Rick Antle

AN EMPIRICAL-INVESTIGATION OF THE RELATIVE PERFORMANCE EVALUATION OF CORPORATE-EXECUTIVES

This paper investigates empirically whether top corporate executives are compensated as if their performance is evaluated relative to the performance of competitors.1 This research extends previous investigations into the structural relation between executive compensation and absolute measures of firm performance.2 The premise of these investigations was that tying executive pay to firm performance helps align the goals of executives with the goals of the firms owners. The efficiency

THE AUDITOR AS AN ECONOMIC AGENT

The purpose of this paper is to present and analyze some fundamental issues which arise when the auditor is modeled as an economic agent. There are many reasons that it is desirable to explicitly model the auditor. As Gjesdal [1981] points out, extant theories of the demand for auditing (see Ng [1978], Ng and Stoeckenius [1979], and Evans [1980]) are incomplete because they ignore the problem of the auditors incentives. The first step in addressing the issue of the auditors incentives is to model the auditor explicitly as an expected utility maximizer. As we shall see, this introduces many technical difficulties. At the same time, a new point in the study of the auditors role in the firm arises; namely, risk-sharing with the auditor. These technical issues, which involve problems with modeling the owner-manager-auditor relationship in a tractable way, must be confronted before the demand for auditing can be fully established. Otherwise, we cannot compare the alternative of hiring an auditor to the owners other alternatives, such as not hiring the auditor (standing pat), or renting the firm to the manager. Another reason to model the auditor as an expected utility maximizer is the obvious symmetry that such a model provides. If we seek to understand the behavior of owners, managers, and investors by modeling them as expected utility maximizers, why change the approach when studying auditors? Unless we believe that auditors are somehow qualitatively different from the other types of economic agents that we study,

Information Rents and Preferences among Information Systems in a Model of Resource Allocation

Using a model in which private information and self-interested behavior induce a socially inefficient allocation of resources, we analyze the effects of introducing a public information system. A manager of productive resources has an informational advantage over the owner of the resources, as in Antle and Eppen [1985]. In this setting, mutually beneficial production is foregone as the owner attempts to limit the managers information rent. We consider the possibility of introducing a public information system that reduces the managers information advantage. In particular, we describe conditions under which the social efficiency of production is enhanced or reduced by the introduction of a public information system. In three scenarios, public information is exogenously given, chosen by the owner and influenced by the manager, and stochastically determined by the managers actions. We find that regardless of who chooses

Models of Capital Investments with Private Information and Incentives: a Selective Review

The purpose of this paper is to selectively review research that addresses capital budgeting decisions in settings characterized by dispersed information and incentive problems. The papers are theoretical; they formulate and analyze models that vary in the number of periods considered, the number of economic actors involved, and the number of alternative projects available. The aims of the review are to describe some of the formulations that have been studied, to highlight their key economic and mathematical properties, to reveal their common economic forces, and to collect and organize their basic results. Copyright Blackwell Publishers Ltd 1997.

Contracting Frictions, Regulation, and the Structure of CPA Firms

The prominence of management consulting services in the largest CPA firms leaves little doubt that there are economies of scope between auditing and at least some types of consulting. The source of these economies of scope has been conjectured to be the result of information produced as a by-product of performing audit work (e.g., Simunic [1984]). This information may be about the benefits to a client from a certain type of consulting project, or it may be about how best to produce desired consulting services and thereby reduce the cost of supplying these services. The purpose of this paper is to explore theoretically another potential source of economies of scope: contracting frictions. The particular contracting frictions we study arise from the CPA firms private information about the costs of performing auditing and consulting for a particular client. We show such private information may give rise to economies of scope, in the sense that the client is better off purchasing auditing and consulting from the same CPA firm as opposed to separate sourcing of the two

Information systems, incentives and the timing of investments

The purpose of this paper is to study the effects of introducing information systems into a model featuring managerial incentive problems and investment opportunities that are mutually exclusive over time. In a principal-agent model in which a manager (agent) has superior information about investment costs, we introduce information systems, the signals from which are available to both the manager and the owner of the investment opportunity, which allow the owner to decrease the managers informational advantage. We examine (i) the characteristics of the optimal information systems; (ii) the effects of such information systems on the owners investment and compensation choices and on the value of the investment opportunity to the owner; (iii) the effects of such information systems on the timing of investment; (iv) the effects of such information systems on the overall probability of investment; and (v) when the owner might want to improve the information system at a particular point in time.

Self-Selection via Fringe Benefits

This paper extends the theory of self-selection to circumstances in which economic agents have some access to markets. We use the analysis to explain the existence of multidimensional compensation packages in the presence of limited (re)marketability. Employment contracts that include fringe benefits are prominent examples of such multidimensional packages.

Essays in accounting theory in honour of Joel S. Demski

Joel S. Demski: A Leader in Accounting Scholarship.- Joel S. Demski: A Leader in Accounting Scholarship.- General Theory.- Fair Value, Accounting Aggregation and Multiple Sources of Information.- Equilibrium Voluntary Disclosures when Firms Possess Random Multi-Dimensional Private Information.- Synergy, Quantum Probabilities, and Cost of Control.- Moral Hazard with Hidden Information.- On The Subtleties of the Principal-Agent Model.- Applied Theory.- Incentive Problems and Investment Timing Options.- Aligning Incentives by Capping Bonuses.- The Controllability Principle in Responsibility Accounting: Another Look.- Public Disclosure of Trades by Corporate Insiders in Financial Markets and Tacit Coordination.- Connections to Practice.- The Structure of Performance-Vested Stock Option Grants.- The Lcamr Missile.- Commentary and Perspectives.- A Note on the Information Perspective and the Conceptual Framework.- Economizing Principle in Accounting Research.

Incentive Problems and Investment Timing Options

We characterize optimal investment and compensation strategies in a model of an investment opportunity with managerial incentive problems, caused by asymmetric information over investment costs and the managers desire to consume slack, and flexibility over the timing of its acceptance. The flexibility over timing consists of the opportunity to invest immediately, delay investment for one period, or not invest at all. The timing option provides an opportunity to invest when circumstances are most favorable. However, the timing option also gives the manager an incentive to influence the timing of the investment to circumstances in which he gets more slack. Under the assumption that investment costs are distributed independently over time, the optimal investment policy consists of a sequence of target costs, below which investment takes place and above which it does not. The timing option reduce optimal cost targets, relative to the case when no timing option is present. The first cost target is lowered because the compensation function calls for the payment of an amount equal to the managers option to generate future slack, should investment take place. This increases the cost of investing at the first opportunity, thus reducing its attractiveness. In order to ease the incentive problem at the initial investment opportunity, the second target cost is also lowered, even though no further timing options remain. Making the additional assumption that costs are uniformly distributed, we generate additional insights. We find circumstances in which the profitability of investing initially exceeds the profitability of investing at the second opportunity, a result that is impossible in the first-best context. Second, we identify circumstances under which the initial target cost is increased by incentive effects. Third, we identify the conditions under which the option to wait is effectively shut down when incentive problems exist. The implications of relaxing several key assumptions, such as investment cost independence, the owners commitment to the manager and not to renegotiate, are explored.

Cost-minimizing welfare programs

Abstract We study opportunities for lowering the cost of welfare programs by exploiting heterogeneity in the unobservable tastes of welfare recipients. Relying on the inability of cash-based programs to achieve self-selection, we provide circumstances in which it is optimal to provide payments-in- kind. Our model differs from other self-selection models because we allow the recipients the opportunity to trade the subsequent to the receipt of their welfare packages. The presence of unreported cash among the recipient population is considered.