Systematic risk and the theory of the firm: A reexamination

A recent microeconomic model of the determinants of equity betas (Subrahmanyam and Thomadakis 1980) is generalized by including risky human capital in the market portfolio and allowing a general covariance structure between the model's sources of uncertainty. This provides an explanation of the ambiguous effect of operating leverage on beta by viewing human capital and equity contributors as risk sharers in the firm's output risk. This explanation may help to clarify the apparent conflict with the previous literature. The relationship between systematic risk and monopoly power is rederived and shown to depend upon a plausible condition on the correlation between wage rate and price uncertainty. Finally, the public policy implications of this analysis are presented.     

Inventories,credit transactions,and the marginal effective tax rate

It is observed that marginal effective tax rates (METR), as conventionally calculated, can only consider working capital requirements to a limited extent. A formula is derived to incorporate inventory requirements into the calculation and, via a numerical example, it is shown that such an incorporation can radically alter METRs from those conventionally calculated. The analysis is extended to credit transactions without affecting the above conclusion. Thus, if METRs are to be used as a means of evaluating the effects of tax policy on the incentive to invest, working capital requirements need to be explicitly allowed for.     

A look at the public policy conflict regarding the discovery of accountants' tax accrual workpapers

This article focuses on the conflict in public policy between the need to provide the investing public with accurate information with regard to corporate financial statements and the need to provide the IRS with the necessary tools in order to assure corporate compliance with the tax laws of the country. The conflict arises because of the contention of the IRS that it is entitled to have access to an independent auditor's tax accrual workpapers on the one hand, and the contention by CPAs that such access will prevent adequate disclosure to the independent auditor. The article examines the policy questions on both sides of the issue and concludes that regardless of any decision by the Supreme Court in a pendingcase, Congress should pass legislation to resolve the conflict and clearly identify the scope of any previlage accorded with regard to tax accrual workpapers.     

Failure prediction: Sensitivity of classification accuracy to alternative statistical methods and variable sets

The purpose of this study was to assess the sensitivity of the prediction of business failure to the use of different variable sets and different statistical methods. This objective was accomplished by comparing the performance of failure prediction models using four alternative variable sets on firms which failed from 1966–1975. The four sets of variables were those used by Altman (1968), Deakin (1972), Blum (1974), and Ohlson (1980). A linear discriminant model, a quadratic discriminant model, and a logit model were developed for each of the four variable sets. For a given variable sets, the linear and logit models had comparable misclassification rates and performed at least as well as the quadratic models. Using linear discriminant analysis or logit analysis, all four variable sets performed comparably.     

Accounting and budgeting systems: The issue of congruency

The importance of designing an accounting system that is congruent with an organization's budgeting system has been noted in the literature. Unfortunately, in many government organization it is common to find incompatible budgeting and accounting systems. The purpose of this study is to investigate whether gearing the accounting information system to a zero-base budgeting system increases the perceived usefulness of the budgeting process. This issue is examined under conditions of both scare and abundant resources. Based on an empirical study, it is shown that the usefulness of a budgeting system to budget recipients may indeed be dependent on the accounting information system, conditioned on the availability of resources. Given the relationship between budgeting and public policy, implications of the study for the public policy making process are discussed.     

Accounting information and municipal bond net interest cost: An empirical evaluation

The objective of this study was to test the association between the surplus/deficit of selected Minnesota municipalities and the net interest cost of the general obligation bonds issued by these municipalities. This objective was accomplished by employing a pooled time-series design.A two-way analysis of variance was used to determine if there was a significant difference in the effect of net interest cost between positive and negative forecast errors. The ANOVA results of both tests indicate that the surplus/deficit is not correlated with increases/ decreases in the net interest cost of the bonds issued by a municipality. The results were unaffected by the exclusion of bond ratings as an independent variable.     

A fundamental flaw of debt limitations for state and local governments

Debt limitations, though adopted with the noblest of intentions, have failed to reduce governmental borrowing because of the ease with which they can be circumvented. This article identifies a critical deficiency of debt limitations: the difficulty of developing a definition of debt that is broad enough to prevent governments from using subterfuges to increase borrowing capacity and yet is sufficiently narrow to enable them to carry out their assigned functions. It reviews the history of debt limitations and the judicial interpretations of them. It shows how courts have analyzed leases and other executory contracts that create debts so as to permit form to take precedence over economic substance.     

