nep-acc New Economics Papers
on Accounting
Issue of 2005‒02‒06
eight papers chosen by
Bernardo Batiz-Lazo
London South Bank University

  1. The Earnings Quality Consequences of Announcements to Voluntarily Adopt the Fair Value Method of Accounting for Stock-Based Compensation By Shilpa Manaktala; John D. Phillips; Karen Teitel
  2. Yes, Managers Should Be Paid Like Bureaucrats By Bruno S. Frey; Margit Osterloh
  3. Accounting and Management Reform in Local Authorities: A Tool for Evaluating Empirically the Outcomes By J. CHRISTIAENS; P. WINDELS; S. VANSLEMBROUCK
  5. DISCLOSURE AND LIQUIDITY By Monica Espinosa; Mikel Tapia; Marco Trombetta
  6. Royal Ahold: A Failure Of Corporate Governance By Jong, A. de; DeJong, D.V.; Mertens, G.; Roosenboom, P.
  7. Toward a Modern State in Chile: Institutions, Governance, and Market Regulation. By Eduardo Saavedra; Raimundo Soto
  8. Taxing Electronic Commerce: The End of the Beginning? By Richard M. Bird

  1. By: Shilpa Manaktala (University of Connecticut, School of Business); John D. Phillips (University of Connecticut, School of Business); Karen Teitel (Department of Economics, College of the Holy Cross)
    Abstract: We identify 133 firms that between July and December 2002, announced plans to voluntarily adopt the fair value method of accounting for stock-based compensation. We investigate whether such announcements increased the quality of these firms’ earnings as perceived by market participants. Answering this research question not only provides evidence relevant to the debate surrounding the expensing of employee stock options, but doing so provides evidence that conservative accounting choices in general lead to higher perceived earnings quality. Using two measures of earnings quality, the price-earnings relation and the earnings response coefficient, we find evidence consistent with an increase in perceived earnings quality for these firms relative to a control set of firms that in 2002 did not announce plans to adopt the SFAS 123 stock-based compensation recognition provisions.
    Keywords: SFAS, stock options, accounting, expensing options, fair value method
    Date: 2004–12
  2. By: Bruno S. Frey; Margit Osterloh
    Abstract: Corporate scandals, reflected in excessive management compensation and fraudulent accounts, cause considerable damage. Agency theory’s insistence on linking the compensation of managers and directors as closely as possible to firm performance is a major reason for these scandals. They cannot be overcome by improving variable pay for performance, as selfish extrinsic motivation is reinforced. Based on the common pool approach to the firm, institutions are proposed which serve to raise intrinsically motivated corporate virtue. More importance is to be attributed to fixed pay and strengthening the legitimacy of authorities by procedural fairness, relational contracts and organizational citizenship behavior.
    Keywords: agency theory, intrinsic motivation, crowding theory, management compensation, pay for performance, organizational citizenship
    JEL: D21 D23 J33 L20
    Date: 2005
    Abstract: Since the last years many governments have undergone an accounting and management reform, being strongly inspired by the New Public Management (NPM) philosophy. This research note provides a methodology to explain the success (if any) of such reforms, by examining the level of compliance with prescribed accounting and management legislation and regulations. To measure the level of adoption of a reform, two compliance indices are constructed. Furthermore, this research note reaches a method to explain the cross-sectional differences in the level of compliance based on factors derived from previous research. After the formulation and explanation of the research questions and the derived hypotheses, this note introduces the concept of the compliance indices in local governments and clarifies the purpose and construction of the accounting and management index. The next section is devoted to an explanation of the research methodology. Finally, the conclusion summarizes the main findings and further research possibilities.
    Date: 2004–11
  4. By: Angel Leon; Diego Piñeiro (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: The aim of this paper consists of valuating a real biotechnology firm that is based on a portfolio of several drug development projects at different phases. They are patentprotected R&D projects and their values are obtained by implementing an extension of the real options approach in Schwartz (2004). To be precise, the life cycle of the drug is modeled by considering an alternative and more realistic behavior for the evolution of the FCF, different from the standard Geometric Brownian motion, once the peak sales is reached till the patent expiration, we will also allow for the possibility of the generic entrance once the patent expires. Different expected costs to completion are considered here, that is one equation to each compound; a different probability of catastrophic event depending on the phase and so on. It is shown that the abandonment value is higher for those compounds being in preclinical testing than those in clinical trials.
    Keywords: Patent, R&D phase, drug, real options, investment cost, free cash flow, generics, life cycle, Monte Carlo simulation.
