research opportunities in management accounting robert s. kaplan journal of management accounting...

Research Opportunities in Management Accounting

Robert S. Kaplan

Journal of Management Accounting Research (1993)

Research Opportunities in Management Accounting (1) Limitations of statistical analysis to test emerging

theories The role for analytical research Role for design research vs. analysis research

The new research agenda for management accountants should encompass mode design and less analysis

The new research should like engineering and less like science

The new research should take basic principles and apply them to the new environment in which management accounting is being practiced

The researchers have to learn how to perform and evaluate research whose output is something new: a prototype, a management accounting system that seems to work, according to criteria they develop, in an actual setting

Research Opportunities in Management Accounting (2)

Role for Field Research “What-is” research

Tested theories that had been influential and in existence long enough for company practice to have change based on the theories

“What’s new” research Observing and documenting the changes and

innovations now underway in organizations Researchers associate themselves with the

organization to become intimately familiar with the circumstances of such experiments and the process of implementation and change

Research Opportunities in Management Accounting (3)

Role for Field Research “What’s new” research

The research output: Describe what practitioners believe and the

design principles that guided their action Document the historical circumstances that led

to the innovation, and the principles of learning the practitioner used

A priori predictions about the types of resistances the design innovation will encounter and its likelihood of success

The researcher must identify opportunistically innovating companies

Research Opportunities in Management Accounting (4) Role for Field Research

“What’s new” research Conduct in-dept observation and

documentation to describe the management accounting innovation

Describe practice Formulate theories that provide a

conceptual framework to explain the successful innovations The theories can then be tested using normal

science investigative methods when widespread adoption of the innovation begins to pervade practice


“To-be” research Active participants in the change process Required when adoption of new methods is

slow or unlikely The researcher becomes like the

practitioner, a part of the design and implementation process, and hence come closer to developing not only a more complete theory of management accounting, but contributing to a more general theory of management


“To-be” research Longitudinal action-oriented research Research on new settings

A management accounting innovation has yet to be tried in a particular setting

Active role of researcher: extend and customize the innovation to that setting

Design research: Developing and evaluating new systems Attempting to identify some of the different

or unique features that arose in the new settings

Being sensitive to implementation concerns


“To-be” research Research on implementation

Explore the wide set of issues that arise when attempting to implement new management accounting concepts

Research on integration Who does what?

Situations still arise when normal science methods can and should be productively employed

The longitudinal and action research methods may require a greater maturity and knowledge of individual and organizational behavior

Field Research Methods in Management Accounting

S. Mark Young

Accounting Horizons (1999)

Introduction

Sources disciplines: anthropology, sociology and business

Unique characteristics: people interactions

Major influence: Kaplan (1983)

The Range of Field Research Methods (1)

Depends on levels of observation, interaction and participation with organizational members

Outsider vs. insider perception Adler and Adler (1987): based on the

degree of researcher involvement The Chicago School of Sociology Existential Sociology Ethnomethodology

The Range of Field Research Methods (2) The Chicago School of Sociology

Stages: Direct observation (observe members) Direct but detached interaction (interact with

members) Firsthand participation in member’s activities

(participate with members) Characters:

Researcher attempt to remain objective Researcher adopt an overt role and

acknowledge to organizational members that they are conducting a study

Strive to not become emotionally involved as organizational members to not risk influencing the environment they are studying

The Range of Field Research Methods (3) The Existential Sociology

Investigates participation Fundamental assumption: people in

organizations tend to present (at least) two sides of their behavior and activities Presented to outsiders (impression

management) Presented to insiders

Researcher rules: Shed their objective detachment Become an insider to the organization Establish relationships with organization

members to gather information and tp drwa on members’ subjective experiences

Use combination of overt and covert roles

The Range of Field Research Methods (4) Ethnomethodology

The peripheral membership role Researchers seek an insider’s viewpoint and

take part in social activities Researchers do not assume leadership roles or

participate in the core activities of the group Researchers may decide to restrict their

involvement because they do not want to participate in some of the group’s activities

The Active Membership Role Researchers moves into a more central role in

the organization Researchers ascend to a higher level of insider

status by interacting with members as colleagues and co-participants in the groups’ core activities

