The effect of cost management knowledge on the relationship between budgetary participation and managerial performance

This study investigates the relationship between budget participation (BP), cost management knowledge and managerial performance. It draws on relevant previous research in the theory of work performance and accounting to formulate the research questions. Eighty-three managers from Finnish companies participated in the study. Data were collected from the managers using a mail questionnaire. The results indicate that managers’ cost management knowledge, and especially the balanced perspective of cost management knowledge, moderates the effect of BP on self-perception of managerial performance. It was specifically found that the effect of BP on perceived managerial performance becomes more positive when managers’ cost management knowledge increases. High perception of managerial performance is obtained when both the BP and managers’ cost management knowledge are high. Our results suggest that organizations should improve the cost management knowledge of managers who participate in the budgeting process.     

Do investors value smooth performance?

This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings smoothing resulting from managers’ accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers’ efforts to produce smooth financial statements add value, but only via the cash component of earnings.     

A note on work-related values, budget emphasis and managers’ organisational commitment

Managers’ work-related values (WRVs) have important implications for designing appropriate management accounting systems (MAS) in organisations. This paper examines the effect of the interaction between managers’ WRV for innovation and budget emphasis (an integral part of MAS) on their organisational commitment. The sample consisted of 109 managers from production, marketing and support departments within Australian manufacturing firms. Hypotheses were tested using both quantitative and qualitative data collected by a questionnaire survey and post-survey interviews. The results indicate that the adoption of low budget emphasis led to high organisational commitment when managers’ WRV for innovation was high, but not when managers’ WRV for innovation was low. The results also indicate that marketing managers held higher WRV for innovation than production managers. The post-survey interviews provide further insight into how a more customer- and competitor-focused subculture of marketing managers and a more technical- and efficiency-focused subculture of production managers may promote the difference in their WRV for innovation, and affect their attitudes towards budget emphasis. The findings of the study have implications for design of performance evaluation systems for managers in functionally differentiated organisations.     

The effect of framing and negotiation partner’s objective on judgments about negotiated transfer prices

A common approach to set transfer prices is via intra-firm negotiation. However, Luft and Libby [Luft, J. L., & Libby, R. (1997). Profit comparisons, market prices and managers’ judgments about negotiated transfer prices. The Accounting Review, 72(2), 217–229] found that because of the existence of self-serving biases, negotiating managers have different expectations regarding what constitutes a ‘fair’ transfer price, leading to a less efficient negotiation process. In this study, we examine two factors that are expected to affect managers’ transfer price negotiation judgments, namely, framing as a gain or as a loss and the negotiation partner’s objective (whether the partner’s objective involves high or low concern-for-others). We propose that these two factors affect managers’ perceptions of the negotiation context, and thus the way they interpret the economic and social consequences of accounting information. Our results show that a loss frame (compared to a gain frame) exacerbates managers’ self-serving biases and increases the ‘transfer price expectation gap’ between buyers and sellers. Further, in our experiment where market price is higher than equal-profit price, we find that managers’ transfer price expectations are lower (and deviate more from the prevailing market price) when they are negotiating with a partner with high concern-for-others than with a partner with low concern-for-others. We discuss the broader implications of these results for the design of management accounting systems.     

Competition, fee-for-service requirements, and government performance: evidence on the Federal Reserve

This paper examines the impact of competition and fee-for-service requirements on the efficiency and quality of government services. Using internal cost and quality data on the United States Federal Reserve, I find that fee-for-service requirements alone were not enough to motivate performance improvements. Costs went down only in the single Fed service (forward check-clearing) that also faced vigorous product-market competition, and the extent of the cost reductions was greater in more competitive markets. Importantly, the cost reductions in check-clearing were accompanied by quality improvements, with service quality positively associated with contemporaneous and subsequent costs. These results are consistent with studies on the private sector that indicate that quality improvements can increase productivity and reduce costs. Taken together, the evidence points to competition as a potential tool in the nation’s efforts to improve the performance of government services.     

Associations between strategic resource importance and performance measure use: The impact on firm performance

This study investigates the relation between managers’ perception of the importance of several types of performance measures and managers’ assessment about the importance of the firm's strategic resources that sustains its competitive advantage. Furthermore, it investigates whether there is a significant association between the importance of performance measures and firm performance, and thus, whether performance measures are mediating variables in the relation between the importance of strategic resources and performance. Using survey data from 107 companies, the results indicate that managers place importance on multiple measures and show some evidence that the importance of performance measures mediates the association between the importance of strategic resources and performance. Implications and insights are discussed, along with ideas for future research.     

