramakrishnan, [Discussion of Internal Control and External Auditing for Incentive Compensation Schedules]: A Reply, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 182-183

Bala V. Balachandran, Ram T. S. Ramakrishnan, Internal Control and External Auditing for Incentive Compensation Schedules, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 140-171

In this article, the authors provide a unified approach to joint cost allocation for situations where allocation is needed. First, with the help of an illustration, the apparent weakness of Moriarity's scheme is discussed. Later, certain desirable properties of Louderback's method are shown. Employing their "propensity to contribute" concept, the authors utilize the desirable aspects of both the Moriarity and the Louderback schemes to come up with a model which is shown to be in the core. With game-theoretic concepts, a "modified Shapley Value" to allocate the joint cost is provided.

Ram T. S. Ramakrishnan, Anjan V. Thakor, Moral Hazard, Agency Costs, and Asset Prices in a Competitive Equilibrium, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 4, Proceedings of the 17th Annual Conference of the Western Finance Association, June 16-19, 1982, Portland, Oregon (Nov., 1982), pp. 503-532

This paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions. The model is cast in a financial market framework, thus leading to an identification of conditions sufficient for the existence of financial intermediaries. Intermediation is shown to improve welfare if informational asymmetries are present, and the information generated to rectify these asymmetries is potentially unreliable. The usual appeal to transactions costs to explain intermediation is not needed.

The design of managerial incentive contracts is examined in a setting in which economic agents are risk averse, and the actions of managers can affect asset returns which contain both systematic and idiosyncratic risks. It is shown that in the absence of moral hazard, owners of assets will insure managers against idiosyncratic risks, but with moral hazard, contracts will depend on both systematic and idiosyncratic risks. The traditional recommendation of asset pricing models, namely, to focus only on systematic risks, is thus proved to be valid only when there is no moral hazard. The major empirically testable predictions of the model are (1) managerial incentive contracts will generally depend on systematic as well as idiosyncratic risks, (2) idiosyncratic risks will generally be important in investment decisions, (3) the managers of firms with relatively high levels of idiosyncratic risks will have compensations that are less dependent on their firms' excess returns, and (4) the compensations of managers of larger firms will be relatively more dependent on the excess returns of their firms.

The design of managerial incentive contracts is examined in a setting in which economic agents are risk averse, and the actions of managers can affect asset returns which contain both systematic and idiosyncratic risks. It is shown that in the absence of moral hazard, owners of assets will insure managers against idiosyncratic risks, but with moral hazard, contracts will depend on both systematic and idiosyncratic risks. The traditional recommendation of asset pricing models, namely, to focus only on systematic risks, is thus proved to be valid only when there is no moral hazard. The major empirically testable predictions of the model are (1) managerial incentive contracts will generally depend on systematic as well as idiosyncratic risks, (2) idiosyncratic risks will generally be important in investment decisions, (3) the managers of firms with relatively high levels of idiosyncratic risks will have compensations that are less dependent on their firms' excess returns, and (4) the compensations of managers of larger firms will be relatively more dependent on the excess returns of their firms.