Stanley Baiman

AGENCY RESEARCH IN MANAGERIAL ACCOUNTING: A SECOND LOOK*

This paper surveys the recent agency literature, emphasizing its managerial accounting implications. The paper first describes and compares three branches of the agency literature. Attention is paid to the assumptions, focus, contributions and criticisms of each branch. Empirical tests of implications of the agency model are reviewed. Recent theoretical agency papers with managerial accounting implications are then discussed. The last section of the paper discusses possible directions in future research which may increase the insights which the agency paradigm can bring to managerial accounting research.

The Relation Among Capital Markets, Financial Disclosure, Production Efficiency, and Insider Trading

The purpose of this paper is to establish a link among (1) the nature of the capital market from which a firm secures its investment funds, (2) the firms chosen level of financial disclosure, (3) the firms cost of capital, (4) the extent of its residual agency problems, and (5) the extent of insider trading in its shares, in a model in which the costs and benefits associated with disclosure are endogenous. The nature of the capital market is characterized in our discussion by the potential liquidity needs of investors from whom capital is raised. The level of disclosure is determined by trading off a production efficiency effect and a compensation subsidy effect, both of which fall with increased disclosure, against a market illiquidity effect and its effect on the cost of capital, both of which also fall with increased disclosure. Production efficiency falls because more disclosure means less information about the managers action is impounded in price, so that price-based

Performance Measurement and Design in Supply Chains

This paper examines the relationship between product architecture, supply-chain performance metrics, and supply-chain efficiency. We model the contracting relationship between a supplier and a buyer. The supplier is privately informed about the outcome of his design/production investment. The buyer both appraises the suppliers component and does further processing/component production of his own. If the final product produced by the buyer exhibits decoupling and no function sharing with respect to the components termed separable architecture, the first-best outcome is attained if both internal and external failures are contractible. When only one type of failure can be contracted on, we derive conditions under which contracting on internal failure is superior to contracting on external failure, and vice versa. If the buyers final product has a nonseparable architecture with respect to the components, first-best cannot be achieved even if both internal and external failures are contractible. The value of contracting on internal failure alone is unaffected by the architecture design, while that of external failure declines relative to the separable setting; the net result is often to make the former the uniformly dominant performance metric. Our results highlight the interaction between the performance metrics used for contracting within the supply chain, the architecture of the product produced by the supply chain, and the incentive efficiency of the chain.

Incentive issues in inter-firm relationships

Abstract This paper discusses the incentive problems to which buyer-supplier transactions are subject and, by surveying the incentives literature, discusses some of the inter-firm design instruments that can be used to mitigate these problems. Most of the literature discussed is based on the incomplete contracting model, which is better suited to analyzing inter-firm issues. We also discuss some of the managerial accounting issues which are raised by this literature and suggest some managerial accounting issues for further research.

The Role of Information and Opportunism in the Choice of Buyer-Supplier Relationships

An important characteristic of any buyer-supplier relationship is the amount and type of information that is exchanged between the contracting parties. Buyer-supplier networks are characterized by greater information exchange than arm’s-length transactions. This enhanced information exchange allows for greater production efficiency but increases the potential for information misappropriation. In this paper we characterize the set of innovations for which each of these forms of exchange relationships is efficient. We then explore the effect of an initial information linkage between the buyer and supplier. Such linkages increase the set of innovations for which networks are efficient. However, such linkages have a negative effect on the buyer’s incentive to innovate and an ambiguous effect on the supplier’s incentive to invest in flexible production techniques. Finally, we identify settings in which the buyer-supplier surplus is greater with such linkages.

Organizational Design For Business Units

This paper studies empirical differences across decentralized firms with respect to the allocation of tasks from the parent firm to its business units and the level of compensation risk imposed on business unit managers. We structure our empirical analysis around two hypothesized determinants of these organizational structure decisions: the parent firms task expertise relative to that of the business units and the relative importance of the business unit to the performance of the parent firm. We develop a principal-agent model of the task allocation and compensation risk decisions as a function of these two determinants, and test several research hypotheses suggested by this model. In our analysis, we use the term relative expertise to refer to the competence of the parent, relative to the business unit manager, to make the divisions operating decisions. Relative task expertise can be characterized in several ways; we consider three such characterizations and, using our model, find that they have different implications for the allocation of tasks and the imposition of compensation risk in decentralized firms.1 We label our three characterizations of relative expertise as follows: Cost

Earnings and price-based compensation contracts in the presence of discretionary trading and incomplete contracting

Abstract The paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information, and share price is set rationally based on privately held information, publicly available and contractible information, and publicly available but noncontractible information. In addition, we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy.

Procurement in Supply Chains When the End-Product Exhibits the 'Weakest Link' Property

We consider a supply chain with one manufacturer who assembles an end-product using multiple outsourced parts. The end-product exhibits the “weakest-link” property, such that if any of its component parts fails, the end-product fails. The supplier of each component part can improve the (uncertain) quality of her parts by exerting costly effort that is unobservable to the manufacturer and is non-contractible. We analyze three possible contractual agreements between the manufacturer and suppliers: Acceptable Quality Level (AQL), Quality–Based Incentive Pricing (Q–Pricing) and Group Warranty. Under AQL, the manufacturer inspects all incoming parts, but establishes different quality thresholds and pays the suppliers different amounts for achieving the different thresholds. Under Q-Pricing, the manufacturer also inspects all incoming parts but pays each supplier a constant amount for each good part. Under Group Warranty there is no testing of the individual parts; instead all suppliers are responsible for any failed end-product. We compare the efficiency of these three contractual arrangements as a function of the exogenous variables.

Optimal Cost Targets and Incentives for Acquiring Expertise

This paper studies the optimal choice of cost standards (or cost targets) over time in an agency setting in which a worker is responsible for both implementing actions and acquiring skill/expertise that would enable him to improve his future performance with respect to those actions. We characterize the effect of the decision horizon and the observability of the workers acquired expertise on both the optimal path of cost standards and the workers investments in expertise. In addition, we characterize the trade-off between motivating the workers investment in expertise and motivating his efficient use of the expertise.

Resource Allocation Auctions within Firms

There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve first-best resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second-best outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve second-best, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.