The importance of state accounting practices for creditor decisions

This paper examines the association between state government accounting practices and creditor decisions. Creditor decisions were surrogated by yield premiums and variances of the premiums on general obligation debt securities. Accounting practices were summarized from the Council of State Governments Survey. In addition to these practices, accounting ratios and bond ratings were included as independent variables in regression models. The results demonstrated that accounting practices were not directly associated with the bond risk and return measures but may have been indirectly related as a result of their effect on bond ratings.     

Auditor independence and nonaudit services: Director views and their policy implications

The external auditor's role and relationship with an audit client are not purely matters of private concern between the two parties. The rationale for the external auditor's work—indeed a primary justification for the existence of the public accounting profession—arises from the need for reliable financial information in order for our economy to operate smoothly. Thus the auditor, in certifying financial statements, performs a quasi-public function. The necessary relationship between auditor and client is one of complete independence. In recent years public policymakers including the U.S. Congress have questioned the propriety of auditors' performing nonaudit services for their clients. This paper reports the results of an empirical study of U.S. corporate directors who considered the propriety of allowing a firm's auditors to perform various nonaudit service engagements.The results show, especially in the case of systems design, increasing director concern and a lack of overall consensus as nonaudit services approach 40 percent of the firm's audit fee. Policy implications of the findings are considered.     

Class-action privileges and contingent legal fees: Investor and lawyer incentives to litigate and the effect on audit quality

The Cohen Commission recognized the importance of litigation incentives and recommended that research based upon an economic approach be conducted into the effects that litigation incentives can have on the auditing profession. By extending Simon (1981), an economic analysis of an auditing environment is presented wherein audit firms issue reports, representative investors make decisions based upon audit reports, and lawyers (as well as representative investors) play an active role in determining whether or not to initiate litigation against audit firms. The influence that alternative litigation privileges (i.e., class-action privileges with contingent legal fees and no class-action privileges with fixed legal fees) have on representative investor and lawyer incentives to litigate and on the equilibrium characteristics of this audit market are analyzed.     

Utilization of SFAS No. 14 disclosures in assessing operating risk

This paper examines the usefulness of segmental disclosures required by SFAS No. 14 in assessing the operating risk of the firm. It is shown that the segmental asset data required by SFAS No. 14 is theoretically linked to an assessment of operating risk. In addition, an empirical investigation is conducted to examine whether this new disclosure was material enough to cause a reassessment by market participants of the operating risk of the affected firms. Segmental disclosure policy implications of the findings of this study are also discussed.     

Pension ratios as “correlates” of municipal pension underfunding

Unlike the corporate sector, detailed estimates of unfunded pension liabilities for most local governments are not available. Thus, prior research on the association between unfunded pension liabilities and municipal creditor decisions (Copeland and Ingram 1983; Marks and Raman 1985) has implicitly assumed that certain pension ratios are good surrogates for municipal pension underfunding. In this paper, we rely on a theoretical model by Ehrenberg (1980) to test empirically the appropriateness of pension ratios as “correlates” of municipal pension underfunding. These ratios were found to be correlated with pension underfunding, although they accounted for only about 30 percent of the variance in the underfunding variable.     

Theories of the state and the state of accounting: Economic reductionism and political voluntarism in accounting regulation theory

It has recently been suggested that the inability of the economics-finance literature to say anything definitive about the appropriate form of accounting regulation highlights the need to augment neoclassical economic analysis with sociopolitical considerations. It is argued in this paper that patching up the orthodox theory would be futile; that the flaws are so fundamental as to warrant abandoning neoclassical state theory and embarking on a serious debate about radical theoretical alternatives. Economic reductionism and political voluntarism are shown to be the main flaws in the neoclassical theory, and these deficiencies are primarily responsible for the present theoretical disarray. After a brief overview of radical theories of the state, this paper suggests that replacing—not refurbishing—neoclassical state theory is the most plausible strategy for accounting researchers.     

An analysis of the role of accounting standards for enhancing corporate governance and social responsibility

Accounting standards have been suggested as a means of requiring reporting by corporations that would enhance managers' concern for their shareholders and/or society. The analysis presented in this paper, however, leads to the conclusion that this role for accounting standards is not likely to be beneficial. The conclusion is based on the fact that the required measurements for useful standards cannot generally be made. This inherent limitation is absolute with respect to social responsibility concerns. With respect to corporate governance, accounting standards might be useful, primarily for reporting potentially fraudulent dealings and similar misuses of shareholder's assets by corporate managers. But even then, the cost of an accounting standard, ex ante, is likely to exceed its benefits to shareholders.