The objective of our model is to develop a cash-based economic rate of return measure which extends previous research in two ways: (1) the model explicitly considers non-depreciable assets and (2) it permits a rate of return on equity calculation as well as a rate of return on total assets calculation. It is also important that our approach be adaptable to ®nancial statements, a valuable property of previous cash-based models. Initially, we follow the model of Salamon (1982, pp. 294±295) which generalizes that of Ijiri (1978, pp. 338± 342). Salamon's model ofa ®rm makes rather strong assumptions, such as a single investment opportunity, when compared with those of Miller and Mo- digliani (1961, pp. 412±414), Ohlson (1995, pp. 666±668), and Feltham and Ohlson (1999, pp. 169±171). However, only the Ijiri±Salamon approach ad- dresses the issue of calculating a ®rm's economic rate of return from ®nancial statements. The model's development and its application to ®nancial state- ments combine to produce considerable notation. Appendix A comprises a list of terms which the reader may want to refer to occasionally.
Using a nine-point scale, participants answered the following question: ``How likely is it that stockholders will suer ®nancially as a result of the general manager's decision?'' The response to this question was used as the dependent measure to test Hypotheses 2a and 2b. Hypothesis 2a predicts that shareholders are expected to judge a lower likelihood that shareholders will suer ®nancially when earnings management is undertaken for company as opposed to individual bene®t. This hypothesis is tested using the subset of subjects assigned to the shareholder treatment of user class. Panel A in Table 3 presents the statistical results and Panel C presents descriptive statistics. As shown, earnings management intent is not signi®cant ( F 2:47; C < 0:13). Thus, Hypothesis 2a is not supported even though the overall mean for company intent was lower than the overall mean for individual intent. Analysis of variance was also performed on each scenario. The results from these tests indicate that earnings management intent was signi®cant ( F 5:9; C < 0:02) for the operating gain scenario but not for the accounting gain scenario ( F 0:03; C > 0:86) or the accounting loss scenario ( F 0:33; C > 0:56). This evidence provides support for Hypothesis 2a only under the operating gain scenario.
Bruce Miller is a Professor ofAccounting at the Anderson School at UCLA. He received his Ph.D. in Operations Research from Stanford University. He has served as the Accounting Departmental Editor of Management Science and as the Anderson School's Accounting Area Chair. Professor Miller has published in a number of journals including JournalofAccounting Research, Econometrica, Journalof Economic Theory, Journalof Applied Probability, SIAM Journal on Applied Mathematics, Annals of Mathematical Statistics, SIAM Journal on Control, Operations Research and Management Science.
Relative to unfavorable ®nancial information (UF), favorable ®nancial in- formation (FF) resulted in signi®cantlyhigher ALLOC (mean di. 23.33; p < 0 : 05, one-tail test) and MERIT (mean di. 0.42; p < 0 : 05, one-tail test). To further test H1 an analysis was conducted at the treatment level, comparing favorable ®nancial information (FF) to unfavorable ®nancial information (UF) when non®nancial performance information was not present (NP). Panel A shows that consistent with the factor level analysis, ALLOC and MERIT had signi®cantly(p < 0 : 01, one-tail test) higher values when ®nancial infor- mation was favorable (FF). However, contraryto the factor level ®nding, treatment level analysis showed SCORE was signi®cantly (p < 0 : 001, one-tail test) and positivelyin¯uenced byfavorable ®nancial treatment information. The mean dierence at the factor level versus the treatment level increased more than fourfold. The treatment level comparison is most similar to ana- lyzing the current state of reporting requirements (i.e., currently non®nancial performance information is often not required). The highlysigni®cant results suggest that when only®nancial information is available it is used not onlyin awarding resources but also in evaluating an agent's performance.