The Range of Field Research Methods (5) Ethnomethodology

The complete membership role Researchers literally go native and become

bona fide members of a group with co-equal status in all ways

Type: opportunist vs. convert Management accounting

Chicago school Field research in management accounting is still

its infancy and many researchers are in a “learning-by-doing” phase of their own development

Many of researchers have been schooled in the logical empiricist tradition

Contributions of Field Research to The Management Accounting Literature

Testing and developing theories with data not obtainable using other research methods

Raising new research questions Informing other research methods Understanding the limitations of the

outsider’s view

Advancing Our Use of Field Methods

Learning by doing Apprenticeships with field researchers Forge relation with managers and

business people involved with their own institutions

Joint the practitioner forums Formal coursework: field research,

training in specific techniques, and study on philosophy of science

Directions in Accounting Research: NEAR and FAR

Accounting Horizons (1996)

William H. Beaver

Factors Affecting Directions in Accounting Research (1)

Exogenous factors: arise “outside” of the influence of the accounting academic community Applications from other disciplines (Finance,

Information Economics, Behavioral Sciences) Greater data availability at lower cost (CRSP,

COMPUSTAT, I/B/E/S, GLOBAL VANTAGE, OSIRIS) Changes in the financial reporting environment

(changes in event, transaction, and nature of the regulatory oversight: changes in accounting standards)

Factors Affecting Directions in Accounting Research (2)

Endogenous factors: are those that largely lie within the influence of the academic accounting community Journals (Journal of Accounting Research –

empirical accounting research; Journal of Accounting and Economics – positive accounting theory research)

Annual conferences Sections of the profession association Promotion policies at colleges and universities Creative process of talented individuals

NEAR Directions Sources:

Accounting doctoral seminar on security price research at Stanford

Research currently in progress See Figure 1 at page 116 Features of NEAR:

The number of nodes in which research is actively taking place

The proportion of research that is taking place in nodes that are subcategories of subcategories

There is an paucity of research that has opened “new” nodes at a higher level in the hierarchy (synthesis vs. fragmentation)

Personal Examples of NEAR (1) The Pricing of Discretionary Accruals

“Accrual Management” node Test the relationship of security prices and

discretionary portion of loan loss Discretionary and non-discretionary Particular industry and particular accrual Findings: indicate that the nondiscretionary

portion is negatively priced and, as predicted, the discretionary portion is significantly less negative priced

Personal Examples of NEAR (2) The Value-Relevance of SFAS No. 107: Fair

Value Disclosures “Accounting Data as Measurement” node SFAS 107 vs. SFAS 33: similarities and

differences Dependent variable: the difference between

market value and the book value of equity; Independent variable: the difference between SFAS 107 fair value and the respective book values of five categories, investment securities, loans, deposits, long-term debt and off-balance sheet items

Selection of dependent variable: level vs. event study

Old vs. new passion of estimation technique

Personal Examples of NEAR (3) The price-earnings relation – A simultaneous equation

approach “Information Content of Prices” node and “Earnings

Response Coefficients” node New applications of econometrics tool: simultaneous

equation approach Relative Importance of Book Value and Earnings

“Accounting Data as Measurement” node Initial findings: the importance of the balance sheet

in explaining valuation increases with financial difficulty and is higher for industries where intangible assets are less likely

Conservatism and Delayed Recognition in Accrual Accounting

Features of FAR Trends in accounting research

Outstanding accounting research is likely to be a blend of theory, empirical analysis and institutional knowledge

The emphasis on contextual rather than generic research (need particular samples, specific reporting issues, and the collection of distinctive data bases)

The “wild card” factors: Change in the financial reporting environment The creativity of individual researchers Syntheses

Perspectives on Recent Capital Market Research The Accounting Review (2002)

William H. Beaver

Introduction

Market efficiency Feltham-Ohlson modeling Value relevance Analysts’ behavior Discretionary behavior

Market Efficiency [1] Market efficiency and the regulation of financial

reporting Market efficiency and investment decisions –

resource allocation and production efficiency Market efficiency and researchers (set of

inference, variable measurement, and interpretations)

Earlier studies: confirmed the market efficiency Recent studies: post-earnings announcement

drift; market-to-book ratios and its refinements; contextual accounting issues

Market Efficiency [2] Post-Earnings Announcement Drift Market-to-Book Ratios and Extensions

Abnormal return associated with portfolio strategies based on market-to-book ratios

Extensions: (1) market-to-value ratios; and (2) analysts’ biased forecasts

Contextual Accounting Issues The price of accrual and cash flow information The IPO puzzle etc

Market Efficiency [3] How can widely disseminated and examined data used

with simple portfolio strategies that require no knowledge of accounting be associated with abnormal returns?

