Alfred Wagenhofer

Voluntary disclosure with a strategic opponent

Abstract This paper analyzes voluntary disclosure strategies of a privately informed firm when the information is relevant for the market price of the firm and also for an opponent. Favorable information increases the market price but might induce the opponent to take a discrete action that imposes proprietary costs on the firm. It is shown that there is always a full-disclosure equilibrium. There can exist partial-disclosure equilibria with two nondisclosure intervals. Comparative statics show some counter-intuitive results, e.g., higher proprietary costs or higher risk of an adverse action can make disclosure of favorable information more or less likely.

Economic Consequences of Internet Financial Reporting

The paper considers two major economic effects created by the Internet for financial accounting and disclosure. First, the Internet changes the costs of information processes and with it the demand and supply of financial information in capital markets. Second, Internet financial reporting creates a demand for standardization, which has been taken up with the development of XBRL. It is argued that while XBRL is designed to standardize only the format of information, it will also standardize contents. Finally, the paper discusses the issue of assuring high quality Internet financial reporting.

Optimal impairment rules

We study the optimal accounting policy of a financially constrained firm that pledges assets to raise debt capital for financing a risky project. The accounting system provides information about the value of the collateral. Absent accounting regulation, the optimal accounting system is conditionally conservative: it recognizes an impairment loss if the asset value is below a certain threshold, but never reports unrealized gains. We describe the optimal impairment rule and the optimal precision of the accounting information, and we provide comparative static results that lead to testable predictions on the determinants of impairment rules.

Problems and Opportunities of an International Financial Reporting Standard for Small and Medium-sized Entities. The EAA FRSC's Comment on the IASB's Discussion Paper

Abstract In June 2004 the IASB issued the Discussion Paper ‘Preliminary Views on Accounting Standards for Small and Medium-Sized Entities’. This invited comments on the central question of whether the IASB should develop separate standards for small and medium-sized enterprises (SMEs), and on further issues and questions arising from this. This paper briefly introduces the background to the publication of the Discussion Paper. This is followed by a review of prior literature on SME financial reporting implications, prepared by the European Accounting Associations Financial Reporting Standards Committee as the basis of its response to the Discussion Paper. The paper concludes with a brief summary of events and issues arising since the end of the consultation period.

Transfer Pricing under Asymmetric Information — An Evaluation of Alternative Methods

This paper analyzes optimal transfer prices in a simple setting with two divisions. One division receives a special order. In order to fulfill it an upstream division has to supply an intermediate good. The production costs of the divisions are their respective private information. The objective of headquarters is to induce the divisions to take decisions which maximize firm value. It uses transfer prices to coordinate these decisions.

Earnings Management, Conservatism, and Earnings Quality

This monograph reviews economic models that study earnings management and conservatism in an information economics framework. Both introduce a deliberate or a mandatory bias in financial reports. The fundamental issue this monograph addresses is what economic effects these biases have on earnings quality. We focus on models of managers in firms interacting with rational capital market participants, and briefly consider some contracting models. The models allow us to analyze earnings management and rational inferences by market participants in equilibrium in a variety of settings and to pinpoint costs and benefits of earnings management. We discuss how investors can elicit the maximum information from the biased reports and what potential remedies actually achieve in equilibrium. For example, accounting standards that reduce discretion for earnings management may be detrimental from a welfare point of view. In rational expectations models earnings quality can be defined as the information content in reported earnings. We discuss the earnings response coefficient, value relevance, and accounting-based earnings quality measures and how they reflect changes in earnings quality. Further, we review analytical work on conservatism of accounting standards and why conservatism can be welfare-enhancing even though it introduces a bias in the earnings reports. It is exactly through this bias that the benefit arises. Therefore, a differentiated view of earnings management and conservatism is warranted; neither is principally desirable or undesirable, but this depends on the circumstances. The benefit of equilibrium models is that they offer a rigorous explanation for the phenomena and show that sometimes conventional wisdom does not apply. There exist subtle interactions between accounting standards, the institutional environment, and earnings management that lead to several insights that challenge conventional wisdom. The models describe the economics behind these results and the particular circumstances.

Earnings Quality Measures and Excess Returns

This paper examines how commonly used earnings quality measures fulfill a key objective of financial reporting, i.e., improving decision usefulness for investors. We propose a stock-price-based measure for assessing the quality of earnings quality measures. We predict that firms with higher earnings quality will be less mispriced than other firms. Mispricing is measured by the difference of the mean absolute excess returns of portfolios formed on high and low values of a measure. We examine persistence, predictability, two measures of smoothness, abnormal accruals, accruals quality, earnings response coefficient and value relevance. For a large sample of US non-financial firms over the period 1988–2007, we show that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings. Accruals measures generate the largest spread in absolute excess returns, followed by smoothness and market-based measures. These results lend support to the widespread use of accruals measures as overall measures of earnings quality in the literature.

Management Accounting Theory and Practice in German-Speaking Countries

Abstract This chapter provides insights into the state of management accounting theory and practice in German-speaking countries. We begin with a brief history of German management accounting and its relationship with financial accounting. We review cost theories, German cost accounting systems, and various uses of management accounting information in organizations and present their theoretical foundations and their diffusion into practice. Our selection is guided by what we consider innovations that are specifically “German” and are not widely recognized outside the German-speaking countries. We put these developments in perspective with international developments and discuss their potential contribution to theory and practice.

Earnings Quality Metrics and What They Measure

This paper provides a theory of earnings quality metrics, explaining what they capture and how they are related with each other. We develop a simple economy in which a manager has market price, earnings, and smoothing incentives and can bias earnings reports. This economy provides a framework for the analysis of earnings quality metrics. We express value relevance, persistence, predictability, smoothness, and discretionary accruals in terms of their primitives, the manager’s incentives, operating risk, and accounting noise, and examine their behavior on varying these primitives. We find that some of them, particularly value relevance and persistence, trace closely the change in information content in our setting. In contrast, smoothing and discretionary accruals reflect the rational market reaction to the earnings reports inconsistently. These results provide guidance for understanding and selecting metrics in empirical tests.

The Usefulness of Academic Research in Understanding the Effects of Accounting Standards

This paper provides an overview of why, and how, academic research can assist regulators and standard setters in evaluating ex ante and ex post the effects of standardization and regulation of corporate financial reporting and disclosure. We argue that academic research is a valuable and often underutilized resource that can help standard setters and policymakers understand the possible effects of accounting standards and regulations. We give an overview of approaches that can, and are, used for this objective and provide selected examples to illustrate how academic research can inform standard setters and regulators.