Previous healthcare research has addressed the relations among the Medi- care prospective payment system, patient LOS, and hospital costs from apublicpolicy perspective. For example, Sloan et al. (1988, pp. 210±211), sug- gested that Medicare's prospective payment mechanism has resulted in an in- creased cost per patient day in the hospital, and Newhouse (1992, p. 11) reported that the real cost per patient day increased by ``nearly a factor of 4 from 1965 to 1986'', at the same time that mean LOS declined. In seeking to explain the increase in cost per patient day, Sloan et al. (1988, p. 210) noted that increasing average inpatient severity could be an important contributing factor. However, because they (1988) did not control for potentially con- founding factors such as severity, the implication of their analysis for the social policy debate on reductions in LOS was limited. 4 Eldenburg and Kallapur (2000, p. 99) found that after controlling for changes in cost allocations, the Medicare prospective payment system, which has been associated with shorter hospital stays, was not associated with inpatient cost containment. Our study complements such previous research by incorporating LOS, procedures and cost per patient day in a framework in which LOS is endogenous, while also including an explicit control for patient severity.
The ®rst one concerns the audit service contract. Early theoretical work in generalized audit settings suggests that managers are in a powerful position relative to auditors, primarily because managers can in¯uence audit fees and hire or ®re the auditor (Emerson, 1962; Goldman and Barlev, 1974, p. 710; Nichols and Price, 1976, pp. 338±340). However, in bank audits, management's position is much weaker. Unlike most businesses, banks are faced with two sets of outside evaluators ± the external auditor hired by the bank and the bank examiner. Although bank managers have a measure of economic power over their external auditor, they cannot ®re the bank examiner. Further, although non-bank management generally has wide latitude in negotiating the fees of external auditors, bank examiners do not charge a separate fee that can be threatened. 9 As a consequence, the power of bank management in an ac- counting con¯ict is likely much more limited than the power of non-bank management.
Our study considers if additional insight can be gained by analyzing ex- ternal audit-timing from a sample of cities for ®scal year-end 1996 and considers changes since 1982. The most likely factor increasing the time from ®scal year-end to the external auditor-report date (report time) is the im- portance of federal regulations that increase the complexity and risk of the ®nancial audits, especially the Single Audit Act of 1984 (USC, 1984). Federal regulation increased external audit requirements, including reports on inter- nal control and compliance with federal laws and regulations (USC, 1984). External audit reports and in some cases external auditor working papers are reviewed by federal and state agencies with oversight responsibilities (Deis and Giroux, 1992, pp. 468±470). These agencies document substandard ex- ternal audits and refer severely non-compliant external auditors to state boards of accountancy for remedial action (see, e.g., Deis and Giroux, 1992, p. 472).
additional wages and salaries to the workforce or transferred to the common consumption fund; any remaining surplus could be used for investment within the organization (Turk, 1988, p. 163). If the net income was negative, then taxes would be decreased or eliminated (Turk, 1988, p. 164). Clearly much re-education was required (Petrovic and Turk, 1995, p. 815). This has been recognized in the standard setting process, in that seven of the standards cover issues not covered by International Accounting Standards (SAS 16 ± ``Costs in Terms of Types, Centres and Units''; SAS 20 ± ``Budgeting''; SAS 21 ± ``Bookkeeping Documents''; SAS 22 ± ``Books of Account''; SAS 28 ± ``Accounting Supervision''; SAS 29 ± ``Accounting Analysis''; SAS 30 ± ``Accounting Information'') and are designed to be educational as well as prescriptive (Turk and Garrod, 1996, p. 154). Laudable though the educa- tional aspect of Slovene standards may be, it underlines the problems of any economy which changes its economic goals, aspirations and values over a short period of time. It is unrealistic to expect Slovene company accountants to assimilate these new concepts via accounting standards alone and to be producing substance over form and true and fair accounts (®nancial state- ments) immediately. The ongoing world-wide debate about asset and liability de®nitions, the nature and appropriate treatment of goodwill andaccounting for brands and intangible assets indicates the complexity of the pro- blem (International Accounting Standards Committee, 1997, Appendix 3, pp. 67±109).