How can studies of arcane disclosure find that such disclosures are apparently reflected in prices, yet more visible variables, such as earnings and book value, are not?

How can studies of security return in the very short run shwo evidence of relatively rapid response, and yet have evidence of abnormal returns that appear to persist for year after the portfolio formation date?

How can the body of research in aggregate show that prices both lead and lag accounting data?

Feltham-Ohlson Modeling [1]

Key Feartures of F-O Modeling Parsimonious assumptions – the value of equity

= the present value of expected future dividends, the clean surplus relation, and some form of a linear information dynamic

Provides a role for many importance features of the accounting system: clean surplus, book value, earnings, transitory components of earnings, conservatism, delayed recognition


Key Feartures of F-O Modeling Stimulated considerable empirical research

Both book value and earnings are significant pricing factors The relative importance of book value is inversely related

to the financial health of the firm The coefficient on earnings is lower for firms with low

return on equity The coefficient on positive earnings is positive and

significant, while the coefficient on losses is insignificantly different from zero

Accrual vs. cash flow components of earnings are priced significantly differently from one another. In general, the accrual components are associated with a lower coefficient


Criticisms of the F-O Approach The model has no endogenous demand for

accounting data vs. F-O models do not attempt to derive a demand for accounting

There is no information asymmetry and that hence no strategic uses of accounting data arise within the F-O framework

Some aspects of the models are unsupported by the empirical data

Value-Relevance Research [1] Examines the association between a security

price-based dependent variable and a set of accounting variables

What are the distinctive characteristics? Value-relevance research demands an in-depth

knowledge of accounting institutions, accounting standards, and the specific features of the reported numbers

Timeliness of information is not an overrding issue (event studies, level of stock prices and the accounting data)

Value-Relevance Research [2] Why Is Timeliness Not the Key Issue?

Delayed recognition Earnings announcements are largely preempted by the

disclosure of other information vs. the cost of obtaining the prior information

Key role of financial statements is to summarize relevant information parsimoniously and in a manner consistent with the underlying concept

The financial statements are not intended to list only those assets, liablities, revenues, and expenses not preempted by other publicly available information

Timeliness is only one dimension Implication for research: change vs. level

Value-Relevance Research [3] What Is the Conceptual Foundation of

Value-Relevance Research? Combination of a valuation theory plus

contextual accounting arguments that allow researchers to predict how accounting variables relate to the market value of equity

Valuation models Earnings-only approach – MM (1996): present

value of permanent future earnings Balance-sheet approach F-O models: book value of equity and the present

value of expected future abnormal earnings

Value-Relevance Research [4] What Have We Learned?

Is it priced? Is it priced consistently with some

theoretical value? Is a particular accounting number priced

equal to or differently from similar accounting numbers?

Addressess questions relating to footnote information and nonfinancial intangle assets

Value-Relevance Research [5] The Role of Value-Relevance Research

Help articulate the nature of the issues and provide a paradigm or language with which to frame the questions of interest

Provide a theory Provide empirical evidence

Unresolved Issues Market efficiency Econometric issues Other puposes of financial statements

Research on Analysts’ Behavior [1]

Analysts are among the major information intermediaries who use and interpret accounting data

Security prices reflect the results of their analysis

Analysts rely on a rich set of publicly available data – assess the importance of accounting data relative to the total mix of information


What Have We Learned? Analysts’ forecasts are optimistics Analysts employed by investment firms that

are associated wth the underwriting of the firm’s securities issue more optimistic forecasts

Analysts’ forecasts tend to be revised downward during the year

Analysts with better forecasting ability appear to have a higher profitability of survival


