A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory--including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion-based incentive systems, the absence of up-front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic--focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.
{"title":"Compensation and Incentives: Practice vs. Theory","authors":"G. Baker, M. C. Jensen, Kevin J. Murphy","doi":"10.2139/ssrn.94029","DOIUrl":"https://doi.org/10.2139/ssrn.94029","url":null,"abstract":"A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory--including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion-based incentive systems, the absence of up-front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic--focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1988-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115901144","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine corporate disclosure activity around seasoned equity offerings and its relation to stock prices. Beginning six months before the offering, our sample issuing firms dramatically increase their disclosure activity, particularly for the categories of disclosure over which firms have the most discretion. The increase is significant after controlling for the firm's current and future earnings performance and tends to be largest for firms with selling shareholders participating in the offering. However, there is no change in the frequency of forward-looking statements prior to the equity offering, something that is expressly discouraged by the securities law. Firms that maintain a consistent level of disclosure experience price increases prior to the offering and only minor price declines at the offering announcement relative to the control firms, suggesting that disclosure may have reduced the information asymmetry inherent in the offering. Firms that substantially increase their disclosure activity in the six months prior to the offering also experience price increases prior to the offering relative to the control firms, but suffer much larger price declines at the announcement of their intent to issue equity, suggesting that the disclosure increase may have been used to "hype the stock" and the market may have partially corrected for the earlier price increase. Firms that maintain a consistent disclosure level have no unusual return behavior relative to the control firms subsequent to the announcement, while the firms that "hyped" their stock continue to suffer negative returns, providing further evidence that the increased disclosure activity may have been "hype," and suggesting that the "hype" may have been successful in lowering the firms' cost of equity capital.
{"title":"Voluntary Disclosure and Equity Offerings: Reducing Information Asymmetry or Hyping the Stock?","authors":"Mark Lang, Russell J. Lundholm","doi":"10.2139/ssrn.252653","DOIUrl":"https://doi.org/10.2139/ssrn.252653","url":null,"abstract":"We examine corporate disclosure activity around seasoned equity offerings and its relation to stock prices. Beginning six months before the offering, our sample issuing firms dramatically increase their disclosure activity, particularly for the categories of disclosure over which firms have the most discretion. The increase is significant after controlling for the firm's current and future earnings performance and tends to be largest for firms with selling shareholders participating in the offering. However, there is no change in the frequency of forward-looking statements prior to the equity offering, something that is expressly discouraged by the securities law. Firms that maintain a consistent level of disclosure experience price increases prior to the offering and only minor price declines at the offering announcement relative to the control firms, suggesting that disclosure may have reduced the information asymmetry inherent in the offering. Firms that substantially increase their disclosure activity in the six months prior to the offering also experience price increases prior to the offering relative to the control firms, but suffer much larger price declines at the announcement of their intent to issue equity, suggesting that the disclosure increase may have been used to \"hype the stock\" and the market may have partially corrected for the earlier price increase. Firms that maintain a consistent disclosure level have no unusual return behavior relative to the control firms subsequent to the announcement, while the firms that \"hyped\" their stock continue to suffer negative returns, providing further evidence that the increased disclosure activity may have been \"hype,\" and suggesting that the \"hype\" may have been successful in lowering the firms' cost of equity capital.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123450217","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the political costs of firms upon the establishment of the Prices Surveillance Authority in Australia in 1984. The paper identifies and defines a linkage between political actions likely to transfer wealth away from targeted firms and firms' subsequent earnings management. The cross-sectional and longitudinal evidence presented in this study does not support the hypothesis that firms are more likely to affect negative accounting accruals during periods when they are subjected to intense political scrutiny as a means of reducing their exposure to political costs. A further examination of the institutional environment and structural arrangements for price surveillance suggests that while establishing a linkage between political costs and earnings management by firms is a necessary condition, it is not by itself a sufficient condition. Earnings management is but one of several options which can be used to deflect political costs by firm managers.
{"title":"Institutional and Structural Constraints to Detecting Earnings Management of Firms Subjected to Price Regulation","authors":"Stephen Lim","doi":"10.2139/ssrn.15063","DOIUrl":"https://doi.org/10.2139/ssrn.15063","url":null,"abstract":"This study examines the political costs of firms upon the establishment of the Prices Surveillance Authority in Australia in 1984. The paper identifies and defines a linkage between political actions likely to transfer wealth away from targeted firms and firms' subsequent earnings management. The cross-sectional and longitudinal evidence presented in this study does not support the hypothesis that firms are more likely to affect negative accounting accruals during periods when they are subjected to intense political scrutiny as a means of reducing their exposure to political costs. A further examination of the institutional environment and structural arrangements for price surveillance suggests that while establishing a linkage between political costs and earnings management by firms is a necessary condition, it is not by itself a sufficient condition. Earnings management is but one of several options which can be used to deflect political costs by firm managers.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124215246","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This commentary describes an internet valuation paper by Trueman, Wong and Zang (TWZ) presented at the 2000 Journal of Accounting Research conference. TWZ investigate the role of accounting and internet use data in valuing internet firms, using a residual income valuation model and two "eyeball" measures of web activity. TWZ reveals that internet valuations in the 1998-99 period were consistent with investors: (1) differentially weighting permanent and transitory income statement components, (2) relying on non-financial measures of internet use, and (3) using different models for e-tailer vs. portal/content firms. Since the internet is a nascent industry, the TWZ's analysis is constrained by the short trading history, limited financial and non-financial data, and a small sample size. This commentary describes econometric, modeling, and interpretation-related concerns with the TWZ paper and offers suggestions for future research on "New Economy" firms.