Furthermore, we regressed stock returns on LAS earnings and on the indi- vidual reconciling items. These regressions suggest that, in addition to LAS earnings, the level of adjustment for untaxed reserves and the net adjustment for consolidation dierences are value relevant. Once again, the ®ndings are similar across the two investor groups. However, these results should be interpreted with a degree of circumspection, because the sample size is limited to 97 observations. Overall, our results give little evidence that local GAAP earnings reconcil- iations to IAS have dierent value relevance to foreign versus domestic in- vestors. Thus, somewhat surprisingly, our paper provides little support to the view that IAS reconciliations would be particularly useful to the audience for which they are targeted, i.e. foreign investors. In fact, the ®ndings from the tests with individual reconciling components fall in line with the view that certain items are value relevant to all investors irrespective of their domicile.
My paper examines the relevance of capital intensity in explaining the cross-sectional variation in market returns to chemical industry ®rms following the Bhopal, India chemical leak. The Bhopal accident was expected to increase environmental regulation (see Blacconiere and Patten, 1994, p. 358), and negative market returns to chemical industry ®rms were observed (Blacconiere and Patten, 1994, p. 358). It is assumed that investors used capital intensity as a proxy for the level of pollution abatement controls presently in place. Consistent with this assumption, I found a positive, signi®cant re- lation between market returns and capital intensity. I also found that, in the presence ofa capital intensity variable, environmental disclosures continued to be positively related to market returns. Ó 2000 Elsevier Science Ltd. All rights reserved.
Most state regulatory commissions allowed partial recovery of abandon- ment costs. The Federal Energy Regulatory Commission (FERC), the federal agency that regulates inter-state wholesale electricity rates also adopted a partial recovery policy in 1979. 7 Under partial recovery investors receive a return of, but no return on their investment. Although there are several variants of partial recovery methodologies (DOE/EIA, 1983, pp. 40±41), partial re- covery, as it is used here, includes any method that returns all or part of the costs invested in abandoned nuclear projects to investors through periodic amortization charges which increase electricity rates, but does not allow in- vestors to earn a return on the unamortized balance (DOE/EIA, 1983, p. xiv). In other words, all prudently incurred costs invested in abandoned nuclear projects were returned to investors through periodic amortization charges which increased electricity rates (DOE/EIA, 1983, p. xiv). But, the unamortized investment in cancelled plants was excluded from the rate base (DOE/EIA, 1983, p. xiv). Consequently, investors did not earn a return on their investment during the amortization period (DOE/EIA, 1983, p. xiv). The partial recovery method was adopted in 70 (60.3%) of the regulatory commission rulings and court cases between 1976 and 1987 (RRA, 1988, pp. 2±5). Amortization pe- riods ranged from 2 to 20 years with 10 years being most common (RRA, 1988, pp. 2±5).
Economic consequences of regulatory accounting in the nuclear power in- dustry: market reaction to plant abandonments, The, 161±187. Eects of changes in cost allocations on the assessment of cost containment regulation in hospitals, The, 97±112. Eect of relative performance evalua- tion on earnings management: a game- theoretic approach, The, 377±397. Empirical analysis of auditor report timing by large municipalities, An, 263±281.
In general, the results in Table 4 reinforce prior evidence. First, the earnings variable is positive and signi®cant; its coecient of 2.13 (1.95 in model 2) suggests that a change in de¯ated earnings by 1% leads to an analogous change in median-adjusted stock returns by 2.13% (1.95%). In contrast to Hypothesis 1, the outsider representation±earnings interactive term is insigni®cantly dif- ferent from zero, suggesting that board composition is not related to earnings informativeness, unconditionally. This result holds regardless of the de®nition of outsider representation. Importantly, there remain signi®cant dierences in earnings usefulness across board-size categories even after controlling for nu- merous ®rm characteristics such as size, growth, board composition, ownership structure, systematic risk, and default risk. In fact, the interactive term coef- ®cient suggests that the dierence in the earnings±returns relation between ®rms with large boards (with 12 or more members) and ®rms with small boards remains substantially unchanged compared to the dierence suggested by model 3 in Table 3 which excludes the control variables (ÿ1:28 vs ÿ1:23, respectively). The persistence of this ®nding is interesting and remains in line with the increased monitoring eectiveness of smaller boards.