What Have We Learned? Analysts’ forecast outperform the best statistical models Analysts’ forecast do not reflect all of the information in

the past earnings series (the forecast errors are serially correlated and analysts underestimate the persistency of earnings)

Capital markets appera to reflect naively analysts’ forecast in prices – abnormal returns associated with MTB and MTV strategis

Analysts’ forecasts appear to be a parsimonious way to capture “other information”

Analyst coverage is greater for firms with more institutional investor and more intagible assets


Unresolved Issues Need a better understanding of the

incentives of analysts with respect to forecasting

Identification the other information besides accounting data that influences analysts’ forecasts

Research on Discretionary Accruals [1]

Motives for Accrual Management Opportunistics vs. signaling Compensation contracts, debt

covenants, capital market pricing, taxes, litigation, and regulatory behavior

Multiple motives: opposing or reinforcing?


What Have We Learned? Earnings management identification:

Generic models of discretionary accruals Tests based on discontonuities in the

reported earnings distribution Account-specific models of discretionary

behavior Combination


What Have We Learned? Earnings management motivation:

Avoid a loss Avoid an eanrings decline Avoid falling below analysts’ forecasts Meeting the earnings forecasts

EM appears to be widespread and relatively easy to detect, at least as estimated by extant techniques


What Have We Learned? EM:

Accrual management Hedging activities Altering research and development

expenditures Combination

Capital markets appear to price differently the nondiscretionary and discretionary components of an accrual


Estimation of Discretionary and Nondiscretionary accruals Jones (1991) model: parsimonious model Use sector-specific variables for investigating sector-

specific accruals

Unresolved Issues Identification of discretionary accruals The nature of the discretion may be known but not

contractible Incentives and costs to eliminate discretionary

behavior are unclear, and discretionary behavior may be an equilibrium outcome, albeit not a “first best” solution

Empirical Research on Accounting Choice

Thomas D. FieldsThomas Z. LysLinda Vincent

Journal of Accounting and Economics (2001)

Introduction [1]

Market imperfections and accounting choice

Definition of accounting choice The motives behind the accounting

choice decision Accounting research: the determinants

and implication of accounting choice Literature review

Introduction [2]

Structure of review: Review and summarize the results of research

bearing on accounting choice (focusing on the 1990s)

Assess the extent to which knowledge of the importance of accounting choice has increased beyond that of the 1970s and 1980s

Conclusions about the importance and implications of accounting choice research

Suggestions for future avenues of research into accounting choice

Introduction [3]

Organization of review: Agency costs: contractual issues – mitigate

agency costs Information asymmetric: informed vs. less

infromed parties – disseminate privately held information

Externalities: third-party contractual and non-contractual relations – quality and quantity of financial disclosures, which in turn have welfare and policy implications in the presence of externalities

Introduction [4]

Brief conclusions: Accounting research has made modest progress in

advancing the state of knowledge beyond what was known in the 1970s and 1980s

Researchers generally focus on refinaing knowledge of specific accounting choice or on narrow problems that accounting choices are presumed to address

Accounting research generally fail to distinguish appropriately between what is endogenous and exogenous

A comprehensive theory is currently unavailable and possibly unattainable: limit to use of accounting choice and ignore the major role of accounting in normal, day-to-day situations

Introduction [5]

Opportunities Evidence be gathered on whether the alleged

attempts to manage financial disclosures by self-interested managers are successful; that is, what are the economic implications of the accounting choices”

More emphasis on the costs and benefits of addressing the three types of market imperfections driving accounting choice

Reseachers develop better theoretical models and more refined economectric techniques with the explicit goal of guiding empirical research and articulating expected results from such empirical research

Reasons for Accounting Choices [1]

Accounting choices in accounting principles

Accounting choices and information asymmetries

Accounting choices and issues of consistency and comparability

Accounting choices and efficient contracting


Accounting choices and mixed motives

Accounting choices: cost vs. benefit – optimal level of discretion

Accounting choices and earnings management: intention and opportunity


Zero accounting choices: Disputes over interpretation of the code Detail rules for all facts and circumtances New situations required new accounting rules Accounting flexibility mitigates manager’s attempt to

obtain desired accounting results by means of real decisions

Accounting choices as part of an optimal solution to an agency problem

Accounting choices made can be informative

Accounting choices: cost (?) vs. benefits (?)

