1、Chapter 8Economic Consequences and Positive Accounting Theory1Economic Consequences, a Simple DefinitionAccounting Policies Matter (Especially to Managers)2Recall From Efficient Securities Market TheoryBeaver (1973) Argued That Accounting Policy Choices Do Not Affect Firms Security Prices, if No Cas

2、h Flow Effects and if Chosen Policies are Fully DisclosedThis Argument Implies That Accounting Policies Do Not Matter3Another Efficient Securities Market Anomaly?Answer: NoEconomic Consequences Can Be Reconciled With Efficient Securities Market TheoryBut First, We Illustrate Existence of Economic Co

3、nsequences4Employee Stock OptionsAPB 25 (1972)ESOs usually issued with zero intrinsic value, so that no expense recordedFASB Exposure Draft (1993) Fair value of ESOs to be expensedFair value based on an option pricing formula, such as Black/ScholesFair value amortized over vesting period5Employee St

4、ock Options, ContdManagements Negative Reaction to 1993 FASB Exposure Draft, Despite No Direct Effect on CashflowsLower share prices, higher cost of capital?Inadequate employee motivation?Reduced innovation?Low reliability?6Employee Stock Options, Contd.Problems Of Black/Scholes Applied To ESOsBlack

5、/Scholes assumes freely traded American optionsESOs cannot be exercised until they vestExposure draft proposed using expected time to exercise in Black/ScholesTime to exercise is highly variable (early exercise)Leads to low reliabilityMay overstate fair value (Huddart (1994), Marquardt (2002)7Employ

6、ee Stock Options, ContdFASB Backs DownSFAS 123: Disclosure in notes allowedUse Black/Scholes formula with expected time to exercise8Employee Stock Options, ContdMore recent developmentsEnron, WorldCom financial reporting scandalsConcerns over “pump and dump behaviourRenewed pressure to expense ESOsI

7、n Canada and internationally, ESOs expensed from 2004In U.S., ESOs expensed from June, 20059Successful Efforts (SE) Accounting in Oil and Gas Recall Full Cost v. SE ControversySE tends to lower reported earnings, especially for actively exploring companiesNote no effects on cash flowsSFAS 19 (1977)

8、exposure draftRequired SEStrong manager objectionsLev (1979) documented negative share price reaction for affected firms. Why?Today, firms can use either method10Positive Accounting Theory (PAT)11What is PAT?Studies Managers Accounting Policy Choices, As Part of the Overall Process of Corporate Gove

9、rnanceThat Is, Accounting Policies are Chosen StrategicallyPositive, Not Normative. Tries to Understand and Predict Managers Accounting Policy Choices. 12ASSUMPTIONS OF PATManagers are Rational (Like Investors) Conflict (Between Interests of Managers and Investors)Efficient Securities MarketEfficien

10、t Managerial Labour MarketBut may be inside information about manager effort and ability (moral hazard problem)A second major role for financial reporting-to report on manager effort and ability13The 3 Hypotheses of PATBonus Plan HypothesisDerives from managerial incentive contractsDebt Covenant Hyp

11、othesisDerives from debt contractsPolitical Cost HypothesisVery large firms minimize political “heatNB: Contacts are Rigid14Managing Reported EarningsWays to Do ItChanging accounting policiesManaging discretionary accrualsTiming of adoption of new accounting standardsChanging real variables-R&D, adv

12、ertising, repairs & maintenanceSPEs (Enron), capitalize operating expenses (WorldCom) 15Managing Reported Earnings Through Discretionary AccrualsNI = OCF Net Accruals = OCF Net Non-Discretionary Accruals Net Discretionary AccrualsExamples of Discretionary AccrualsAllowance for doubtful accountsProvi

13、sion for reorganization16Estimating Discretionary AccrualsUse Total Accruals as ProxyHealy (1985)Examine Specific AccountsAccounts receivable & allowanceMcNichols & Wilson (1988) 17Estimating Discretionary Accruals, ContdThe Jones Model TAjt = j + 1jREVjt + 2jPPEjt + jt Estimate by least-squares reg

14、ressionDiscretionary accruals = actual - predictedThe s and s are coefficients to be estimated. No relation to a shares beta182 Versions of PATOpportunistic VersionManagers choose accounting policies for their own benefitEfficient Contracting VersionManagers choose accounting policies to attain corp

15、orate governance objectives of the firm19Distinguishing Opportunistic v. Efficiency Versions of PATHard to DoMian & Smith (1990)Consolidated financial statementsChristie & Zimmerman (1994)Takeover targetsDichev & Skinner (2002)Debt covenants20Distinguishing Opportunistic v. Efficiency Versions of PAT, ContdHard to Do, ContdDechow (1994)Net income more highly associated with share returns than cash flowsGuay (1999)Limit firm risk using derivatives21Distinguishing Opportunistic v. Ef