[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.]

[This paper provides an analysis of the association between the accounting gain produced by an equity-for-debt swap and executive compensation. Our results suggest that the executives of firms completing a swap transaction experience an increase in cash compensation (salary plus bonus). The increase is largest both in absolute magnitude and in statistical significance for firms whose compensation plans are more "accounting-oriented" (i.e., firms whose executives would be expected to experience the greatest increase in compensation under the hypothesis that firm's compensation plan is not adjusted for the accounting gain produced by the swap). We also find that, on average, the value of the executives' personal equity holdings decreases in the period surrounding the announcement of the swap. The magnitude of this decrease is, on average, comparable in size to the increase in their compensation. However, there is some weak evidence that executives of firms whose compensation plans are more "accounting-oriented" experience a statistically significant increase in their total wealth (i.e., the sum of excess compensation and the value of personal equity holdings) as a result of the swap transaction.]

Abstract ABSTRACT: 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.

Richard A. Lambert, William N. Lanen, David F. Larcker, Executive Stock Option Plans and Corporate Dividend Policy, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 409-425

Abstract ABSTRACT: This paper provides an analysis of the association between the accounting gain produced by an equity-for-debt swap and executive compensation, Our results suggest that the executives of firms completing a swap transaction experience an Increase in cash compensation (salary plus bonus). The increase is largest both in absolute magnitude and in statistical significance for firms whose compensation plans are more "accounting-oriented" (i.e., firms whose executives would be expected to experience the greatest Increase in compensation under the hypothesis that firm's compensation plan is not adjusted for the accounting gain produced by the swap), We also find that, on average, the value of the executives' personal equity holdings decreases in the period surrounding the announcement of the swap. The magnitude of this decrease is, on average, comparable in size to the increase in their compensation. However, there is some weak evidence that executives of firms whose compensation plans are more "accounting-oriented" experience a statistically significant increase in their total wealth (i.e., the sum of excess compensation and the value of personal equity holdings) as a result of the swap transaction.