nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2007‒12‒08
seven papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Residual income and value creation: An investigation into the lost-capital paradigm By Magni, Carlo Alberto
  2. Finanical and Tax Accounting: Transparency and 'Truth' By Judith Freedman
  3. Information in Balance Sheets about Future Stock Returns: Evidence from Net Operating Assets By Georgios Papanastasopoulos; Dimitrios Thomakos; Tao Wang
  4. Cost stickiness revisited: Empirical aplication for farms By Josep Maria Argiles Bosch; Josep Garcia Blandon
  5. A Sum&Discount method for appraising firms:An illustrative example By Magni, Carlo Alberto
  6. A Balance-Sheet Approach to Fiscal Sustainability By Eduardo Levy Yeyati and Federico Sturzenegger
  7. Internal and external factors on firms? transfer pricing decisions: Insights from organization studies By Dan Li; Manuel Portugal Ferreira

  1. By: Magni, Carlo Alberto
    Abstract: This paper presents a new way of measuring residual income, originally introduced by Magni (2000a, 2000b, 2003). Contrary to the standard residual income, the capital charge is equal to the capital lost by investors. The lost capital may be viewed as (a) the foregone capital, (b) the capital implicitly infused into the business, (c) the outstanding capital of a shadow project, (d) the claimholders' credit. Relations of the lost capital with book values and market values are studied, as well as relations of the lost-capital residual income with the classical standard paradigm; many appealing properties are derived, among which a property of earnings aggregation. Different concepts and results, provided by different authors in such different fields as microeconomics, management accounting and corporate finance, are considered: O'Hanlon and Peasnell's (2002) unrecovered capital and Excess Value Created; Ohlson's (2005) Abnormal Earnings Growth, O'Byrne's (1997) EVA improvement, Keynes's (1967) user cost, Drukarczyk and Schueler's (2000) Net Economic Income, Fern\'{a}ndez's (2002) Created Shareholder Value, Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view. The results found make this new theoretical approach a good candidate for firm valuation, incentive compensation, capital budgeting decision-making.
    Keywords: Management accounting; corporate finance; residual income; abnormal earnings; paradigm; value creation; incentive compensation; outstanding capital; lost capital; net present value; book value; market value.
    JEL: G11 M41 M40 M20 G10 G0 G30 M21
    Date: 2007–11
  2. By: Judith Freedman (University of Oxford)
    Abstract: In the USA there have been calls for greater conformity between the rules producing tax accounts and those used for financial reporting purposes. A number of benefits are claimed for this so-called ‘book-tax conformity’, including reduced compliance costs and better opportunities for monitoring. In Europe, the debate around use of the financial accounts for tax purposes has arisen from a different conceptual starting point as well as differences in surrounding circumstances. Linkage between tax and financial accounts is common in Europe, although it takes varying forms. This does not result in complete book-tax conformity, however, and recent developments in accounting may be increasing divergence rather than reducing it. Despite the strong arguments in favour of conformity, there are also good reasons for some divergences, meaning that the most likely outcome in any system, whatever the starting point, is partial convergence. The problem with a hybrid outcome of this kind is that, at the point of divergence, there can be conceptual confusion and difficulties in integrating and managing two conceptually very different rule systems. Clarity of the relationship between the rules and improved accounting disclosure requirements might be more important than convergence, and might be achieved with less distortion to either tax or financial accounting. The current UK position is used to illustrate these points.
    Date: 2007
  3. By: Georgios Papanastasopoulos; Dimitrios Thomakos; Tao Wang
    Abstract: This paper, builds on the work of Hirshleifer, Hou, Teoh and Zhang (Journal of Accounting and Economics, 38, 2004) on the NOA (net operating assets) anomaly. After controlling for current profitability, we find a strong negative relation of NOA with future stock returns. Moreover, the results indicate that this relation is driven from the asset side of NOA. We also find, that the hedge strategies on NOA and operating assets generate positive abnormal returns and constitute statistical arbitrage opportunities. Overall, our evidence on the sources of the NOA anomaly, suggests that it requires accounting distortions arising from earnings management.
    Keywords: Net operating assets (NOA), stock returns, earnings management, growth.
    Date: 2007
  4. By: Josep Maria Argiles Bosch; Josep Garcia Blandon (Universitat de Barcelona)
    Abstract: This article reviews previous research regarding cost stickiness and performs an empirical analysis applied to a sample of farms. It recognizes that modelization of cost stickiness is a particular case of representation of cost variations as a function of output variations. It also discusses methodological issues and analyses cost stickiness for all registered farm costs and opportunity costs of family work. Costs exhibit a considerable level of rigidity. Even for variable costs, a decrease in activity involves a lower decrease in costs than the amounts involved when activity increases. While registered indirect costs slightly decrease when activity decreases, opportunity costs always increase. The study provides empirical evidence that cost stickiness is significantly reduced with better management decision practices.
    Keywords: cost stickiness, cost behavior, farm management accounting
    JEL: M10 M40 M41
    Date: 2007
  5. By: Magni, Carlo Alberto
    Abstract: This paper presents a new way of valuing firms and measuring residual income. The method, originally introduced in Magni (2000a, 2000b, 2000c, 2001), is here renamed lost-capital paradigm. In order to enhance comprehension the presentation relies on a very simple numerical example which shows that the new paradigm of residual income enjoys a property of abnormal earnings aggregation, according to which the NPV (and therefore the market value) of the firm does not change if each residual income changes, as long as the (uncapitalized) sum of all residual incomes do not change. While radically different from the standard residual income, the difference between the two notions is equal to the interest accrued on the past cumulated standard residual incomes, which has interesting implications for incentive compensation.
    Keywords: Firm valuation; residual income; lost capital; Discount∑ Sum&Discount; incentive compensation
    JEL: G11 G12 M41 G31 M40 G30 M21
    Date: 2007–11
  6. By: Eduardo Levy Yeyati and Federico Sturzenegger
    Abstract: Recent empirical research on emerging markets debt, currency crises and fiscal sustainability has placed a significant focus on the role of currency mismatches with the emphasis placed on the currency composition of explicit government liabilities . The key insight of this paper is that these liabilities, while relevant, usually represent a small share of actual government liabilities: indeed, as an indicator of fiscal solvency, they are relatively uninformative –and possibly misleading– if not matched with the remaining liabilities (promises of wage and pension payments among others) and the asset side of the government’s balance sheet: financial and real government assets as well as the present value of future tax collection. These non-debt liabilities and assets may be affected by changes in the real exchange rate in a way that dwarfs the effect on the explicit liabilities which are typically the focus of attention. With this in mind, this paper contributes proposes a balance-sheet approach that, as illustrated by the practical applications included here, may radically alter the results from traditional sustainability evaluations –and, more generally, the perception of a country’s fiscal vulnerability.
    Date: 2007
  7. By: Dan Li (Kelley School of Business - Indiana University); Manuel Portugal Ferreira (Instituto Politécnico de Leiria)
    Abstract: Well understood in economics, accounting, finance, and legal research, transfer pricing has rarely been comprehensively explored in organization management literature. This paper explores some theoretical explanations of transfer pricing within multidivisional firms drawing insights from various organizational theories - primarily institutional theory, transaction cost economics, and social networks - to develop a conceptual model of transfer pricing. This model focuses on the nature of multidivisional firms' internal transfers, internal and external technological environments, and internal and external social environments. We highlight the importance of transfer pricing as a key strategic dimension to understand intra-firm flows and their associated costs.
    Keywords: theory, value, transfer pricing, intra-firm flows, multidivisional firm
    JEL: F3 H2 M1 M2 M4
    Date: 2007–11

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