The marketability of bank assets, managerial rents and banking stability

Financial innovation and greater information availability have increased the tradability of bank assets and have reduced banks’ dependence on individual bank managers. We show that this can have two opposing consequences for banking stability. First, the hold-up problem between bank managers and shareholders becomes less severe. Consequently, banks’ capital structure needs to be less concerned with disciplining the management. Deposits – the most effective disciplining device – can be reduced, increasing banks’ resilience to adverse return shocks. However, limiting the hold-up problem also diminishes bank managers’ rents, reducing their incentives to properly monitor and screen borrowers, with adverse implications for asset quality. Thus, the default risk of banks does not necessarily decline. We argue that this delivers a novel explanation for the origin of the recent subprime crisis.     

An investigation of how the informal communication of firm preferences influences managerial honesty

This study investigates the effectiveness of informal firm communication at motivating managerial honesty. Specifically, it focuses on the effectiveness of informal cost targets, which communicate firms’ specific cost preferences to managers without tying managers’ compensation to reporting costs that meet those targets. I develop predictions about how the tightness of an informal cost target influences the effect that a cost target has on managers’ reporting honesty. Using an experimental setting, I examine three levels of target tightness—loose, moderate, and tight—within a uniformly distributed cost range and where participants’ financial incentives are to ignore the cost target and fully misreport their cost information. I find that both moderate and loose cost targets, on average, increase honesty relative to when the firm does not communicate a specific target or it communicates a tight target. Tight targets have no significant effect, positive or negative, on honesty. Whereas prior research focuses only on the potential benefits of firms communicating their general preferences, my study provides important insights regarding the potential incremental effectiveness of communicating specific preferences.     

Managing budget emphasis through the explicit design of conditional budgetary slack

Budgetary slack plays an important role in the functioning of budgets in organizations. While theory has found negative as well as positive elements associated with its presence, the empirical literature has interpreted it as being dysfunctional to organizations. In this paper, we present empirical evidence on how a company purposefully budgeted additional financial resources with a motivation intention (Lukka. Budgetary biasing in organizations: Theoretical framework and empirical evidence. Accounting, Organizations and Society 13 (1998) 281–302) to facilitate the managers’ task in achieving the goals of the company. Using quantitative and qualitative data from four logistic sites of a disk drive manufacturer for 24 months, we examine how the company accepted more slack as the demand on business processes increased and goals other than budget targets––in particular, service quality––became harder to achieve. By allowing this practice, headquarters made it clear to local managers that product quality and service were at least as important as meeting budget objectives. We also find that not only was budgetary slack purposefully built during the budgeting process but also in the budgeting system itself through the underlying cost accounting assumptions. The results of this paper provide empirical evidence on the positive aspects of budgetary slack and on the role of cost accounting models used in the budgeting system to facilitate managerial work.     

CORPORATE GOVERNANCE AND ACCOUNTING MODELS OF THE REPORTING ENTITY

The IASC’s Framework (1989) allows a choice of accounting models when measuring financial performance. However, subsequent reports by the G4+1 focus exclusively on the version of the Assets−Liabilities=Equity model pioneered by the[16], [17]. Sub-components of income, such as operating income, are acknowledged as important but these are treated as matters for display and are not conceptually defined. The issue of model choice has assumed increased importance following the decision of the EU to require the group accounts of listed companies to comply with International Accounting Standards by 2005. In this paper the emerging literature that links styles of corporate governance to financial and legal systems and then to economic performance is extended to consider the role of accounting model choice. The issue of accounting for non-reciprocal transfers, in particular, government grants, is used to illustrate the reduction in the relevance, reliability and comparability of financial statements that result from the failure to provide a conceptual definition of performance at the level of operating profit. Compliance with UK disclosure requirements for government grants following the 1981 Companies Act is investigated and differences in the corporate governance, financial, legal and accounting systems of Germany, a code law country, and the UK, a common law country, are reviewed. To serve the interests of investors in all jurisdictions and the information requirements of different styles of corporate governance it is recommended that different accounting models be applied to measure operating income and shareholder income in a single income statement.     

Market Valuation of Research and Development Spending under Canadian GAAP*

Section 3450 of the Canadian Institute of Chartered Accountants (CICA) Handbook requires Canadian firms to capitalize development costs that meet certain criteria and to expense those that relate to research. International Accounting Standard (IAS) No. 38 favours a similar approach. In the United States, Statement of Financial Accounting Standard (SFAS) No. 2 recommends the immediate expensing of all research and development (R&D) spending. The only exception is SFAS No. 86, which requires software development costs to be capitalized when a product successfully passes a technological feasibility test. Consequently, the Canadian financial disclosure regime provides a rich setting for testing the market valuation of capitalized R&D. Our primary research question asks whether capitalized R&D provides useful information to market participants investing in Canadian firms. We use price‐level and return models to assess the value relevance of capitalized R&D disclosed in the financial statements under Canadian GAAP. In line with expectations, using a price‐level model, we find that capitalized R&D and R&D expense as disclosed in the financial statements provide information that is value relevant to market participants. However, we find that R&D capitalized during the year helps explain returns while R&D expense does not. Thus we conclude that the application of section 3450 of the CICA Handbook produces value‐relevant information.     

