John Christensen

Communication in Agencies

In this article the value of communications structures is considered in an agency model with differential information. The optimal compensation to the agent is characterized, and it is shown that this characterization is related to the accountants use of the budget as a motivation device. Within our framework, we discuss the relationship between the content of information systems supplied to the agent privately and the agencys well-being. It is shown that the agency is not always better off if the agent is supplied with more information, since he might use that information to shirk.

The Determination of Performance Standards and Participation

The purpose of this paper is to study the usefulness of performance standards. It is often recommended that subordinates should participate in determining their own standards of performance, the main reason being of a behavioral nature. I shall demonstrate that there is also an economic rationale for this participation when the participation is used to convey information from a better-informed subordinate to a lessinformed manager. Given that this information will be used for the subordinates performance evaluation, the subordinate has an obvious incentive to cheat in this reporting. I construct an agency model which includes these reporting incentive problems and use it to study the effects of participation on the agency and the value of information systems to the agency. Throughout the analysis the agent will be kept at a constant level of utility so that the principals utility becomes a measure of the agencys preferences, thus reflecting pareto optimality. The methodology in this paper is closely related to that of Demski and Feltham [1978], Magee [1980], and Baiman and Demski [1980]. Magee [1980] in particular studied issues related to participation, but he did not confine his study to pareto optimal contracts, as will be the case in this paper. In order to maintain a tractable problem, many behavioral factors will be left outside the formal analysis despite the fact these have played a major role in the behavioral literature on participation (cf. Argyris [1952], Becker and Green [1962], Stedry [1960], and Swieringa and Moncur [1975]).

Product Costing in the Presence of Endogenous Subcost Functions

We study a multiproduct setting in which the underlying technology permits identification of economic subcost functions. We then explore the ability of various accounting procedures to produce relatively accurate marginal cost estimates. This ability varies with the underlying technology, as well as among the products. Moreover, a portfolio perspective emerges: with errors varying among the products the issue of where in product space to tolerate relatively large costing errors in order to help ensure relatively small costing errors in other products arises.

Conceptual Frameworks of accounting from an information perspective

Abstract This paper analyses the benefits of accounting regulation and a conceptual framework using an information economics approach that allows consideration of uncertainty, multiple agents, demand for information, and multiple information sources. It also allows private information to enter the analysis. The analysis leads to a set of fundamental properties of accounting information. It is argued that the set of qualitative characteristics typically contained in conceptual frameworks does not adequately aggregate the information demands of users of accounting information. For example, the IASBs conceptual framework contains no guidelines for the trade‐off between relevance and reliability. Furthermore, neutrality might not be part of an optimal regulation. The statistical bias introduced by the stewardship use of accounting information is not necessarily undesirable and will always remain; stewardship is the characteristic of accounting information that provides incentives for management to act in the desired way. Accounting information is inherently late compared to other information sources but influences and constrains the content of more timely sources. The accounting system does not exist in a vacuum. Other information sources are present and the purpose of the accounting system cannot be analysed without considering the existence of other information sources. Finally, financial statements are audited by an independent auditor. This implies that accounting data are hard to manipulate.

Asymmetric Monitoring: Good Versus Bad News Verification

We analyze a principal-agent setting with multiple sources of contracting information in which the signal from each source can be unmistakably interpreted as “good” or “bad” news. We then ask whether it is best to condition the acquisition of one of the information sources on whether the earlier reporting source has reported “good” or “bad” news. That is, is it efficient to “chase the good news” or to “chase the bad news”? The answer depends on whether the earlier source is publicly observed or self-reported by the agent. We also explore ties to institutional features, and in particular conservative accounting treatments.

Good Analytical Research

The purpose of this commentary is to address the issues raised by Ohlson from the point of view of analytical accounting research. The aim is not only to provide some input to young researchers who are going to publish good research using analytical methods, but also to give some hints to help users of analytical accounting research to understand and interpret the findings of this type of research. Ohlson has taken on a task of identifying a set of critical factors which are likely to lead to successful research. Good research is defined as research that makes an impression. Thus, it is not enough to get the research published – not even in a premier journal. The research should have an impact, the community should learn something. As Ohlson notes, there is enough ‘ordinary’ research. In my view this is the right attitude. Short-term optimization is also widespread in the research community and that is not what we should strive for. With the objective in place, I will continue to analyze the question in relation to analytical research. I start out discussing the aim of analytical research by providing a few examples of good models. The first is the Feltham-Ohlson model and the second is the agency model. Both are simple and elegant models dealing with difficult issues. The analysis proceeds to characterize good models. A good model is a simple model that zooms in on the problem under scrutiny. It is a ‘minimal’ model that contains the problem and nothing outside the problem. I then proceed to characterize good research in an analytical framework. This is research that tackles a problem that is of interest to the users and the researcher. In this process I also identify current notable analytical research. Finally, I contrast this to the recommendations of Ohlson.

Fair Value, Accounting Aggregation and Multiple Sources of Information

Accounting information is formed by an aggregation of the information available to the accounting system. Introduction of fair value accounting represents a new solution to the accounting aggregation problem as market information is merged into the accounting system. Multiple sources of information are available to market participants and accounting information is but one of these sources. Fair value information is available to the accounting system, to the public, and to individual market participants, hence, the aggregate information available in the economy — aggregate informativeness — depends on the confluence of accounting information and other sources of information. Particularly, the price process might well be informative but is influenced by the accounting policy chosen and, hence, it is not obvious the introduction of fair value accounting leads to an improvement in aggregate informativeness. Fair value accounting may destroy the aggregation mechanism of the market.

Project selection and audited accrual measurement in a multi-task setting

This paper studies monitoring and accrual measurement in a principal-agent setting. The advantage of the principal-agent setting is that it allows accrual measurement to be explicitly connected to monitoring and to encompass questions of managerial behaviour and communication incentives. It also allows the analysis to take place in a setting where competing and complementary sources of information are available. Here the accrual measurement is used to discipline other, perhaps more timely, sources of information and to carry information itself. The argument rests on a two-period agency setting. The usual moral hazard story is expanded to include the agent also observing .a potential project opportunity (e.g. an additional customer, a labour-saving opportunity or whatever). This creates an interest in monitoring the agents project selection. This monitoring may, it turns out, be useful for purposes of controlling the familiar short-run versus long-run tension or for better managing short-run incentives. Accrual questions enter in terms of allocating the projects up-front cost across the two periods, thereby separating expenditure from expense. In information-content terms, though, this turns out, given that cashflow is observed, to be equivalent to a monitor story that reports on project selection.

Analytical Modeling of Cost in Management Accounting Research

Abstract The advantage of analyzing the highly complex economics of a firm by means of a model is the simplicity of the model. Historically models of cost have developed from simple models under certainty to models incorporating uncertainty and strategic behavior. Models of cost are constructed with either a product cost focus or a stewardship focus. As the focus of the problem changes the model changes dramatically as some dimensions are highlighted and others are dimmed. This represents the challenge of the model constructor. The chapter will illustrate these facets of building and using analytical models for analysis of cost.

An analysis of new stock issues in Denmark

In this paper the results of an analysis of the price behaviour in the period immediately after initial public offerings are reported. The specific purpose of this study was to test whether the market can set suitable prices for new stocks instantaneously after the settling, or whether systematically over- or underpricing of new stocks can be observed. The empirical analysis reveals that there seem to be abnormal returns associated with the public offerings. It is not possible to explain this in terms of the general market behaviour. To seek an explanation of the observed behaviour of returns, a bidding model is discussed.