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Abstract:
U.S. business schools are locked in a dysfunctional competition for media rankings that diverts resources from long-term knowledge creation, which earned them global pre-eminence, into short-term strategies aimed at improving their rankings. MBA curricula are distorted by quick fix, look good packaging changes designed to influence rankings criteria, at the expense of giving students a rigorous, conceptual framework that will serve them well over their entire careers. Research, undergraduate education, and Ph.D. programs suffer as faculty time is diverted to almost continuous MBA curriculum changes, strategic planning exercises, and public relations efforts. Unless they wake up to the dangers of dysfunctional rankings competition, U.S. business schools are destined to lose their dominant global position and become a classic case study of how myopic decision-making begets institutional mediocrity.

Business school rankings, MBA programs

Abstract:
U.S. business schools are locked in a dysfunctional competition for media rankings. This ratings race has caused schools to divert resources from investment in knowledge creation, including doctoral education and research, to short-term strategies aimed at improving rankings, such as placement offices and public relations campaigns. Curriculums are narrowing and training students for their first jobs, not their entire careers. Faced with a prisoner's dilemma, deans select short-run strategies that reduce research and doctoral education. The result is a looming critical faculty shortage and ultimately the demise of the pre-eminence of American management education. The worldwide preeminence of American business schools is on the decline, and Internet-based distance learning is not the threat. Rather, leading U.S. business schools, institutions once dedicated to generating new knowledge and disseminating it to the next generation of managers via their MBA programs, are locked in a dysfunctional competition for rankings - notably the Business Week surveys. This ratings race has caused schools to divert resources from investment in knowledge creation, including doctoral education and research, to short-term strategies aimed at improving rankings. The resulting decline in business doctorates is creating a severe shortage of quality faculty. American business schools are mortgaging their future; they are consuming their seed corn.

Abstract:
Ethics is a branch of philosophy that can trace its roots back at least 2500 years. Since the time of Socrates, Plato, and Aristotle a succession of theories has been advanced to provide a set of principles of human conduct. As examples, egoism argues that an act is appropriate if and only if it promotes an individual's long-term interests; utilitarianism suggests that behaviors should produce the greatest balance of good over bad for everyone affected; Kant argued that only good deeds matter?the nature of the act should be judged, not its outcome; ethical relativism holds that moral principles cannot be valid for everyone?people should follow the conventions of their own group. Even a cursory review of major ethical philosophies yields an immediate conclusion: Despite considerable effort by some of history's best minds, there is no consensus as to which behaviors are ethical and which are unethical.

Abstract:
The empirical managerial accounting literature has failed to produce a substantive cumulative body of knowledge. This literature has not matured beyond describing practice to developing and testing theories explaining observed practice, like other areas of accounting research. While the lack of publicly available data is a popular reason for this literature's underdeveloped state, it is not the only one. Other conjectures include: its inductive approach, researchers' incentives, its use of non-economics-based frameworks, the lack of empirically testable theories, and its emphasis on decision making, not control.

Abstract:
The empirical managerial accounting literature has failed to produce a substantive cumulative body of knowledge. This literature has not matured beyond describing practice to developing and testing theories explaining observed practice, like other areas of accounting research. While the lack of publicly available data is a popular reason for this literature's underdeveloped state, it is not the only one. Other conjectures include: its inductive approach, researchers' incentives, its use of non-economics-based frameworks, the lack of empirically testable theories, and its emphasis on decision making, not control.

Abstract:
Contrary to previous studies, we find that managers change depreciation methods and/or revise depreciation estimates in predictable ways. Our tests differ from prior ones because we examine more dimensions of depreciation policy changes and managers? discretion over those dimensions. Managers change depreciation policies in response to tax law changes, poor performance and changes in investment opportunities. First, a 1981 tax law altered the frequency and type of estimate revisions and method changes. Second, managers adopting income-increasing method changes for both new and existing assets experience poorer performance than those who adopt income-increasing method changes only for new assets. Finally, non-income-increasing policy changes appear to be in response to changes in firms? investment opportunities.

Abstract:
The papers in this volume and briefly summarized in this introduction document that: (1) executive compensation is positively related to share price performance: (2) poor firm performance is associated with increased executive turnover; (3) managers choose accounting accruals in ways, that increase the value of their bonus awards; (4) the adoption of new short- and long-term executive compensation plans and golden parachutes are associated with positive share price reactions; (5) the death of a firm's founder is associated with positive share price reactions; and (b) managers are less likely to make merger bids that lower their stock prices when they hold more stock in their firm. These findings are interpreted as generally supporting the view that executive compensation packages help align managers' and shareholders' interests.

executive compensation, performance, golden parachutes, share price reaction, manager and shareholder interest

Abstract:
We document that CEO cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns. Since stock returns include both unrealized gains and unrealized losses, we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains (positive returns) than when returns contain unrealized losses (negative returns). This is consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation paid to CEOs.

