Financial Accounting & Auditing

This paper examines transfer pricing in multinational firms when individual divisions face different income tax rates. Assuming that a firm decouples its internal transfer price from the arm's length price used for tax purposes, we analyze the effectiveness of alternative pricing rules under both cost- and market-based transfer pricing. In a tax-free world, Hirshleifer (1956) advocated that the internal transfer price be set equal to the marginal cost of the supplying division.

In the wake of the recent corporate scandals that have damaged investor confidence, policymakers, academics, and pundits have taken aim at accounting rules as one of the areas in need of reform. Proposals for changing the rules governing the accounting for the granting of stock options has become one of the most hotly contested areas. Advocates of reform argue that options are a form of compensation and that granting options entails real costs to stockholders. They argue that it follows that options should be included as an expense item in the firm's financial statements.

We investigate whether the accruals anomaly is a manifestation of the glamour stock phenomenon documented in the finance literature. Value (glamour) stocks, characterized by low (high) past sales growth, high (low) book-to-market (B/M), high (low) earnings-to-price (E/P), and high (low) cash flow-to-price (C/P), are known to earn positive (negative) future abnormal returns. Note that "C" or cash flow is operationalized in the finance literature as earnings adjusted for depreciation.

This study examines whether the quality of online buying experience represents a competitive advantage for Internet firms focused on business to consumer e-commerce (“e-commerce” firms). Forrester Research, a consulting firm, estimates that revenues in the business to consumer segment will grow from $20 billion in 1999 to $184 billion by 2004. Such explosive growth is due, in part, to the superior shopping experiences that new e-commerce firms offer.

Intertemporal aggregation results in a summarization of information and a natural delay in the release of information. We study a principal-agent model and show that intertemporal aggregation can be an optimal feature of a performance evaluation system. We then highlight subtleties associated with valuing additional information as the level of aggregation of existing information is varied.

This paper presents a financial statement analysis that distinguishes leverage that arises in financing activities from leverage that arises in operations. The analysis yields two leveraging equations, one for borrowing to finance operations and one for borrowing in the course of operations. These leveraging equations describe how the two types of leverage affect book rates of return on equity.

This paper considers the problem of sequential parameter and state estimation in stochastic volatility jump diffusion models. We describe the existing methods, the particle and practical filter, and then develop algorithms to apply these methods to the case of stochastic volatility models with jumps. We analyze the performance of both approaches using both simulated and S and P 500 index return data. On simulated data, we find that the algorithms are both effective in estimating jumps, volatility, and parameters.

This study investigates whether banks manage the disclosed fair value of their major asset, the loan portfolio. Using two cross-section samples, I find evidence that suggests banks manage the fair value of loans. The estimated extent of overstatement of loans' fair value is negatively related to regulatory capital, asset growth, liquidity and the gross book value of loans, and positively related to the change in the rate of credit losses.

In this lecture, I ask two questions: 1) What does "quality accounting" look like? 2) How does the equity analyst deal with "poor quality accounting"? The answer to the first question conveys what the analyst expects of the accountant and so characterizes accounting quality. The second question focuses on the quality of equity analysis rather than the quality of the accounting. How does the analyst recognize the imperfections of accounting—some of which are inevitable, I will argue—and adapt to them?