Browsing by Author "Gamble, George O."
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Item Accounting for imputed interest on equity capital and its effect on predictive ability of annual income : an empirical investigation(1982) Yallapragada, RamMohan R.; Liao, Woody M.; Boockholdt, James L.; Gamble, George O.; Khumawala, Saleha B.; Scamell, Richard W.Accounting for the cost of capital is an old but unresolved conceptual problem in accounting. The accounting profession has not agreed on a consistent set of accounting principles for interest costs even though the topic has been under debate since the turn of the century. Under the present accounting framework, interest cost on borrowed funds is recognized and treated as an expense for the period; but, the cost on equity capital is not. Some companies, however, have been capitalizing interest on borrowed funds as part of the cost of certain fixed assets. Some others, such as utility companies, capitalize not only in terest on borrowed funds but also an imputed interest on equity capital as part of the cost of certain kinds of assets. Many critics claim that the current practice and the income presently reported in financial statements are not realistic because the cost of capital, a major cost of business, is not considered.The objective of this study is to examine the impact of recognizing an imputed equity interest cost on the information content of financial statements, specifically in the context of predicting annual income. The main research question in this study is: Does the annual income computed with an imputed interest cost on equity capital demonstrate superior predictive ability of annual income of business firms as compared to the income computed under the present accounting framework? In this study, the sample consists of 118 manufacturing firms and 111 nonmanufacturing firms. Data pertaining to the sample firms for a period of 14 years are gathered from Annual Industrial Compustat Data File [1980]. Reported (unadjusted) incomes of firms are adjusted for an imputed equity interest cost using three different interest rates (the prime interest rate, the Aaa corporate bond rate, and earnings/price ratio). Forecasts of unadjusted and adjusted incomes are developed using three forecasting models. Mean absolute percentage forecast errors of unadjusted income and adjusted income for sample firms are compared and tested for level of significance of difference using Wilcoxon matched pairs signed ranks test. A total of 243 different cases are examined using nine different groups of sample firms, three forecasting models, three interest rates, and three groups of debt/equity ratios. The results in the study show that, in general, recognition of an imputed equity interest cost does not enhance predictive ability of annual income. In the majority of the 243 cases tested, the differences in predictive ability are found to be significant and in favor of income reported under the present accounting framework. In addition, the differences in predictive ability are discovered to be significant in more cases for manufacturing firms than for nonmanufacturing firms.Item An analysis of the effectiveness of the research and experimentation tax credit within a q model of valuation(1988) Coberly, Janet Wood; Pratt, James W.; Gamble, George O.; Craig, Steven G.; Thompson, Steven C.The purpose of this research is to analyze whether the R&D credit has been effective in increasing R&D activities among the firms constituting the primary target group over the period 1981 through 1985. Within the framework of Tobin's q theory [Tobin, 1969] this study identifies firms for which the R&D credit provided an incentive. The thesis of the research is that the R&D credit will provide more of an incentive to increase R&D activity for firms in equilibrium, with q equal to one, than for firms with q ratios either above or below one. The methodology of the study groups firms according to their q ratios. The influence of the credit across groups, working through the user cost of R&D [Cordes, et al., 1987], is then empirically tested. The credit is a significant determinant of investment in research and development for firms in the study. Consistent with expectations, it provides more of an incentive to increase R&D expenditures for firms in equilibrium, q equal to one, than for firms with q values either above or below one. Cost-benefit analysis shows that the R&D credit was not cost effective for firms with q greater than one. The findings of this study provide timely new evidence for Congress which is essential to efficient redesign of the credit to achieve tax policy objectives. The results have important implications for both tax policy and accounting policy research.Item An examination of budget slack within an expectancy theory framework(1987) Leavins, John R.; Liao, Woody M.; Finley, David R.; Gamble, George O.; Phillips, James S.A major problem facing all organizations is that of maximizing efficiency. Modern organizations exert much effort to improve operational efficiency and yet there is much evidence to suggest that this goal is very difficult to attain. The behavioral theory of the firm states that managers often tend to satisfice rather than maximize. This often causes organizational efficiency to be at a suboptimal level. There is theoretically a minimum payment which organizations can make and still retain participation by individuals within the organization. Organizational slack is defined as payments made by the organization in excess of the minimum required to retain participation. When these payments are made to internal groups, internal slack is said to exist. Since internal allocations are usually formulated in the budget, internal slack is often called budget