Robert P. Magee

An analysis of the stock price reaction to sudden executive deaths: Implications for the managerial labor market

Abstract Certain characteristics of managerial employment arrangements and of the managerial labor market make shareholder wealth dependent on an executives continued employment. These wealth effects are investigated by examining the common stock price reaction to unexpected deaths of senior corporate executives. Abnormal stock price changes are documented for a sample of fifty-three events. These abnormal stock price changes are associated with the executives status as a corporate founder and with measures of the executives ‘talents’ and decision-making responsibility, and of the transaction costs associated with renegotiating or terminating the employment agreement.

Cost-Volume-Profit Analysis, Uncertainty And Capital-Market Equilibrium

The usefulness of cost-volume-profit (CVP) analysis as a crude device for sensitivity analysis in managerial decision-making has been emphasized in a number of cost accounting texts.1 Its primary value is in highlighting the effects on profit of different levels of activity (volume and mix) and different combinations of fixed and variable costs of production. The basic model of CVP analysis simply states that:

Financial Contracts, Opportunism and Disclosure Management

This article shows that if all variables that determine a firms future cash flows are not contractible, it can be ex ante optimal to design a financial contract that admits debtholders waiving debt covenants on a discretionary basis and firms investing opportunistically subsequent to contracting. Further, as the contractible variable becomes less informative, the contract attaches greater significance to it. Finally, uncertainty in the magnitude of reporting latitude induces aggressive reporting by the firm to avoid violating the covenant or to enhance the chances of a waiver. The debtholders respond by sometimes not allowing the firm to implement mutually beneficial projects.

Discussion of 'Contracting Theory and Accounting'

Professor Lambert provides a very useful synthesis of the major issues in managerial accounting and the insights that agency theory has provided on those issues. In this discussion, I highlight some of the limitations of these models in examining accounting measurement questions. Lambert calls for additional work in multiperiod contracting models, and I discuss some of the modeling choices that must be made in such work. Finally, I present some thoughts on the relation between contract models and empirical research.

Reasonably Certain Estimates, Recognition, and Communication of Uncertainty

This paper presents a model in which asset/liability recognition is a means for a risk-neutral entrepreneur to communicate with risk-averse investors about the riskiness of investments or the uncertainty of future obligations. The model shows that more conservative accounting may produce less conservative investing and lower expected payoffs for the entrepreneur. While the desired uncertainty-based recognition hurdle is increasing in an assets expected payoff, it is decreasing in a liabilitys expected magnitude. The impact of further sub-categorization of recognized assets is also considered. While finer classification of assets produces no direct benefit, it may provide a cost-effective means to reduce the entrepreneurs incentives to engage in costly voluntary disclosure.

Discretion in reporting managerial performance

Abstract In a single period agency model in which the agent has some discretion regarding how to report his periods performance, we show when the agents contract is increasing in his report regardless of the characteristics of his production technology, and how to rank changes in the agents reporting technology according to the expected cost of compensating the agent.

Computer-assisted financial planning: The planner-model interface

Abstract Computer-based financial statement generators constitute one of the most widely used class of computer-based decision aids. Surveys reveal most planners using these models are concerned with ease of use, especially greater flexibility, reduced data-entry burden, increased understandability, and enhanced sensitivity analysis. This article includes data generation functions, sensitivity analysis capabilities, and illustrative planner-computer dialogues designed to cope with these problems.

Voting over disclosure standards

Abstract This article examines the nature of disclosure standards, under the assumption that (i) standards preferred by more firms are collectively chosen and (ii) privately informed firms prefer standards that increase market perceptions about the value of their assets. A standard is stable if it is preferred by a large enough super-majority of firms over any other standards. Absent any restriction on possible standards, only unanimity would make a standard stable. By contrast, when requiring standards that classify news from best to worst, there is at most a single stable standard, and it must be full disclosure. For a large class of distributions over valuations, the required super-majority is about two-thirds, close to the majority required in many standard-setting boards. Value distributions with heavy tails, such as news that contains extreme risks, require higher super-majorities to be stable. These insights are robust to settings in which the information is used in decision-making.

On the Possibility of Socially Accepted Accounting Standards

This article examines the nature of disclosure standards, under the assumption that (i) standards preferred by more firms are collectively chosen and (ii) privately informed firms prefer standards that increase market perceptions about the value of their assets. A standard is stable if it is preferred by a large enough supermajority of firms over any other standards. Absent any restriction on possible standards, only unanimity would make a standard stable. By contrast, choosing standards that classify news from best to worst, there is at most a single stable standard, and it must be full disclosure. For a large class of distributions over valuations, the required supermajority is about two thirds, close to the majority required in many standard-setting boards. Distributions with heavy tails, such as news that contains extreme risks, require higher super majorities to be stable. These insights are robust to certain settings in which the information is used in decision-making.This article examines the nature of accounting standards under super majority voting by parties informed about the value of their asset. A standard is stable if it is preferred by enough voters over any other standard. Absent any restriction on the space of possible standards, we show that there is no stable standard regardless of the super majority. Restricting the space of standards that classify news monotonically, there exists a super majority such that the unique stable standard is full disclosure. For a large class of common distributions, the required super majority is about 63%.