Inferences regarding type II errors also vary across prior research. Dechow et al. (1995, p. 194) found that power is low even for the models with the lowest standard error (the Jones and modi®ed Jones models had the lowest standard errors, with mean standard errors of about 9% of total assests for forecast accruals over their random sample of 1,000 ®rms). Earnings management would have to exceed 18% of total assets for the average ®rm (or 1% of TA for each ®rm in a sample of 300 ®rms) to generate signi®cant statistics that would reject the null hypothesis of no earnings management. Kang and Sivarama- krishnan (1995, pp. 361) paint a more optimistic picture, because they move from the individual ®rm level to samples of 100 ®rms each. When they seeded their ®rms with a random accrual that averaged 2% of total assests (it actually ranged between 0.064% and 30.469%), their rate of rejection of the null hy- pothesis at the 5% level increased from 5% (before seeding) to 23% for the Jones model (and 33% and 47% for their IV and GMM models).
To relax this constraint we estimated Eq. (1) for the 1977±1983 period and examined the residuals for the period after 1983. If inpatient costs were con- tained then predicted costs (the expected costs assuming no change in the cost function) would exceed actual costs and residuals would be negative. However, when we used full costs, the residuals for the 1984±1994 period were negative, indicating that costs were lower than predicted. When we used direct costs and direct costs plus depreciation, the residuals were positive, providing no evi- dence of cost control. Moreover, the magnitudes and signi®cance levels of the average residuals were similar to those of the DUMAF coecients for each cost measure. Thus the equality constraint did not appear to bias our results. To check the statistical robustness of our ®ndings we identi®ed outliers using in¯uence statistics (Belsley et al., 1980, p. 103). Deletion of these observations did not signi®cantly alter the results. 15 We also estimated the regression equation using the rank and normal score transformations of INPCOST and INPREV to determine whether any potential departures from normality aect the results. The results of both of these procedures were stronger than our reported results.
BD and DPZ parallel DSS and Bradshaw et al. (1999), which focus on ®rms subject to SEC enforcement actions, by identifying ®rms manipulating earnings and then examining hypotheses about management's incentives and methods of managing earnings. In contrast, the designs of many prior studies rest on the joint hypotheses that ®rms manage earnings in response to speci®ed factors and that the proxy for discretion over earnings is suciently sensitive to detect it. BD and DPZ provide a powerful tool to the earnings management arsenal in that they identify contexts in which large number of ®rms appear to manage earnings. The approach also provides an indication of the frequency of manipulation, though this rests on an assumption about the distribution of earnings absent manipulation. As BD indicate, the as- sumption that the expected frequency in a given region is the average of the observed frequencies in the adjacent regions of the earnings distribution is not valid for the distribution of earnings after manipulation. This occurs because manipulation may have aected the adjacent regions around the hypothesized benchmark, and because manipulation may be re¯ected in other regions of the distribution.
CMAAD and CMAAD/BED are both positively correlated with bond ratings. It is possible that lower admissions indicate that a hospital has limited capacity to generate revenue (Lawrence and Kurtenbach, 1995, p. 374). Also, CMAAD provides some indirect information on the level of revenue the hospital generates. The Case Mix Index used to adjust the number of admis- sions in formulating CMAAD is created using Diagnostic Related Groups (DRGs). DRGs are used by the government to determine the amount of re- imbursement to hospitals for their treatment of Medicare patients 18 (Fetter, 1991, p. 3). There are more than 470 DRGs and each represents a particular procedure or service or groups of related procedures and services provided by the hospital (Fetter, 1991, p. 3). Each DRG has a ®xed rate of reimbursement attached to it (Fetter, 1991, p. 3). Many third party payers follow reimburse- ment guidelines similar to those provided by DRGs (Fetter, 1991, p. 4). Therefore, in addition to providing information on the volume of patients treated, CMAAD also conveys some information on the level of revenue which these patients generate.