{"title":"Discussion of the Eyeballs Have it: Searching for the Value in Internet Stocks","authors":"E. Keating","doi":"10.2139/ssrn.248137","DOIUrl":"https://doi.org/10.2139/ssrn.248137","url":null,"abstract":"This commentary describes an internet valuation paper by Trueman, Wong and Zang (TWZ) presented at the 2000 Journal of Accounting Research conference. TWZ investigate the role of accounting and internet use data in valuing internet firms, using a residual income valuation model and two \"eyeball\" measures of web activity. TWZ reveals that internet valuations in the 1998-99 period were consistent with investors: (1) differentially weighting permanent and transitory income statement components, (2) relying on non-financial measures of internet use, and (3) using different models for e-tailer vs. portal/content firms. Since the internet is a nascent industry, the TWZ's analysis is constrained by the short trading history, limited financial and non-financial data, and a small sample size. This commentary describes econometric, modeling, and interpretation-related concerns with the TWZ paper and offers suggestions for future research on \"New Economy\" firms.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123328462","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a large sample of quarterly observations for the 16 years, 1984-99, I present four types of related temporal evidence: (1) a decrease in the tendency of managers to report quarterly earnings that fall slightly short of analyst estimates [small negative surprises of no more than three cents]; (2) the temporal decrease in the tendency of managers to report small negative surprises pertains more to growth than to value firms; (3) the adverse valuation consequence of reporting small negative surprises has increased in severity in recent years; and (4) the temporal increase in the adverse valuation consequence of reporting small negative surprises pertains more to growth than to value firms. My frequency results are robust to alternative definitions of small negative surprises, and my valuation results are robust to including median surprises as a potential correlated omitted variable and are not due to temporal changes in the frequency of losses.
{"title":"Small Negative Surprises: Frequency and Consequence","authors":"L. Brown","doi":"10.2139/ssrn.281383","DOIUrl":"https://doi.org/10.2139/ssrn.281383","url":null,"abstract":"Using a large sample of quarterly observations for the 16 years, 1984-99, I present four types of related temporal evidence: (1) a decrease in the tendency of managers to report quarterly earnings that fall slightly short of analyst estimates [small negative surprises of no more than three cents]; (2) the temporal decrease in the tendency of managers to report small negative surprises pertains more to growth than to value firms; (3) the adverse valuation consequence of reporting small negative surprises has increased in severity in recent years; and (4) the temporal increase in the adverse valuation consequence of reporting small negative surprises pertains more to growth than to value firms. My frequency results are robust to alternative definitions of small negative surprises, and my valuation results are robust to including median surprises as a potential correlated omitted variable and are not due to temporal changes in the frequency of losses.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121884278","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines whether managers in the U.S. manage earnings, profits and losses surprises to a greater extent than do managers in 12 other countries. We expect managers in the U.S. to be more likely to manage earnings, profits and losses surprises than do managers in other countries since U.S. managers have greater incentives to monitor current price performance. These incentives include greater equity ownership by top executives, more monitoring by institutional and large shareholders, a larger number of outside directors on their board of directors, a greater threat of external takeovers, and a more litigious environment. Consistent with our expectations, we find that managers in the U.S. manage earnings surprises relatively more than do managers in 12 other countries. More specifically, U.S. managers are more likely to manage profits surprises than do managers in all 12 other countries examined, and they are more likely to manage losses surprises than do managers in all other countries except Japan, the only country requiring managers to forecast earnings. We also expect U.S. managers to be more likely to manage analysts' estimates, given their extensive public relations departments and their greater incentives to manage earnings surprises. Our evidence bears out our contention.
{"title":"Managing Earnings Surprises in the U.S. Versus 12 Other Countries","authors":"L. Brown, H. N. Higgins","doi":"10.2139/ssrn.202132","DOIUrl":"https://doi.org/10.2139/ssrn.202132","url":null,"abstract":"This paper examines whether managers in the U.S. manage earnings, profits and losses surprises to a greater extent than do managers in 12 other countries. We expect managers in the U.S. to be more likely to manage earnings, profits and losses surprises than do managers in other countries since U.S. managers have greater incentives to monitor current price performance. These incentives include greater equity ownership by top executives, more monitoring by institutional and large shareholders, a larger number of outside directors on their board of directors, a greater threat of external takeovers, and a more litigious environment. Consistent with our expectations, we find that managers in the U.S. manage earnings surprises relatively more than do managers in 12 other countries. More specifically, U.S. managers are more likely to manage profits surprises than do managers in all 12 other countries examined, and they are more likely to manage losses surprises than do managers in all other countries except Japan, the only country requiring managers to forecast earnings. We also expect U.S. managers to be more likely to manage analysts' estimates, given their extensive public relations departments and their greater incentives to manage earnings surprises. Our evidence bears out our contention.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129605992","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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