Usefulness of comprehensive income reporting in Canada

In January 2005 the Canadian Accounting Standards Board (AcSB) issued three new accounting standards that require Canadian firms to mark-to-market certain financial assets and liabilities and recognize the holding gains and losses related to these items as other comprehensive income or as part of net income. The Board’s objectives for issuing the new standards are (i) to harmonize Canadian GAAP with US and International GAAP, (ii) to enhance the transparency and usefulness of financial statements, and (iii) to keep pace with changes in accounting standards in other countries that are moving towards fair value accounting. This paper investigates empirically whether requiring Canadian companies to report comprehensive income and its components provides the securities market with incremental value-relevant information over the traditional historical-cost earnings approach.Previous empirical studies provide mixed evidence on the value relevance of other comprehensive income and its components. This mixed evidence may be attributed partially to the use of as if methodology to construct an ex-ante measure of other comprehensive income prior to the implementation of SFAS 130, which introduces measurement error. In contrast, this study uses actual data on other comprehensive income for a sample of Canadian firms cross-listed in the US in the period 1998–2003. We find evidence that available-for-sale and cash flow hedges components are significantly associated with price and market returns. We also find that aggregate comprehensive income is more strongly associated (in terms of explanatory power) with both stock price and returns compared to net income. However, we find that net income is a better predictor of future net income relative to comprehensive income. Our findings suggest that mandating all Canadian firms to adopt the new accounting standards is expected to enhance the usefulness of financial statements. Our findings, therefore, should be of interest to Canadian accounting policy makers as they provide ex-ante evidence on the potential usefulness of mandating firms to report comprehensive income and the components of other comprehensive income in their financial statements.     

Is private social, ethical and environmental reporting mythicizing or demythologizing reality?

There is some evidence that private social, ethical and environmental reporting (SEER) between companies and their core institutional investors has started to evolve over recent years. However, there is little research exploring the private SEER process in detail. This paper seeks to address this evolving area of corporate communication using interviews. The evidence reveals a series of mutual benefits to companies and institutional investors arising from the private SEER process. Companies are gaining from SEE engagement and dialogue, as they are using the process to inform public SEE disclosure. They are using private SEE disclosure to preempt investor surprises. Institutional investors are benefiting from the supplementary SEE information gained in private communications with investee companies. They are also using information on managers’ SEE performance gained from private dialogue, as a proxy for management quality. The private SEE disclosure process appears to be nurturing mutual understanding between companies and their core institutional investors. Drawing from a pedagogic perspective, applied previously to SER and stakeholder engagement, as well as to accounting education, we show that ‘good’ private SEE disclosure should take on the characteristics of a dialogic, problem-posing, educative process. We consider four potential outcomes. Such a process may demythologize SEE issues. However, there is also the possibility that a recreated joint myth may emerge from collaborative dialogue between two such powerful groups. Other possible outcomes are that companies may capture the process in order to perpetuate their own SEE myth or that private SEE disclosure may dwindle as public SEE disclosure improves.     

Hedging, hedge accounting, and speculation in a rational expectations equilibrium

This paper explains corporate hedging and speculation in a two period rational expectations model. A risk averse manager represents a firm that is priced in a risk neutral market. The manager enters into a cash flow hedge of a forecast transaction by taking a short position in the futures market. When the futures position is chosen, the manager possesses private information regarding the firm’s production capacity. Mandatory disclosure of the futures position in the financial statements allows the market to draw inferences over the manager’s information. These inferences affect the market’s pricing decision and in turn the manager’s hedging decision. The futures position taken is chosen not only to reduce price risk exposure but to signal some capacity level. In equilibrium, however, the market anticipates the manager’s strategy and is not fooled.Considering varying managerial preferences, we analyze three settings. In the basic setting speculation occurs whenever the manager prefers high market values in both periods. In the second setting we add transaction costs and find that speculation is less likely. Finally, we introduce uncertainty regarding the manager’s preferences. If the market needs to determine prices based on expected preferences, incentives to speculate are mitigated in equilibrium but still present.     

