DAVID F. LARCKER, Stanford University - Graduate School of Business
Email: Larcker_David@gsb.stanford.edu
TJOMME O. RUSTICUS, Northwestern University - Kellogg School of Management
Email: t-rusticus@northwestern.edu

Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.

KATSIARYNA SALAVEI, Fairfield University - Department of Finance
Email: ksalavei@mail.fairfield.edu
JOSEPH H. GOLEC, University of Connecticut - Department of Finance
Email: jgolec@sba.uconn.edu
JOHN P. HARDING, University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies
Email: John.Harding@business.uconn.edu

A large negative stock price reaction to a restatement announcement could imply a particularly significant accounting error, or one made by a firm that has a relatively high probability of being sued. This paper investigates the extent to which market reactions to restatement announcements are explained by litigation risk. We model the simultaneous relationship between restatement announcement abnormal returns and litigation risk and find that about half of the -9.2 percent average restatement announcement effect is due to expected litigation costs. We also find that the significance of the accounting error does not directly affect the magnitude of the abnormal return; it only affects abnormal return indirectly because it increases the probability of being sued.

ANDREY IGOREVICH ARTEMENKOV, The Russian Society of Appraisers, State University of Management
Email: artemenkov@rambler.ru

This 50-page survey of methodological history in the area of Professional Valuation aims to deliver a historic analysis of the methodological material and context which lay behind the foundation of the Professional Valuation - first institutionalized in the United States by the Appraisal Institute during the period of The Great Depression.

We come to the conclusion that during this period the Professional Valuation methodology (back then mostly focused on the appraisal of real estate) can be broadly characterized as possessing a non-positivist slant. This means that, in the perception of the first methodologists of the Profession, appraisal values were not supposed to be in the likeness of prevailing market prices other than by accident, viz. they have been conceived as broad anticyclical metrics of sustainable values in the framework of long-term 'normal prices' from the Marshallian price analysis. Conditions of the Great Depression were favorable to the dissemination of this non-positivist view of professional appraisal functions, according to which the Profession tended to regard itself as an explicit public interest profession consciously combating the destruction of values amidst the extreme seizure of the capital markets.

After the World War II and the settling of capital market activities into the growth mode accompanied by the generally increasing public affluence, there had occurred a gradual shift toward a more positivist view of the appraisal functions. The profession began to trust market prices and the new winds among valuers caused them to believe that their functions should include nothing more than reflecting prevailing market prices and certifying them as 'values' in their reports. By 1960th the valuers had become mere passive scorekeepers/reflectors of the market and abandoned all the aspiration of them ever possessing some pricing influence to serve public interest. The conscious annunciation of this new significantly desiccated ideology occurred during a so-called ‘positivist revolution in valuation methodology’ pioneered by such writers as Wendt, Ratcliff, Kinnard etc. Their views were paralleled and reinforced by dogmas of the so-called new classical economics that included the proponents of efficient markets theories. Since their time, the mechanistic, purely positivist functions of the valuation profession have been taken for granted and still dominate its worldview. Beyond them the profession ventures not.

Our analysis, by building on the ‘liquidity pricing scientific research program’ pioneered in the modern day by such researchers as Plantin, Sapra, Shin, Carletti et al, attempts to bring to light what we contend are substantive merits of the non-positivist valuation doctrine of the Depression Era methodologists (such as Babcock, Schmutz & MacKomrick, Hyder etc.). The revival of such a doctrine will help to impregnate with new vision and scope currently ongoing disputes about public benefits of the fair value accounting etc. As for professional valuers themselves, by reading this paper they will benefit from understanding the historic and general economic context of the development of the three-approaches-to-value doctrine, and also gain an insight into interpreting the Market value basis convention and how it evolved overtime. The hidden conceptual facets of the Elwood approach to valuation, not discussed elsewhere, are also highlighted in this paper, as are some distinctions of emphasis between the American and British schools of valuation thought.

