Research Lab

In this paper, we propose a method of accounting for stock options that tracks the effect of the options on shareholder value. The accounting approach we outline can be applied not only to employee stock options but to all claims that are effectively convertible into common shares, including convertible preferred stock, warrants, and call and put options on the firm's own stock. Our proposal also aims to make accounting consistent with stock prices, since the market surely takes account of the (potential) valuation effects of these claims when setting stock prices.

Although prices in financial markets play an important role in improving allocative efficiency in the real economy, few models of securities markets explicitly incorporate resource allocation decisions. In this paper, we study the equilibrium in a securities market when the market price provides valuable information that can improve allocative efficiency. We show that a decision maker will subsidize liquidity in an illiquid securities market to gather valuable information about her decision payoffs.

As different activities cannot be measured or communicated with the same precision, accounting information is often only a partial and unbalanced reflection of the fundamental economics, emphasizing certain aspects of the underlying operations while disregarding others. We highlight this inherent imbalance in information as the source of an interaction between corporate operating and discretionary disclosure strategies, and thereby also as an important determinant of the information acquisition strategy.

Investment decisions frequently require coordination across multiple divisions of a firm. This paper explores a class of capital budgeting mechanisms in which the divisions issue reports regarding the anticipated profitability of proposed projects. To hold the divisions accountable for their reports, the central office ties the project acceptance decision to a system of cost allocations comprised of depreciation and capital charges.

The comprehensive survey reported here allowed analysis of how senior U.S. financial executives make decisions related to performance measurement and voluntary disclosure. Chief financial officers were asked what earnings benchmarks they cared about and which factors motivated executives to exercise discretion — even sacrifice economic value — to deliver earnings. These issues are crucially linked to stock market performance. The results show that the destruction of shareholder value through legal means is pervasive, perhaps even a routine way of doing business.

Weak public institutions, including high levels of corruption, characterize many developing countries. We demonstrate that this feature has important implications for the design of monetary policymaking institutions. We find that a pegged exchange rate or dollarization, while sometimes prescribed as a solution to the credibility problem, is typically not appropriate for countries with poor institutions. Such an arrangement is inferior to a Rogoff-style conservative central banker, whose optimal degree of conservatism is proportional to the quality of institutions.

This paper revists two basic questions that are critical for understanding and controlling DB pension risk: How should the value of DB pension liabilities be computed; and how should pension assets be allocated? In particular, we reexamine the role of stocks in valuing and hedging pension obligations. Our approach differs from others in the literature in at least two ways. First, it is one of the few that focuses on market value, and does so by using a derivative approach.

The conference paper by Johnson (2006, Review of Accounting Studies, forthcoming) develops an incomplete-contracting transfer pricing model with a number of novel features: taxation, sequential investments, and intangible assets being transferred. This discussion aims to disentangle these features so as to highlight those that are the key drivers of the results. Moreover, I show that some of the results can be generalized to settings involving a greater level of technological interdependency between the divisions.

When a boom ends, the downturn is generally sharp and short. When growth resumes, the boom is more gradual. Our explanation rests on learning about productivity. When agents believe productivity is high, they work, invest, and produce more. More production generates higher precision information. When the boom ends, precise estimates of the slowdown prompt decisive reactions: Investment and labor fall sharply. When growth resumes, low production yields noisy estimates of recovery. Noise impedes learning, slows recovery, and makes booms more gradual than downturns.