slack. Prior studies of the budget process provide evidence that the budget system is a major factor in the creation of slack. However, the concept has received a limited amount of research attention. The slack variable has been primarily treated in conceptual terms and has not been effectively operationalized. This study had five basic objectives. The first objective was to identify from the literature certain factors which have been associated with budget slack. Another objective was to obtain an objective budget slack indicator from published financial data. The third objective of the study was to obtain from a field study a subjective measure of budget slack and a subjective measure of certain factors which contribute to budget slack. Fourthly, the study sought to test the significance of correlation between the subjectively determined measure of budget slack and the objective indicator obtained from published financial statements. A final objective of the study was to test the significance of correlation between the measures of budget slack and the measures obtained for each budget slack contributing factor. Regression analysis and Spearman's Rank Order Correlation were used to test the relationships of the variables under study. The objective and subjective slack indicators were found to have a moderately positive relationship, though the result was not significant. Of the five slack contributing factors identified, the budget's link to the company reward system showed the strongest relationship to budget slack. The variables budget participation and budget pressure produced inconclusive results. No evidence was found to support the decentralization variable or the economic environment variable as contributors to budget slack.Item An examination of the effect of the safe harbor rule on the prediction error of management earnings forecasts : some empirical evidence(1988) Yoon, Myung-Ho; Liao, Woody M.; Gamble, George O.; Cheng, Agnes C.; Peixoto, Julio L.The subject of management earnings forecast disclosures has received considerable attention over the years. The majority of research in this area has focused on the usefulness of management earnings forecasts to investors by examining either the relative accuracy or the information content of such forecasts. Management earnings forecasts have been found to be useful to investors even though the precise investors' decision models remain a subject of debate. Since management has access to undisclosed information and provides such information to selected parties (e.g., financial analysts) who might thereby obtain an unfair advantage, it has been argued that more meaningful disclosures are required to assist investors in making informed investment decisions. To reduce this information asymmetry problem, the SEC and the AICPA encourage the disclosure of management earnings forecasts and have provided several guidelines. For example, in 1976, the SEC issued a release to present its position on the voluntary disclosure of forecasts. Many companies, however, still refrain from disclosing their earnings forecasts to the public. The principal reason is the fear of legal liability if forecasts later proved to be incorrect Therefore, in July 1979, the SEC adopted a "safe harbor" rule to encourage voluntary disclosure of management earnings forecasts. This rule is designed to protect firms from legal liability as long as forecasts are prepared with a reasonable basis or disclosed in good faith. The objective of this study is to investigate the effect of the safe harbor rule on the prediction error of management earnings forecasts. Also, the combined effect of the safe harbor rule and each of three relevant variables on management earnings forecasts is examined. The three relevant variables are: the degree of management ownership control, the frequency of forecast disclosures, and the timing of forecast disclosures. Each of these three variables has been found in the previous studies to be significantly related to management earnings forecast disclosures. Management earnings forecasts made over a period of eight years (1975-1982) were examined in this study. Individual effects of the four independent variables were first observed in the error metrics. Then, further statistical tests were conducted to assess the significance of the hypothesized relationship between these variables and prediction errors of management earnings forecasts with the individual effect and the combined effect. Both nonparametric (i.e., Wilcoxon) and parametric (i.e., ANOVA) statistics were applied to test the hypotheses in this study. They resulted in identical statistical inferences. The results of this study suggest the following: (1) After the adoption of the safe harbor rule, more firms disclosed their earnings forecasts, but higher prediction errors of management earnings forecasts were also found. However, management forecasts observed in this study are still more accurate than analyst forecasts on average. (2) The relationship between the degree of management ownership control and prediction errors of management earnings forecasts was significant only for the firms in high BTE (barrier-to-entry) industry. The effect of the safe harbor rule was significant regardless of the degree of management ownership control even though its effect appeared to be greater for management-controlled firms than others. (3) The frequency and the timing of forecast disclosures demonstrated a significant relationship with prediction errors of management earnings forecasts, respectively. After the adoption of the safe harbor rule, not only more earnings forecasts were disclosed, but also earlier disclosures were encouraged. Specifically, routine forecast disclosures showed smaller prediction errors than