Classification of Accounting Choice [1]

The presence of agency costs and the absence of complete markets Accounting choice and contractual

arrangements: efficient contracting perspective

Examples: executive compensation agreements and debt covenants – ex ante vs. ex post setting

There are potential conflicts among multiple goals in the choice of accounting methods


The presence of information asymmetries: attempts to influence asset prices Ex ante: information transfer from well-

informed to less-informed Ex post: self-interest motives

Influence external parties other than actual and potential owners of the firm


Literature review: Research on accounting choices Period: 1990s Sources: (1) Journal of Accounting and Economics; (2)

Accounting Review; and (3) Journal of Accounting Research Major categories of choice-based research US GAAP Exclude managerial choices about eanrings

announcemenet and other kinds of announcements involving accounting numers

Behavioral, experimental, analytical, and empirical Rely on market imperfections and assume individual

decision makers are rational

Prior Literature Reviews [1] Late 1960s and 1970s

Assume that market are efficient Examines the association between stock returns

and accounting information Research question: whether investors could ‘see

through’ alternative accounting practices to the underlying firm economics

Hypothesis: absent effects on the firm’s cash flows, investors do not alter their assessment of share prices based on alternative accounting methods

Methodology limitation

Prior Literature Reviews [2]

Late 1970s Research on Manager’s motives for the choice of

accounting techniques Investigation of the effects of accounting choice on

contractual arrangements Bernards (1989): economic consequences of

mandated accounting changes – little or no evidence of associated stock price effects

Holthausen and Leftwich (1983): fim size and leverages are the only two significant variables explaining choices of accounting techniques

Watts and Zimmerman (1990): ex ante vs. ex post and mixed motives

Contractual Motivations [1] Contractual arrangements and financial

accounting numbers: management compensation contracts bond covenants

Contractual arrangements and accounting choice

The results in general suggest that: managers select accounting methods to increase their compensation and to reduce the likelihood of bond covenant violations

Contractual Motivations [2] Internal Agency Conflicts – Executive

Compensation Background:

Reporting flexibility and the associated increased compensation are a relatively low cost compromise

Manipulating accruals may results in lower wealth losses to principals that manipulating real activity

Interest alignment Market rationality and anticipation


Compensation Evidence of managerial opportunism:

Healy (1985) – lower and upper bound Clinch and Magliolo (1993) – absence of cash

flow effects Gaver et al (1995) vs. Healy (1985) - income

smoothing Holthausen et al (1995) vs. Healy (1985):

methodology Chen and Lee (1995) support Healy (1985) – big

bath behavior


Compensation Evidence of managerial opportunism:

Ittner et al (1997) expand Healy (1985): non-financial measures

Gaver and Gaver (1998) support Healy (1985): asymmetric function

Guidry et al (1999) support Healy (1985) – different business units within a singel corp

Other several studies


Compensation Problem with endogeneity:

The contract itself is endogenous (the obvious opportunities for self-serving behavior should have been anticipated and priced

Other checks and balances exist The models use to detect accrual management

are not very powerful and may not be able to differentiate between accruals management and real performance


Compensation Problem with endogeneity:

The studies implicitly take the conditioning event as exogenous

Only part of the compensation function, usually the cash bonus is analyzed, without condisering the effect on total compensation (includin stock ownership)

Managerial opportunism is usually defined as maximizing the current period’s net income whereas there are different forms of managerial opportunism

Alternative explanations are not explored


Compensation Managerial opportunism vs. value

maximization Summary:

Managers exploit their accounting discretion to take advantage of the incentives provide by bonus plans

However, little is known about whether such manipulations actually result in higher payouts, or about the impanct of earnings management on other corporate goals

Contractual Motivations [8] External Agency Conflicts – Bond Covenants

Research questions: Why lending agreements rely on reported accounting

numbers Why these contracts allow companies discretion to

select and change accounting methods subsequent to the debt issuance

Assumption: Floating GAAP Less costly to monitor The difficulty in specifying frozen GAAP Impposes fewer restrictions on corporate activities,

particularly investments


Hypothesis: Managers select or change accounting methods to

avoid covenant violations – debt hypothesis Tries to explain accounting choices with closeness to debt

covenants Focuses on firms that have violated debt covenants

Investigated which firms are more likely to be adversely affected by mandated accounting changes by analyzing stock price reactions around the announcement of, or the lobbying behavior prior to, mandated accounting changes