    JEL: C15 C61 C63 G13 G31
    Date: 2004–11
  5. By: Monica Espinosa; Mikel Tapia; Marco Trombetta
    Abstract: The purpose of this paper is to test empirically the relationship between two important concepts: disclosure and liquidity. Using a sample of Spanish quoted firms between 1994 and 2000 we show that the estimation of the relationship between disclosure and liquidity depends crucially on two factors: a) the multidimensionality of the concept of liquidity; b) the use of an econometric methodology that deals properly with the features of the sample used. However the use of the Amihud (2002) illiquidity measure provides evidence in favour of a positive relationship between disclosure and liquidity.
    Date: 2005–01
  6. By: Jong, A. de; DeJong, D.V.; Mertens, G.; Roosenboom, P. (Erasmus Research Institute of Management (ERIM), Erasmus University Rotterdam)
    Abstract: Royal Ahold (Koninklijke Ahold NV) was one of the major success stories in the 1990s and is one of the major failures in corporate governance, suffering a complete meltdown in 2003. This clinical study analyzes Ahold?s growth strategy through acquisitions and isolates the cause of the failed strategy, i.e. the absence of internal as well as external oversight of management?s strategy. This study details the consequences of the strategy: bad acquisitions, an accounting scandal and the loss of investor confidence. It illustrates how initially a family and later professional management exploited the intent of the law and existing regulatory structures to maintain absolute control of the company. It analyzes in detail the applicable governance mechanisms of Ahold that were designed to hold the self-interest of the parties in check. It asks the reader to consider whether these governance mechanisms, properly implemented, might have helped prevent Ahold or a situation similar to Ahold.
    Keywords: international economics;financial economics;law and economics;corporate governance;regulation;
    Date: 2005–01–25
  7. By: Eduardo Saavedra (ILADES-Georgetown University, Universidad Alberto Hurtado); Raimundo Soto (Departamento de Economía, Pontificia Universidad Católica de Chile)
    Abstract: Chile, as most Latin American countries, inherited the language, religion, and the institutions from 16th century Spanish conquerors. Most institutions have not changed since. This paper examines the institutional and economic structure of the State in Chile. It concludes that in several dimensions the current structure is incompatible with an adequate functioning of market economies, as those intended by the economic reforms implemented during the last three decades of the last century. The country needs to implement reforms in the administration of the State, the working of the Judiciary system, and the incentives and operation of regulatory agencies. Their combined negative effects imply that the benefits of reforms, privatization and market liberalization are partially dissipated in the form of inefficiency and rent seeking behaviour. In turn, this suggest that it is unlikely that the Chilean economy will reach the high growth rates necessary to overcome under development. Our main conclusion is that, in order to implement a framework in which the State acts mainly as regulator and competition supporter, it is necessary to undertake profound changes in the structure of incentives in which it currently operates. Five elements are at the center of this far-reaching evolution away from centralism, stagnation, and inefficiency: (1) the divestiture of state-owned enterprises, (2) the upgrade and update of regulatory agencies and the institutional framework in which they operate, (3) the improve of competition policy institutions, (4) the improvement of consumer rights protection, and (5) a substantial improvement in the working of the Judiciary system.
    Keywords: Modernization, Institutions, Regulation, Governance
    JEL: H11 K21 K23 L51 L97
    Date: 2004–12
  8. By: Richard M. Bird (University of Toronto)
    Abstract: This paper discusses what the growth of e-commerce means for tax policy and administration, both within countries and between them. Although the fiscal implications of such commerce as yet remain limited, the future may be different and the issues are important. The issues are first discussed with respect to consumption taxes, noting some differences in the situations facing the United States (US) on one hand, the European Union (EU) on the other, and Canada, which in some ways combines characteristics of both. When it comes to income taxes, however, everybody seems to be in more or less the same boat, although the new technology may offer solutions as well as problems for those in the tax business. The paper concludes that, while of course the future remains unknown, when it comes to taking action to deal with the potential implications of e-commerce for taxation, we are by no means at the beginning of the end, but we may, perhaps, be at the end of the beginning.
    Keywords: taxation, electronic commerce, value-added tax, retail sales tax
    JEL: H20 H71 H87
    Date: 2005–01

This nep-acc issue is ©2005 by Bernardo Batiz-Lazo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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