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1、Positive Accounting Theory (PAT) & Agency TheoryCh. 8 & 9 Scott, Accounting Theory1Recall From Efficient Securities Market TheoryBeaver (1973) argued that accounting policy choices do not affect firms security prices, if no cash flow effects and if chosen policies are fully disclosedThis argument im
2、plies that accounting policies do not matterPositive accounting theory2affects peoples behaviorAccountingPeople affect accounting3Economic ConsequencesWhat does this term mean?“The impact of accounting reports on the decision-making behavior of business, government, and creditors.Best way to underst
3、and the concept is through examples4Economic ConsequencesExampleslExpensing employee stock optionsAPB 25 (1972)Exposure draft (1993)FASB 123 (1995)FASB 123R (2004)lOil & Gas Accounting ControversyRequired successful efforts method (FASB 9, 1975)Full cost method restored as option (FAS19, 1977)5Posit
4、ive Accounting TheoryStudies managers accounting policy choices, as part of the overall process of corporate governancelThat is, accounting policies are chosen strategicallylPositive (descriptive) rather than normative. lTries to understand and predict managers accounting policy choices 6ASSUMPTIONS
5、 OF PATFirm is a nexus of contracts Managers are rational economic decision makerslAct to maximize their own utility but not necessarily firms profitslMay be effort averse (lazy)There are efficient markets for bothlCapitallManagerial Labor7The 3 Hypotheses of PATBonus Plan HypothesisManagement choos
6、es policies to shift future earnings to current period (more rewards from managerial incentive contracts)Debt Covenant HypothesisPolicies chosen to shift future earnings to present to avoid violation of debt contractsPolitical Cost HypothesisDefer earnings from current to future to minimize politica
7、l “heat8Managing Reported EarningsWays to Do ItlChanging accounting policieslManaging discretionary accrualslTiming of adoption of new accounting standardslChanging real variables-R&D, advertising, repairs & maintenancelStructured transactions like SPEs lFraud like Worldcom capitalizing operating ex
8、penses92 Versions of PATOpportunistic VersionlManagers choose accounting policies for their own benefitEfficient Contracting VersionlManagers choose accounting policies to attain corporate governance objectives of the firm10Managing Reported Earnings Through Discretionary AccrualsNI = OCF Net Accrua
9、ls = OCF Net Non-Discretionary Accruals Net Discretionary AccrualsExamples of Discretionary AccrualslAllowance for doubtful accountslProvision for reorganization11Estimating Discretionary Accruals, ContdThe Jones Model lTAjt = j + 1jREVjt + 2jPPEjt + jt lEstimate by least-squares regressionlDiscreti
10、onary accruals = actual - predictedlThe s are coefficients to be estimated. No relation to a shares beta12Distinguishing Opportunistic v. Efficiency Versions of PATPer Scott Text: significant evidence in favor of efficiency version of PATThis implies that the inherent conflict between investor and m
11、anager interests is reasonably controlledlHow this is done is subject of Chapter 913Presentation OAP9This article discusses how conservatism may be desirable for contracting reasonsIn Chapter 9 we get into the theoretical (analytic) models that are used to study contracting:lPrincipal-Agent Theory14
12、Principal-Agent TheoryAsymmetric Information15Timeline for Agency Example page 26916EMH and ManagersCorporate managers dont seem to really “believe in EMHStructured transactionsLobbying efforts with standard settersEarnings management to meet perceived investor preferences17Classic Prisoners Dilemma
13、Prisoner A stays silentPrisoner A betrays BPrisoner B stays silentBoth serve 6 monthsB serves 10 yrs, A goes freePrisoner B betrays AA serves 10 yrs, B goes freeBoth serve 2 years18Conflict ResolutionGame TheorylAgency TheoryManagerHONEST (H)DISTORT (D)InvestorBuy (B)60 Inv 40 Mgr20 Inv 80 MgrRefuse
14、 to Buy (R)35 Inv 20 Mgr35 Inv 30 MgrExample 9.1, p. 301Nash equilibrium19Relationship to Single-Person Decision TheoryProjects states of natureRandom mechanismAgency theoryThinking opponent replaces “states of natureOpponent strategy not probabilisticRational manager has own interests at stake20Pri
15、ncipal & Agent TheoryAgency theory has been used to demonstrate:lWhy it may be mutually beneficial to both parties to have an auditlWhy firms may lobby for certain accounting regulations21Principal-Agent Theory22Owner-Manager Agency RelationshipSince fixed salary may not motivate hard workGive manag
16、er a share s(x) of the payoff xlNet incomelOwnership interest through optionslCombination?23Contracting between Manager & OwnerHolmstrms Agency ModelBasing managers compensation on 2 variables is better than on 1 variable, unless the 2 variables are perfectly correlatedThis implies that net income i
17、s in competition with share price performance for “market share24Bondholder-Manager Agency RelationshipSimilar issues for lending contractslInformation asymmetryManager might do things to make repayment of debt less likelylSolution:Contracts to limit management discretionBenefit to manager/company =
18、 lower borrowing cost254 Principles of Contract Design1. The Informativeness Principle 2. The Incentive-Intensity Principle lOptimal level depends on:Incremental profits created by additional effortPrecision with which desired activities can be assessedAgents risk toleranceAgents responsiveness to i
19、ncentivesMilgrom, Paul, and Roberts, John, Economics, Organization and Management 1992, London: Prentice-Hall 264 Principles of Contract Design3. The Monitoring Intensity Principle4. The Equal Compensation Principle(for multi-tasking)From Milgrom and Roberts (1992) as described at :/en.wikipedia.org
20、/wiki/Principal-agent_problem#OverviewMilgrom, Paul, and Roberts, John, Economics, Organization and Management 1992, London: Prentice-Hall 27Implications For Financial AccountingNet income mattersThe agency relationship is a contract Contracts are rigidlImplies accounting policy choice and changes t
21、o accounting policy matter28Implications For Financial Accounting, Concl.To maintain market share, net income should be highly correlated with manager effortlHistorical cost accounting?Fundamental problem of financial accounting theorylMost useful net income for investors is not necessarily the most
22、 highly correlated with manager effort29Multi-Period ConsiderationsManager reputation and resulting value of manager on managerial labor market motivates effortNet income provides information to market about manager valueIs agency contract still needed? lAnswer = Yes30Reconciliation of Securities Market Efficiency and Economic ConsequencesBecause of rigid compensation and debt contracts, accounting policies matter to managersThis argument does not depend on securities market efficiency31