Debt covenant violation: Leverage ratio/Debt to equity ratio Firms that actually violated covenants

Previous reserachs Healy and Palepu (1990) – dividend constraint

in debt covenants: accounting changes vs. dividend reduction

Sweeney (1994) – mixed results & methodological problem


Previous reserachs DeAngelo et al. (1994) - not statistically significant &

methodological problem DeFond and Jiambalvo (1994) – accrual manipulation vs.

accounting changes Haw et al. (1991) & Chase and Coffman (1994) – debt

covenants and specific accounting choice with real economic impact

Chung et al. (1993) and Malmquist (1990) – GAAP vs non GAAP

Francis (1990): cost of violation vs. cost of compliance


Summary The evidence on whether accounting choices are

motivated by debt covenant concerns is inconclusive Consistent with the debt hypothesis and other

hypothesis Moving beyod the use of the debt to equity ratio as the

proxy for proximity to covenant violation Consider alternative hypothesis: efficient contracting vs.

opportunism Relation between accounting choice and violation of

debt covenants

Asset Pricing Motivations [1] Accounting choice and stock price or

returns (equity valuation or cost of capital) Forms:

Maximize earnings in a given period Smooth earnings over time Avoid losses Avoid earnings declines

Researchs: Association between earnings and share prices Market efficiency: accounting choices without direct cash

flow implication and changes in stock prices Alternative explanations: investor irrationality, manager

signaling, and contractual motivations

Asset Pricing Motivations [2]

Researchs: Earnings management and share prices –

specific situations DeAngleo (1986) and Perry & Williams

(1994) – MBO Erickson dan Wang (1999) – equity financed

acquisitions Kasznik (1999) – earnings forecasts


Disclosure Policies Botosan (1997): level of disclosure

(accounting choice) and costs of capital Sengupta (1998): level of disclosure and cost

of debt Hayes & Lundholm (1996) and Harris (1998):

segment disclosures and firm value – level of competitiveness

Balakrishnan et al. (1990) and Boatsman et al. (1993): geographical segments and earnings quality/security valuation


Disclosure Policies Barth & McNichols (1994): environmental

liability disclosures and market value of equity Forst & Kinney (1996): level of disclosure –

foreign vs. U.S. Firms – earnings and stock returns

Summary: Results on whether the level of disclosure affects the cost of

capital are mixed Evidence does not support an unequivocal decrease in cost of

capital as a results of increased disclosure More study is necessary to understand the relative costs and

benefits of increased disclosure


Earnings Management Gaver et al. (1995) vs. Healy (1985): bonus plan

hypotheses DeFond & Park (1997): income smoothing hypotheses Burgstahler & Dichev (1997): avoi earnings decreases

and losses Barth et al. (1999): earnings management and stock

prices Hong et al. (1978) and Davis (1990): earnings

management (purchase vs. pooling) and abnormal returns


Market Efficiency 1970s: support market efficiency 1980s – 1990s: assumes market efficiency and other

economic explanations (example: efficient contracting theory)

1990s: irrationality of investors – behavioral finance Beaver and Engel (1996): decomposition of allowance

for loan losses – nondiscretionary (negatively priced) and discretionary (positively priced)

Subramanyam (1996): value of discretionary accruals – income smoothing: persistency & predictability & communicate private information


Market Efficiency Hand et al. (1990): stock (bond) prices and

insubstance defeasance Summary

There is neither clear evidence that markets are inefficient nor unequivocal evidence that they are not

Most research supporting both conclusions is subject to criticism that interpretation of the results is conditional on both the proper specification of the returns generating process and of the event under consideration

It is difficult to draw strong inferences about the implications of accounting choices for asset prices

Motivation Due to Impact on Third Parties [1]

Taxes Research question: whether firms choose

accounting methods to minimize the present value of taxes

Evidence: consistent with tax-minimizing choices or other offsetting considerations (presence of conflicting goals)