Most importantly, in doing research this paper treats valuation profession as an institution which has important macroeconomic role to play in guiding the pricing processes on the capital markets. Because of this, there is a clear-cut case to regulate the methodology of this profession on the national level and having regard to explicit macroeconomic and public interest, not merely to private interests of the entirety of consumers of valuation services or the valuation industry itself. In all this, some strands of the non-positivist valuation methodology highlighted in this paper emerge that can serve as arrows in the quiver of regulators to encourage the empowerment of Professional Valuation with its newly-found macroeconomic & public interest authority and related duties.

Therefore, this survey is not intended as another survey of mere technical tools of valuation or their development, but as a broad survey of evolving socio-economic vision and forces underlying the methodology that created those techniques and tools.

YURI BIONDI, National Center for Scientific Research (CNRS)
Email: yuri.biondi@free.fr
PIERPAOLO GIANNOCCOLO, University of Bologna
Email: pierpaolo.giannoccolo@unibo.it

This paper develops a model of share price formation driven by accounting and market structures. Heterogeneous investors are assumed to discover and process fundamental information disclosed by the accounting system. The information set available to share market investors is then jointly composed by market-driven and …firm-specific (non-market) information. From one side, the accounting system provides collective signals of fundamental information. From another side, the price system provides collective signals of market-driven information. Both structures are …significant for the formation of aggregate share market prices over time. We simulate share price formation under alternative accounting designs (namely, historical cost, fair value and target reverting accounting), and derive implications and recommendations for the concept and occurrence of speculative bubbles, the cyclical effects of accounting design on share market evolution, and share market allocative efficiencies.

SHURVEER S. BHANAWAT, B.N.P.G. College
Email: shurveer@gmail.com

Disinvestment as a reform measure is sweeping the economies all over the world. The main objective of present paper is to study the impact of the disinvestments on the corporate performance of the public sector undertakings. Corporate performance for the purpose of the present study, has been taken to be the financial performance of the undertakings in which the govt. has undertaken disinvestments. It is assumed here that the financial performance is the basic parameter to measure the efficiency. And thus, if the financial performance has improved it means that there has been an overall efficiency enhancement. The preliminary results of the disinvestment experience show that with the movement from public to private led to some improvement in the corporate performance of the divested units. While the asset utilization and short term liquidity management show an increase in the efficiency, there has been a decline in the overall profitability of the firms. The units show movement in the upper direction as far as solvency position is concerned. However, the change in the variables is not significant. These results have to be interpreted with caution given the small size of the sample. They therefore cannot be generalized for the entire divested unit in India. Moreover, the hosts of factors playing role directly or indirectly in the transition phase have to be kept in mind. Nevertheless, the empirical evidence to date seems to give some positive direction to the process of disinvestment.

ODYSSEAS PAVLATOS, Athens University of Economics and Business - Department of Accounting and Finance
Email: opaulatos@gmail.com

This study examines the relation between cost system functionality, strategy and the use of data. An empirical survey via questionnaires was conducted on a sample of 100 leading hotels enterprises in Greece. The results indicate that the level of cost-system functionality used is low and the cost system functionality has not yet been successfully introduced into the management of hotels. According to our results, the level of cost system functionality is significantly positively associated with the low cost strategy and the extent of the use of cost data. Results showed that there are no statistically significant differences in sales revenue and number of beds between more and less functional cost system users. In addition, there aren’t any significant correlations between hotels that apply more functional cost systems and hotels that do not, regarding their category, management status (member of national chain, member on multinational company, private company) and their type (resort, city hotel). This study extends prior research in several ways. Firstly, rather than simply identifying whether an organization has adopted a single costing technique, comprehensive survey data provide a relatively objective and multidimensional characterization of the functions a cost system can perform. Secondly, the operational homogeneity of hotels enables powerful tests of the research questions. Finally, this study adds to the literature on contingency theory by measuring "fit’" between control system and organizational context using both "selection" and "systems" approaches.