Abstract:
We document that CEO cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns. Since stock returns include both unrealized gains and unrealized losses, we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains (positive returns) than when returns contain unrealized losses (negative returns). This is consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation paid to CEOs.

Compensation, Conservatism, Accounting Earnings

Abstract:
This study focuses on changes in incentives at the William E. Simon Graduate School of Business Administration in the early 1990s to redirect effort from academic research to classroom teaching. We find a substantial and almost immediate jump in teaching ratings following the changes in incentives. Longer-run learning and turnover effects are present. Evidence also suggests that research output fell. This case illustrates the power of organizational incentives to redirect effort in a multi-task environment, even in the presence of apparent human-capital constraints.

Abstract:
This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations - these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) for "non-accelerated filers" (firms with public float less than $75 million). We hypothesize and find that some of these firms had an incentive to remain below this bright line threshold. Moreover, we document that these firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non-affiliates, making more bad news disclosures and reporting lower earnings than control firms. Finally, there is no evidence that firms remaining small are doing so to maintain insiders' private control benefits. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.

unintended consequences, regulations, Sarbanes-Oxley Act, Section 404

Abstract:
Under GAAP, SEC and exchange-listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers’ obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is often disclosed because of an underlying duty to disclose. Our empirical tests isolating the impact of materiality on firms’ disclosures have greater explanatory power over empirical tests that do not. Voluntary disclosure incentives better explain disclosure when the information is less likely to be material. Tests of voluntary disclosure theories ignoring materiality likely lead to incorrect inferences.

Disclosure, Materiality

Abstract:
Finally, the authors apply the framework to another important leadership issue: corporate ethics. In response to the scandals of the past decade and the passage of Sarbanes-Oxley, many U.S. companies have issued formal codes of conduct, appointed ethics officers, and instituted training programs in ethics. But a key question for top management is whether the incentives established by the firm's organizational architecture reinforce or undermine the code of conduct. In this sense, ensuring consistency in organizational design is an important leadership function - one that is critical to encouraging ethical behavior as well as the pursuit of shareholder value. This organizational framework is especially useful for evaluating the likely effects of major corporate initiatives such as “Six Sigma” or the “Balanced Scorecard.” For example, it could be used to help top management determine whether, and under what circumstances, decentralization is likely to improve decision-making and performance, as well as the changes in the firm's performance management and incentive systems that would be required to make decentralization work. The authors illustrate the application of this framework with the case of Xerox's (eventually) successful attempt to create a customer-oriented workforce in the 1980s. But a more effective demonstration of the importance of these principles, as the authors go on to suggest, might well be the same company's well-known failure to realize the commercial promise of the many inventions by its research group in Palo Alto. Effective leadership involves more than developing and communicating the right strategic vision for the company. To encourage employees to carry out the corporate vision, companies must ensure consistency among the following three main components of their “organizational architecture:”

The authors illustrate the application of this framework with the case of Xerox's (eventually) successful attempt to create a customer-oriented workforce in the 1980s. But a more effective demonstration of the importance of these principles, as the authors go on to suggest, might well be the same company's well-known failure to realize the commercial promise of the many inventions by its research group in Palo Alto.

This organizational framework is especially useful for evaluating the likely effects of major corporate initiatives such as “Six Sigma” or the “Balanced Scorecard.” For example, it could be used to help top management determine whether, and under what circumstances, decentralization is likely to improve decision-making and performance, as well as the changes in the firm's performance management and incentive systems that would be required to make decentralization work.

Finally, the authors apply the framework to another important leadership issue: corporate ethics. In response to the scandals of the past decade and the passage of Sarbanes-Oxley, many U.S. companies have issued formal codes of conduct, appointed ethics officers, and instituted training programs in ethics. But a key question for top management is whether the incentives established by the firm's organizational architecture reinforce or undermine the code of conduct. In this sense, ensuring consistency in organizational design is an important leadership function - one that is critical to encouraging ethical behavior as well as the pursuit of shareholder value.

Abstract:
Under GAAP, SEC and exchange-listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers’ obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is often disclosed because of an underlying duty to disclose. Our empirical tests isolating the impact of materiality on firms’ disclosures have greater explanatory power over empirical tests that do not. Voluntary disclosure incentives better explain disclosure when the information is less likely to be material. Tests of voluntary disclosure theories ignoring materiality likely lead to incorrect inferences.

Disclosure, Materiality

Abstract:
Economists have long recognized that government regulations often generate unintended consequences.1 The initial Securities Act of 1933 and the Securities Exchange Act of 1934 exempted small firms from certain filing requirements. The SEC expanded these exemptions in implementing the Sarbanes Oxley Act of 2002 (SOX). Beyond securities regulations, numerous statutory and regulatory exemptions exist for small businesses (Bradford, 2004). This paper presents evidence that exempting small firms from restrictive regulatory requirements (SOX in this case) generates the unintended consequence of creating incentives for some of these firms to remain small.

