Eric W. Noreen

THE ECONOMICS OF ETHICS: A NEW PERSPECTIVE ON AGENCY THEORY.

Abstract Agency theory provides a series of instructive parables concerning the systems consequences of unreservedly opportunistic behavior. Due to a mutual lack of trust, some otherwise mutually beneficial exchanges do not take place. And, even when exchanges do take place, there are dead-weight losses due to monitoring costs and inefficient risk sharing. Therefore, in ex ante terms, everyone may be better off if they mutually agree to restrain their opportunistic behavior. Unfortunately, by its very nature, opportunistic behavior is not readily observed. Thus, an agreement (i.e. ethical code) to abstain from opportunistic behavior cannot be effectively enforced by external rewards or sanctions; instead, the sanctions for unethical behavior must be internalized. Hopefully, this article will stimulate ideas for incorporating ethics in discussions of accounting, using agency theory as a convenient vehicle.

Are overhead costs strictly proportional to activity?: Evidence from hospital departments

Abstract Using cross-sectional data from hospitals in Washington State, we test whether overhead costs are proportional to overhead activities. This assumption is at the heart of nearly all cost accounting systems, which implicitly assume that marginal cost is equal to average cost. Empirically, the proportionality hypothesis can be rejected for most of the overhead accounts. On average across the accounts, the average cost per unit of activity overstates marginal costs by about 40% and in some departments by over 100%. Thus, the average cost per activity should be used with a great deal of caution in decisions.

The Accuracy of Proportional Cost Models: Evidence from Hospital Service Departments

Using data from hospitals in the state of Washington, we examine the time-series behavior of overhead costs. We find that more accurate predictions of changes in costs are usually generated by assuming a cost will not change at all (except for inflation) than by assuming that the cost will change in proportion to changes in activity. We also find that nearly all of the effect of a change in activity on costs appears to occur in the same year as the change in activity. Finally, using a multi-period regression model we find that the proportion of variable costs in the hospital overhead accounts is apparently very modest. These results suggest that costing systems, such as activity-based costing, that assume costs are proportional to activity, will grossly overstate relevant (i.e., incremental) overhead costs for decision-making and performance evaluation purposes.

Changes in the probability of bankruptcy and equity value

Abstract Work in finance suggests that changes in the probability of bankruptcy likely affect firm value by affecting perceptions of the cost of transacting with the firm. In this paper, accounting information from the balance sheet as well as the income statement is used in conjunction with Ohlsons (1980) bankruptcy prediction model to calculate unexpected changes in the probability of bankruptcy. For a sample of firms with a large estimated probability of bankruptcy sometime during the ten-year study period, unexpected changes in the probability of bankruptcy are useful in explaining security returns even after controlling for unexpected earnings.

Detecting Contemporaneous Security Market Reactions to a Sequence of Related Events

This paper describes results of a study of the empirical properties of two statistics, which extend security-return-based test statistics used in previous studies of contemporaneous market reactions to events.1 The first, called the H statistic, is a generalization of the Cumulative Average Residual (CAR) statistic. The procedure employed to test the significance of the H statistic extends the generalized least squares approach of Collins, Rozeff, and Salatka [1982] and Collins and Dent [1984]. The second, called the G2 statistic, is a generalization of the idea first introduced by Beaver [1968], who squared residuals in order to detect market reactions even if the average reaction was zero. The procedure we employed to test the significance of the G2 statistic has its closest antecedents in Patell [1976] and in Gonedes [1975].2 We might also note here that Schipper and Thompson [1983; 1985] propose an alternative framework within which tests similar to ours can be conducted. In our study, empirical distributions of H and G2 statistics were generated under the null hypothesis that there was no market reaction.

A Commentary on ‘The Order of Teaching Accounting Topics-Why do Most Textbooks End with the Beginning?’

Wouters’ (2008) paper contains an intriguing proposal for restructuring the teaching of basic accounting—both financial and managerial. The proposal is a very general sketch that contains few details. Nevertheless, it is appealing and I can think of no obvious reasons why it cannot in principle work pedagogically. Assuming that a high-quality textbook is made available that follows this proposal, the greatest obstacle to adoption may be the fact that in most schools, the introductory courses in financial and managerial accounting are separate, whereas the proposal calls for an integrated approach that ignores traditional financial and managerial accounting boundaries. This would be a formidable institutional barrier to overcome.