Structured around changes in tax rates Dhaliwal & Wang (1992): shifting permanent

and timing differences across periods to minimize the impact of the AMT


Taxes Structured around changes in tax rates

Boynton et al. (1992): smaller firms manipulating discretionary accruals to reduce the impact of AMT

Guenther (1994): firms shift net income from the higher to the lower taxed periods by means of current accruals


Taxes The effect of tax rate changes on the

accounting choices of MNCs Harris (1993), Klaessen et al. (1993), and

Collins et al. (1998): Tax Reform Act 1986 (tax rate changes) and income shifting in MNCs

Jacob (1996): transfer pricing


Taxes Accounting choice and tax effect

LIFO vs. FIFO and the marke reactions: Tse (1990); Hand (1993 & 1995); Jennings et al. (1996) – inconsistence results

Cloyed et al. (1996): firms choose a conforming financial reporting method when the tax savings apparently outweigh the estimated non-tax costs – tax accounting method

Guenther et al. (1997): cash to accrual basis (derived by TRA’86) significantly increased the level of deffered financial statement income


Taxes Tax vs. non-tax considerations

Tax costs to other contracting parties due to deferred revenue recognition and accelerated expense recognition (Scholes et al., 1992)

The impact on debt covenants of shifting income into net operating loss years (Maydew, 1997)

Increased cash flow and smoother earnings (Maydew et al., 1999)

The effect on earnings used for performance measurement and the effect on equity valuation (Klassen et al., 1993)


Taxes Tax vs. non-tax considerations

Dhaliwal et al. (1994): tax minization, earnings management, adn debt covenants all provide incetive to dip into LIFO layers

Klaessen (1997): trade off taxes and financial reporting goals in the context of the choice of the divestiture form chosen

Summary: Firms make accounting choices in order to reduce

theirtax burden The evidence with respect to the stock market effects of

these actions is mixed


Regulation Industry-specific regulations

Focuses on accounting responses to specific constraints

Considers more indirect effets: the political costs of appearing to be ‘overly’ profitable

Managers choose accounting methods and procedures to increase shareholder wealth


Regulation The regulatory costs imposed by capital

adequacy ratio guidelines in the banking industry Moyer (1990): adjusting loan loss

provisions, loan charge-offs, and securities gains and losses

Kim & Kross (1998): manipulating accruals Blacconiere et al. (1991): adopting

voluntary regulatory accounting principles


Regulation Insurance industry

Petroni (1992): insurers bias downward their loss reserves when they are close to receiving regulatory attention

Adiel (1996): insurers enter into costly financial reinsurance transactions to reduce regulatory costs


Regulation The regulation literature generally concludes

that managers select accounting methods to avoid regulatory intervention

There are information costs in the political process such that there is some probability that the regulators will not detect or adjust for the accounting manipulation

The cost of regulatroy interventions and the manner in which the regulation is enforced


Regulation Price-regulated industries

Managers select accounting numbers and procedures to increase cash flows to share-holders, even when this reduces earnngs and increases liabilities: Eldenbrug & Sodestrom (1996) and D’Souza (1998)


Regulation Non-regulated industries

Jones (1991) – income decreasing in the year of import relief investigations

Key (1997) – cable industry Hall & Stammerjohan (1997) and Han & Wang

(1998) – oil company Blacconiere & Patten (1994) – environmental

disclosure in chemical firms


Regulation Multiple incentives and multiple accounting

methods Beatty et al. (1995) – bank’s accounting accruals,

investment, and financing decisions are interdependent and cannot be studied effectively in isolation

Collins et al. (1995) – cross-sectional differences in bank’s responses to capital, earnings, and tax incentives

Summary: Consistent with expectations Third parties are either not willing or not able to undo

the accounting manipulations

Impediments to Progress [1]

Multiple Method Choices One choice vs. multiple accounting

choices to accomplish a specific goal Examine the net effect of all accounting

choices on the accruals of the firms for the period under consideration DeAngelo (1986) and Perry & Williamns

(1994) –discretionary accruals (MBO) Erickson & Wang (1999) – discretionary

accruals (stock-for-stock acquisition)


Multiple Method Choices Discretionary accual estimation model:

