Budget Allocation Among R&D Teams with Interdependent Uncertain Achievement Levels and a Common Goal

How should a firm allocate a budget among projects with different uncertain potentials and interdependent achievement levels? Parallel teams pursuing different R&;D approaches towards a particular objective, whose uncertain achievement levels improve with funding, are to be allocated a fixed budget. Clearly, the optimal allocation depends on the exact objective. We consider three objectives: maximizing the probability that the most successful activity achieves some pre-specified threshold; maximizing the expected achievement of the most successful activity; and maximizing the expected number of activities reaching some threshold(s). To model achievement levels, we use the Marshall and Olkin and a Gumbel's bivariate exponential distributions. The achievement levels in the individual activities are set to be stochastically increasing in the respective budget allocations. We analyze the models resulting from the three objectives and provide supportive numerical results. Some of the qualitative conclusions are intuitive, while others are not.     

'Smoothing' Manifestations in Fourth Quarter Results of Operations: Some Empirical Evidence

'Smoothing' Manifestations in Fourth Quarter Results of Operations: Some Empirical Evidence
The subject of smoothing of annual income numbers has occupied a good deal of the accounting literature. The finding of most studies was that managers of firms did behave as if they intended to impart a smoother trend to accounting earnings. The availability of quarterly reports provides us with an opportunity to gain insights into the timing of smoothing decisions. The paper tests the hypothesis that the observed first three quarters' results trigger actions by management during the fourth quarter that appear as smoothing behaviour. The findings indicate that the manifestations of end-of-year actions by managers are consistent with the possible attempt on their part to alter fourth quarter reported results so as to offset extreme deviations of the first three quarters' reported numbers from a given, predefined, 'normal' trend presumably deemed by managers to be desirable to report.     

Stock returns and real activity in an inflationary environment: The informational impact of FAS No. 33*

Abstract. This paper empirically assesses the degree to which current cost data as required by Financial Accounting Standards Statement No. 33 might implicitly be used by equity market participants. Studies to date, focusing on income measures, documented little or no effect of the data on prices. We argue here that income was the wrong focus. Instead, because current costs can be used to construct quantity indexes and hence measure real productive growth of the firm, the focus should be on the test of association between real productivity (obtained by use of current cost data) and stock returns rather than between income measures and stock returns. Therefore, this paper tests for whether growth measure (of real productive output) which can be obtained by utilizing current cost information and which cannot be obtained without such information, can explain cross-sectional variation in security returns beyond measures based on historical costs. Returns should be more highly associated with current cost based measures of real productive growth than with similar measures based on historical cost, if the current cost data have value. Like the time-series macroeconomic analysis done by Fama (1981), our cross-sectional microeconomic analysis relying on current cost accounting data suggests that security returns are positively related to real productive activity. Moreover, the tests seem to suggest that current cost data, on the margin, reflect productive activity information that may not be already contained in historical cost accounting data. Résumé. Cet article évalue de façon empirique jusqu'à quel point les données au coût actuel requises en vertu de l'énoncé no. 33 (Financial Accounting Standards Statement No. 33) pourraient implicitement être utilisées par les participants au marché des actions. Les études antérieures, portant sur des mesures de bénéfice, ont conclu à peu ou pas d'effet sur les cours imputable à ces données. Nous soutenons ici que le bénéfice ne constituait pas le bon centre d'intérêt. Au lieu de cela, du fait que les coûts actuels peuvent être utilisés afin d'élaborer des indices de quantité et, de là, mesurer la croissance de la productivité réelle de la firme, le centre d'intérêt devrait plutôt tourner autour d'un test du lien entre la productivité réelle (obtenue par l'utilisation des données au coût actuel) et les rendements des actions plutôt qu'entre des mesures de bénéfice et le rendement des actions. Dès lors, cet article examine si une mesure de croissance (de la productivité réelle) pouvant être obtenue à partir de l'information au coût actuel et qui ne peut être dégagée sans une telle information, peut expliquer davantage les variations (en coupe transversale) des rendements des titres que ne le font des mesures fondées sur les coûts d'origine. La relation entre les rendements et les mesures de productivité réelle fondées sur le coût actuel devrait être plus robuste que celle entre des mesures similaires fondées sur le coût d'origine, si tant est que les données au coût actuel présentent une valeur. À l'instar de l'analyse macroéconomique de séries chronologiques effectuée par Fama (1981), notre analyse microéconomique en coupe transversale fondée sur des données au coût actuel semble indiquer que les rendements des titres sont reliés positivement à l'activité productive réelle. En outre, les tests laissent supposer qu'à la marge, les données au coût actuel reflètent une information d'activité productive qui, actuellement, pourrait ne pas être véhiculée par les données comptables exprimées au coût d'origine.     

The Declining Value‐relevance of Accounting Information and Non‐Information‐based Trading: An Empirical Analysis*

Recently, a growing body of literature has suggested that financial statements have lost their value‐relevance because of a shift from a traditional capital‐intensive economy to a high‐technology, service‐oriented economy. These conclusions are based on studies that find a temporal decline in the association between stock prices and accounting information (earnings and book values). This paper empirically tests a theoretical prediction arising from the noisy rational expectations equilibrium model that suggests that the decline could be driven by non‐information‐based (NIB) trading activity, because such trading reduces the ability of stock prices to reflect accounting information. Specifically, Dontoh, Radhakrishnan, and Ronen (2004) show that when NIB trading increases, the R²s of a regression of stock price on accounting information declines. Our empirical tests confirm this prediction; that is, the decline in the association between stock prices and accounting information as measured by R²s is driven by an increase in NIB trading.     

Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing

A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (i) the probability of firms becoming acquisition targets decreases with their leverage, (ii) acquirers' share of the total equity gain increases with targets' leverage, (iii) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase, and (iv) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level.