Rationality of executive compensation schemes and real accounting changes*

Abstract. Managerial preference for accounting methods is examined with respect to the effects of the chosen methods on executives' annual compensation (salary and bonus). Two propositions are considered: (a) the bonus-hypothesis, and (b) the rationality of compensation schemes. While the former asserts a tie between compensation and accounting income, the latter stipulates a connection between the real (cash flow) consequences of the choice of accounting methods and executives' compensation. Two accounting method changes were used: (a) the change in pension costing and funding (which increases both income and operating cash flows), and (b) the change in inventory valuation method to LIFO (which decreases income and increases cash flows). Unexpected compensations in the switch-year were correlated with the effects of each accounting change on income. The results suggest that top executives' salary and bonus payments increased in the switch-year beyond levels predicted by the pre-switch compensation parameters. Several validation checks were also performed using comparison samples. Furthermore, the effects of these two accounting changes on income were found to correlate with unexpected compensation in the directions predicted by the hypothesis of rationality of compensation schemes. Résumé. Les préférences de la direction quant aux méthodes comptables sont examinées relativement aux effets des méthodes retenues sur la rémunération annuelle des dirigeants (salaries et gratifications). Deux propositions sont envisagées: (a) l'hypothèse de gratification, et (b) la rationalité des systèmes de rémunération. Alors que la première proposition affirme l'existence d'un lien entre la rémunération et le bénéfice comptable, la seconde est à l'effet qu'il existe une relation entre les conséquences réelles (flux de trésorerie) de la méthode comptable choisie et a rémunération des dirigeants. Deux types de changement de méthode comptable furent considérés: (a) le changement dans la comptabilisation des coûts et la capitalisation des régimes de retraite (augmentant à la fois le bénéfice comptable et le flux monétaire d'exploitation), et (b) le changement de méthode d'évaluation des stocks pour DEPS (diminuant e bénéfice comptable et augmentant les flux de trésorerie). Les rémunérations imprévues versées dans l'année où il y eut changement ont été corrélées aux effets de chaque modification comptable sur le bénéfice.     

The acquisition value of oil and gas firms: The role of historical costs,reserve recognition accounting,and analysts' appraisals*

Abstract. Our research confirms that book values possess significant ability to explain the acquisition values of oil and gas firms. It also indicates that RRA information provides incremental information over book values in determining acquisition values. However, when analyst information is more current than competing information, analysts' appraisals provide a significant incremental contribution beyond the explanatory ability of book values and reserve recognition data. Current analysts' information provides a stronger basis for predicting acquisition values than any model supplementing analysts' appraisals with additional information. This implies that current analysts' information captures all information sources and is consistent with the findings of “analysts superiority” in the extensive literature on earnings forecasts. Résumé. Les travaux des auteurs confirment que les valeurs comptables peuvent assez bien expliquer les valeurs d'acquisition des entreprises pétrolierès et gazières. Ils révèlent également que les renseignements livrés par la méthode de la capitalisation des gisements fournissent de l'information marginale par rapport aux valeurs comptables dans la détermination des valeurs d'acquisition. Toutefois, lorsque l'information des analystes financiers est plus récente que l'information concurrente, les évaluations des analystes apportent une contribution marginale importante au-delà de la capacité explicative des valeurs comptables et de données relatives à la capitalisation des gisements. L'information récente des analystes offre une base plus solide pour la prévision des valeurs d'acquisition que tout modèle qui sert de complément aux évaluations des analystes. Cela suppose que l'information récente des analystes recouvre toutes les sources d'information et vient confirmer la conclusion reconnaissant la «supériorité des analystes » à laquelle se range une abondante documentation sur les prévisions de résultats.     

A Reconsideration of Minsky's Financial Instability Hypothesis

The worst and longest depressions have tended to occur after periods of prolonged, and reasonably stable, prosperity. This results in part from agents rationally updating their expectations during good times and hence becoming more optimistic about future economic prospects. Investors then increase their leverage and shift their portfolios toward projects that would previously have been considered too risky. So, when a downturn does eventually occur, the financial crisis and the extent of default become more severe. Whereas a general appreciation of this syndrome dates back to Minsky (1992) and even beyond, to Irving Fisher ( 1933 ), we model it formally. In addition, endogenous default introduces a pecuniary externality since investors do not factor in the impact of their decision to take risk and default on the borrowing cost. We explore the relative advantages of alternative regulations in reducing financial fragility and suggest a novel criterion for improvement of aggregate welfare.     

Intergenerational Complementarities in Education,Endogenous Public Policy,and the Relation Between Growth and Volatility

We construct an overlapping generations model in which parents vote on the tax rate that determines publicly provided education and offspring choose their effort in learning activities. The technology governing the accumulation of human capital allows these decisions to be strategic complements. In the presence of coordination failure, indeterminacy and, possibly, growth volatility emerge. This indeterminacy can be eliminated by an institutional mechanism that commits to a minimum level of public education provision. Given that, in the latter case, the economy moves along a uniquely determined balanced growth path, we argue that such structural differences can account for the negative correlation between volatility and growth.