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Abstract:
During spring 2000, the Internet Stock Index declined 45%. Using a sample of internet firms, this paper investigates whether this decline was associated with new disclosures, such as earnings, analyst forecast revisions, and web-traffic measures, or to a "reassessment" by investors of pre-existing information. We find only modest evidence that the decline was associated with new disclosures. However, returns and post-decline stock prices are significantly explained by 1999 annual report data. When earnings are decomposed into gross profit and various expenses, traditional financial information contributes significantly more in explaining the cross-sectional returns and price levels than non-financial information.

valuation, internet firms, stock options, earnings, cash flows

Abstract:
During the spring of 2000, the market values of internet companies declined 61% in 10 weeks. Using a sample of internet direct and support (infrastructure) firms, this paper investigates whether the stock market decline could be attributed to new disclosures over the period (buy/sell recommendations, analyst forecast revisions, and web traffic measures) or to information that caused a "reassessment" of the implications of pre-existing accounting information. In addition, we focus attention on the non-cash purchases of goods and services using equity instruments, such as stock warrants and options. We find little evidence that the spring 2000 decline was precipitated by new disclosures of web traffic statistics, earnings or earnings forecasts. In contrast, the valuation of internet firms, particularly support firms, declined sharply in relation to certain 1999 accounting measures. Firms that earned greater gross profit in 1999 experienced a relatively smaller stock price decline in spring 2000, while firms that spent more on research and development in 1999 experienced a relatively larger stock price decline. Valuations before and after the downturn reflected the speed with which firms consumed cash and marketable securities as well as the use of equity instruments to acquire facilities, goods and services. Finally, we find evidence that employee stock option grants are viewed positively by investors, most likely due to their effect on employee retention.

Valuation, internet firms, stock options, earnings, cash flows

Abstract:
Professor Lambert provides a very useful synthesis of the major issues in managerial accounting and the insights that agency theory has provided on those issues. In this discussion, I highlight some of the limitations of these models in examining accounting measurement questions. Lambert calls for additional work in multiperiod contracting models, and I discuss some of the modeling choices that must be made in such work. Finally, I present some thoughts on the relation between contract models and empirical research.

Contracting; Agency theory; Managerial accounting

Abstract:
Professor Lambert provides a very useful synthesis of the major issues in managerial accounting and the insights that agency theory has provided on those issues. In this discussion, I highlight some of the limitations of these models in examining accounting measurement questions. Lambert calls for additional work in multiperiod contracting models, and I discuss some of the modeling choices that must be made in such work. Finally, I present some thoughts on the relation between contract models and empirical research.

Contracting; Agency theory; Managerial accounting

Abstract:
This paper presents a model in which asset/liability recognition is a means for a risk-neutral entrepreneur to communicate with risk-averse investors about the riskiness of investments or the uncertainty of future obligations. The model shows that more conservative accounting may produce less conservative investing and lower expected payoffs for the entrepreneur. While the desired uncertainty-based recognition hurdle is increasing in an asset's expected payoff, it is decreasing in a liability's expected magnitude. The impact of further sub-categorization of recognized assets is also considered. While finer classification of assets produces no direct benefit, it may provide a cost-effective means to reduce the entrepreneur's incentives to engage in costly voluntary disclosure.

Recognition, Uncertainty

Abstract:
This paper shows that if all variables that determine a firm's future cash flows are not contractible, it can be ex-ante optimal to design a financial contract that admits debtholders waiving debt covenants on a discretionary basis and firms investing opportunistically subsequent to contracting. Further, as the contractible variable becomes less informative, the contract attaches greater significance to it. Finally, uncertainty in the magnitude of reporting latitude induces aggressive reporting by the firm to avoid violating the covenant or to enhance the changes of a waiver. The debtholders respond by sometimes not allowing the firm to implement mutually beneficial projects.