Unobservable outcomes and multiattribute preferences in the evaluation of managerial performance*

Abstract. This paper employs a generalized principal-agent model to analyze accounting situations in which the outcome is not jointly observable and the principal's and agent's preferences are multiattribute in nature. This requires the consideration of accounting signals for risk-sharing (or insurance) information in addition to performance evaluation (or incentive) information. It is shown that precisely two factors determine whether a signal will be valuable in the agency relationship: Observability of the agent's effort and the principal's multivariate risk neutrality. Sufficient conditions for various accounting signals to have value are also developed. Furthermore, when multiple accounting signals are available, it is shown that under certain conditions, the insurance components of the multiple signals can be aggregated into a single aggregate insurance measure and the incentive components of the signals can be aggregated (via a different aggregation procedure) into another aggregate incentive measure. Résumé. Les auteurs utilisent un modèle généralisé mandant-mandataire pour analyser les situations comptables dans lesquelles le résultat n'est pas observable conjointement et les préférences du mandant et du mandataire comportent, par nature, de multiples attributs. Cela exige la prise en considération d'indicateurs comptables relatifs à l'information sur le partage des risques (ou de l'assurance) en plus de l'information relative à l'évaluation du rendement (ou aux stimulants). Les auteurs démontrent que deux facteurs permettent de déterminer avec précision si un indicateur sera valable dans la relation de mandataire: le caractère observable de l'effort du mandataire et la neutralité multivariée du mandant à l'égard du risque. Des conditions suffisantes pour que les divers indicateurs comptables soient valables sont également établies. En outre, lorsque des indicateurs comptables multiples sont disponibles, les auteurs démontrent que dans certaines conditions, les éléments des indicateurs multiples liés à l'assurance peuvent faire l'objet d'une regroupement en une seule mesure globale d'assurance, et que les éléments des indicateurs liés aux stimulants peuvent faire l'objet d'une regroupement (au moyen d'une méthode différente) en une autre mesure globale des stimulants.     

Measuring the Degree of International Harmony in Selected Accounting Measurement Practices

This research assesses empirically the extent to which selected accounting measurement practices of companies from France, Germany, Japan, the UK and the US are harmonised in the context of major international efforts to enhance the comparability of company financial statements. The findings suggest that significant differences continue in accounting measurement practices between companies originating in each of these countries. The results of the study have important implications for international standard-setters, investors, creditors and those interested in international accounting.     

Stock Dividends,Stock Splits,and Signaling

This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a signaling explanation is incomplete.     

The Pricing of Initial Public Offers of Corporate Straight Debt

This study examines the initial-day and aftermarket price performance of corporate straight debt IPOs. We find that IPOs of speculative grade debt are underpriced like equity IPOs, while those rated investment grade are overpriced. IPOs of investment grade debt are typically issued by firms listed on the major exchanges and underwritten by prestigious underwriters. In contrast, junk bond IPOs are more likely to be handled by less prestigious underwriters and are typically issued by OTC firms. Our analysis also reveals that bond rating, market listing of the firm, and investment banker quality are significant determinants of bond IPO returns.