资产负债项目可靠性、盈余持续性及其市场反应

本文将资产负债项目的可靠性和盈余的持续性相联系,并探讨资本市场能否解读这种联系。首先,理论分析表明可靠性更差的资产负债项目导致盈余的持续性更低。其次对应计项目进行分类并评价其可靠性。最后,证据表明,更不可靠的应计项目导致盈余的持续性更低,并且资本市场没有充分预期到这种联系从而作出错误反应。这些结果说明,在财务报表中确认可靠性更低的应计项目会导致更大的成本,相关性的获得不应以牺牲可靠性为代价。     

Carbon Disclosure,Financial Transparency,and Agency Cost: Evidence from Chinese Manufacturing Listed Companies

Given the constraints on carbon emissions due to their impact on global warming, carbon disclosure has become an important way to deliver signals to the market. We examine the benefits associated with carbon disclosure from the standpoint of corporate social responsibility (CSR) for China’s manufacturing industries from 2010 to 2014. We divide corporations into heavily polluting and non-heavily polluting groups in order to control the industry factor. Based on the Principal-Agent Theory, we empirically test the relationship between carbon disclosure and financial transparency, and we evaluate the effect of carbon disclosure on agency costs and operations. Our results highlight that carbon disclosure is negatively associated with agency costs. However, we do not find enough evidence to prove what role financial transparency plays in the relationship between carbon disclosure and agency cost. Therefore, the influence of financial transparency as a mechanism is not yet clear. This study provides a way to look at the intentions of firms that disclose carbon information, and it also enhances the literature on carbon disclosure and agency costs in China based on Chinese data.     

Analyst estimation revision clusters and corporate events, Part II

Summary In Part I of this study, we evaluated the relative usefulness of information in alternative corporate information events (CIEs) to analysts by examining the frequency with which they trigger clusters of analysts’ earnings estimate revisions. In Part II, we examine investor response to various CIEs and their revision clusters. We find that stock prices react most strongly and adjust most quickly to revision clusters that accompany CIEs that focus on financial statement information. CIEs that offer strategic information take longer for analysts and investors to assimilate, and investors appear to rely heavily on later analyst revisions following such events.     

Accounting choice and future performance: The case of R&D accounting in France

We examine whether managers’ decisions to capitalize or expense R&D expenditures convey information about the future performance of the firm. Focusing on a French setting where managers can choose to capitalize R&D expenditures under certain circumstances, we find that, after controlling for industry effects, firms that capitalize R&D expenditures spend less on R&D, have more volatile R&D efforts, and are smaller and more leveraged than firms that expense R&D expenditures. We also find that capitalizers capitalize R&D outlays when they need to meet or beat thresholds. Finally, we show that the decision to capitalize R&D is generally associated with a negative or neutral impact on future performance, even after controlling for self-selection. Our results also show that when firms both capitalize and expense R&D expenditures, the expensed portion exhibits a stronger (and negative) relationship with future performance. Market-based tests corroborate these findings. While we cannot unambiguously establish whether our findings imply that management uses R&D capitalization to manage earnings or because it is unable to estimate the earning power of R&D projects, our results suggest that management is unable to truthfully convey information about future performance through its decision to capitalize R&D. Our findings, based on real data as opposed to simulated data, therefore contrast with previous supportive evidence in favor of capitalization in the literature.     

Economic consequences of firms’ depreciation method choice: Evidence from capital investments

This study identifies several interrelated reasons why firms’ depreciation method choice is likely to influence managers’ capital investment decisions. We find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight-line depreciation. Further, we find that there has been a migration away from accelerated depreciation to straight-line depreciation over the past two decades. Firms that make such accounting changes make smaller capital investments in the post-change periods than in the pre-change periods. These results suggest that a choice made for external financial reporting purposes influences managers’ capital investment decisions.     

The usefulness of accounting estimates for predicting cash flows and earnings

Accounting estimates and projections potentially improve the relevance of financial information by providing managers a venue to convey to investors forward-looking, inside information. The quality of financial information is, however, compromised by the increasing difficulty of making reliable estimates and forecasts and the frequent managerial misuse of estimates. Given the ever-increasing prevalence of estimates in accounting data, particularly due to the move to fair value accounting, whether these opposing forces result in an improvement in the quality of financial information is among the most fundamental issues in accounting. We examine the contribution of accounting estimates embedded in accruals to the quality of financial information, as reflected by their usefulness in the prediction of enterprise cash flows and earnings. Our out-of-sample prediction tests indicate that accounting estimates beyond those in working capital items (excluding inventory) do not improve the prediction of cash flows. Estimates do, however, improve the prediction of next year’s earnings, though not of subsequent years’ earnings. We conclude that the usefulness of accounting estimates to investors is limited and provide suggestions for improving the usefulness of estimates.