Abstract:
This book reviews the theory and methodology underlying the economics-based empirical literature in accounting. An accounting theory theory is an explanation for observed accounting and auditing practices. Such an explanation is necessary for interpretation of empirical associations between variables. The book discusses the role of theory in empirical work. It then reviews accounting theories involved in empirical studies of the use of accounting in capital markets, contracting and the political process and the extent to which the theories are consistent with those studies' evidence. Empirical studies in auditing are also reviewed. The book finishes with a discussion of the role of accounting research and a summary and evaluation of the research up until the mid-1980s.

Accounting theory, capital markets, contracting, political process

Abstract:
This article provides the beginning of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards that are likely to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs and political costs, and they are combined into a model that predicts that large firms that experience reduced earnings due to changed accounting standards favor the change. All other firms oppose the change if the additional bookkeeping costs justify the cost of lobbying. This prediction was tested using the corporate submissions to the FASB's Discussion Memorandum on General Price Level Adjustments. The empirical results are consistent with the theory.

Positive theory, accounting standards, political costs, lobbying

Abstract:
This paper addresses the questions of why accounting theories are predominantly normative and why no single theory is generally accepted. Accounting theories are analyzed as economic goods, produced in response to the demand for theories. The nature of the demand is examined, first in an unregulated, then in a regulated economy.

Government regulation creates incentives for individuals to lobby on proposed accounting procedures, and accounting theories are useful justifications in the political lobbying. Further, government intervention produces a demand for a variety of theories, because each group affected by an accounting change demands a theory that supports its position. The diversity of positions prevents general agreement on a theory of accounting, and accounting theories are normative because they are used as excuses for political action (i.e., the political process creates demand for theories that prescribe, rather than describe, the world).

The implications of the authors' theory for the changes in the accounting literature as a result of major changes in the institutional environment are compared with observed phenomena.

Political process, accounting theory, normative theory, lobbying

Abstract:
This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown empirical regularities. The 1979 paper produced a methodological debate that has not been very productive. This paper attempts to remove some common misconceptions about methodology that surfaced in that debate. It also suggests ways to improve positive research in accounting choice. The most important of these improvements is tighter links between the theory and the empirical tests. A second suggested improvement is the development of models that recognize the endogeneity among the variables in the regressions. A third improvement is reduction in measurement errors in both the dependent and independent variables in the regressions.

Positive theory, accounting, accounting choice, methodology

Abstract:
This paper examines the history of auditing in the U.K. and the U.S. to test whether audits of companies arose as the consequence of governmental regulation or as a voluntary monitoring activity to reduce agency costs and increase firm value. The paper finds that audits existed early in the development of the modern corporation (as early as 1200) and evolved gradually into the type of audit required by the first English companies act (1844). The evidence suggests that the audit's monitoring activity is important, if not crucial, to the formation of firms. The audit's long survival suggests it is a part of the efficient technology for organizing firms.

Differences in the timing of the evolution of professional auditors in the U.K. and U.S. prior to legally required auditing appear to reflect differences in the timing of capital market development in the two countries.

Auditing, corporate governance, capital markets, agency costs

Abstract:
We conjecture that accounting depreciation reduces the over- and under-investment problem in acquiring and utilizing fixed assets. By forcing the agent to cover depreciation charges of assets the agent proposes to buy, the agent commits to generate cash flows in excess of depreciation charges (through either additional revenues or cost savings). Moreover, the book value of undepreciated historical cost commits the agent to maintain the asset's productive capacity. Various accounting techniques, including incorporating depreciation charges in product costs, operating budgets, and performance measures, help ensure commitments are recovered, thereby reducing the incentives to over- or under-invest in capital assets. Moreover, writing down assets when actual performance persistently falls below budget resets the remaining commitment level to a more realistically achievable level. Preliminary tests provide evidence consistent with one of the paper's implications.

Abstract:
We argue that accounting depreciation either is the firm s calculation of the cost of a durable factor, or is information used in determining (implicitly or explicitly) the factor cost. Simple competitive-economic theory then implies a relation between accounting depreciation and product prices. We hypothesize that this relation is strengthened by various accounting techniques, including the inclusion of depreciation charges in standard costs, budgets and actual performance measures, as well as asset write-offs when actual performance persistently falls below budget. Evidence from two steel industry samples shows a significant relation between percentage changes in accounting depreciation and product prices. The data are too aggregate to provide a direct test of the hypothesis, so we plan a more direct test on product-level data.

Abstract:
This paper tests the relative importance of two competing explanations for why large firms use income-decreasing accounting methods: political costs and prior firm performance. We find that key empirical results in contracting-based theories of voluntary accounting choice vary with time period sample selection and the accounting method studied. Further all regressions are misspecified although less so when all variables are differenced from corresponding industry means. When considered jointly with Christie and Zimmerman (1994) these findings lead us to question prior interpretations of evidence about factors affecting accounting choices.