Dechow et al. (1995) – low power Guay et al. (1996) – mixed results Kang & Sivaramakrishnan (1995) – instrumental

variabels approach

The importance of ability to detect earnings management Premise: the interested parties are unable (or possibly

unwilling) to detect the effect of accounting method choice, accounting procedures, and accounting estimates on the reported numbers


Multiple Method Choices The importance of ability to detect

earnings management The difficulty using statistical techniques to detect

earnings management

Three approaches: Continue using the discretionary accruals method Continue to develop and test more powerful techniques

for the detection of earnings management Measure multi-dimensional accounting choice directly

via the financial statements – Hagerman & Zmijewski (1979) and Zmijewki & Hagerman (1981)


Multiple Motivations Mutilple and potentially conflicting motivations

for the accounting choices: interaction between and trade-offs among goals

Adding control variables Researchers often rely on coarse of inappropriate

proxies to measure the role of the omitted determinants of accounting choice

Inference problems are likely to arise when analyzing multiple motivations using proxies with differing amounts of measurement error, particularly when the underlying effects are correlated

The absence of linearity


Multiple Motivations Evidence of progress

Hand & Skantz (1998) Accounting choice of SAB 51 is a function of a

linear combination of different motives: political, debt-covenants, earnings management, and information signaling)

Francis et al. (1996) Discretionary asset write-offs is a function of

managerial incentives to increase compensation and to smooth earnings



Robinson and Shane (1990): the cost and benefits associated with accounting choice of purchase or pooling

Balsam et al. (1995): effect of earnings management and debt covenants on the timing of adoption of new FASB regulations

Bartov (1993): earnings smoothing and debt-to-equity considerations for corporate management of accounting earnings through asset sales



Guenther et al. (1997) – effect of tax motive, compensation contract, debt contract, and asset pricing, to accounting choice

Multiple methods and motivations Hunt et al. (1996) – simultaneous equation

approach: multiple choice (inventory management, depreciation, and other current accruals) vs. multiple objectives (income smoothing, minimizing debt-related costs, and minimizing taxes)


Multiple Motivations Multiple methods and motivations

Christie (1990) – multiple motivations vs. multiple choice

Further progress: Continue to consider the existence of multiple

motivations (Bartov, 1993) Exploring the underlying relations among

different motivations Refining and expanding the methodology


Methodological Issues Standard econometric problems:

simultaneity, errors-in-variables, omitted variables, etc – low power and unreliable tests

Inherent endogeneity of the choices that are made (accounting methods, firm financial structure, organizational structure, contracts, etc)


Methodological Issues Example of endogeneity problem:

Skinner (1993) Investment opportunities set, compensation and

debt contracts, and firms characteristics (including accounting choices)

IOS influence the structure of its compensation plans and debt contracts, and thus indirectly influences its accounting choices

There is an association between IOS and accounting choices

Interrelationship among variables affecting accounting choices


Methodological Issues Example of endogeneity problem:

Begley and Feltham (1999) Control for the endogeneity of both incentive

variables and debt covenants Changes in accounting policy choices of differences

in choices across firms may be driven by underlying economic differences in the firms, either cross-sectionally or through time

The self-selection bias inherent in the sample

Crude proxies vs. actual measurement


Methodological Issues Appropriate research question:

the driven of the accounting choice vs. consistency with one or more posited incentives

Distinguishing between managerial opportunism, shareholder wealth maximization, and information motivation


Narrow Scope of The Research on The Costs and Benefits of Accounting Choice Empirical tests of the benefits of

accounting choice yield mixed results There is little convincing research and

non consensus that the benefits of increased disclosure outweigh the costs


Lack of Theoritical Guidance The environment in which choices are

made and the mechanism by which thet have an impact are not well articulated – the need of analytical research

The limitation of analytical research – focuses on disclosure policy

Recommendations for Future Research

Compelling evidence of the implications of alternative accounting methods

Considering multiple choices and multiple motivations

Develop more powerfull statistical techniques and improve research design

Use the expertise as accountants – small sample and fields studies

research opportunities in management accounting robert s. kaplan journal of management accounting...

Documents

management accounting

management accountants

management accountingrobert

sciencethe new research

analysisthe new research

new systemsattempting

new environment

settingdesign research