non-routine forecast disclosures. Similarly, late forecast disclosures showed smaller prediction errors than early forecast disclosures. The impact of the safe harbor rule on management earnings forecasts is an important issue for the SEC. The results of this study provide some evidence regarding the effectiveness of the safe harbor rule in motivating firms to disclose earnings forecasts. In addition, this study provides valuable insights into the relationship of the three relevant variables to prediction errors of management earnings forecasts. Thus, the issues examined are relevant to both earnings disclosure regulations and the accounting research of management earnings forecasts. These findings also provide an association between the relative accuracy of management earnings forecasts and the behaviors of firms.Item An investigation of internal interim reporting by municipalities(1986) Holley, Joyce Marie Higgins; Gamble, George O.; Cocanougher, A. Benton; Alford, R. Mark; Grinaker, Robert L.; Szilagyi, Andrew D., Jr.Managers as users of accounting information are examined in a governmental environment through an exploratory study of internal interim reporting practices of municipalities. The following potential administrative uses are examined: internal control, personnel performance evaluation, program evaluation, cash management, budgeting, and investment decision-making. Additionally, the content and timing of internal municipal interim reports are analyzed to review adherence to the National Council on Governmental Accounting's recommendations regarding interim reports. Through correlational analysis, the study addresses what city attribute factors are associated with the extent to which interim reports are used, their content, and timing. Based on research findings of significant factors in financial reporting by municipalities, the study analyzes, for cities in the sample, relationships between interim reporting practices and city size as measured in population, revenues, and expenditures; long-term debt; state required GAAP vs non-GAAP; and financial reporting quality. Finally, regression analysis is employed to analyze the combined effect of the factors on the content and timing of internal interim reports. Results of the study provide evidence to rank (in descending order) the uses of internal interim reports by chief financial officers as follows: budgeting, cash management, internal control, investment decision-making, program evaluation, and personnel performance evaluation. The interim statements for administrative uses are accordingly ranked (in descending order): Actual and Estimated Expenditures, Actual and Estimated Revenues, Forecast of Cash Position -All Funds, Comparative Revenues and Expenses, Combined Statement of Cash Receipts and Disbursements -All Funds, and Balance Sheet. City attribute variables proved significant for state-required GAAP in use of the Balance Sheet for investment decision-making and use of the Comparative Statement of Revenue and Expense for budgeting. Evidence of the study further provided that there are differences in how cities use information for investment decision-making, cash management, internal control, and budgeting when subsamples of the independent variables were examined. Cities with less budgeted revenues, expenditures, and long-term debt percapita made greater use of the statements.Item Management earnings expectations, earnings uncertainty, and voluntary disclosure of earnings forecasts by management : an empirical evaluation of current disclosure practices under the voluntary rules(1987) Choi, Jung Ho, 1956-; Khumawala, Saleha B.; Finley, David R.; Gamble, George O.; Peixoto, Julio L.There has been an intensive debate in the accounting profession and the Investment community regarding whether companies should be required to disclose managerial earnings forecasts. The SEC Initially considered a mandatory forecast disclosure rule, but due to the several technical and legal problems adopted a voluntary rule. As a result, corporate managers may publish their earnings forecasts In SEC filings or In annual reports at their discretion. One of the main arguments for the mandatory rule was that, under the voluntary rule, managers are likely to disclose good news forecasts and withhold bad news forecasts relative to the market expectations of earnings. Thus, Investors would always be able to have access to only favorable and good news forecasts. In response to these arguments, the opponents of the mandatory rule contended that corporate managers with highly volatile earnings would provide misleadingly conservative forecasts because they would be concerned with a legal liability which might result from unduly optimistic forecasts. The primary objective of this study Is to address two different but related questions. First, do corporate managers willingly disclose favorable earnings forecasts and withhold unfavorable earnings forecasts relative to the market expectations of earnings? Second, does earnings uncertainty have any Impact on the managers' disclosure patterns of earnings forecasts? With respect to the first question, the results of this study provide mixed evidence depending upon the different model specification of the market expectations of earnings. When the time-series models exclusively based on the past history of actual earnings were employed to estimate the market expectations of earnings, the findings of this study support the "conventional wisdom" that corporate managers disclose good news forecasts and withhold bad news forecasts. When the financial analysts' forecasts were employed to estimate the market expectations of earnings, however, such asymmetrical disclosure practices could not be detected, and hence, on the average, a full disclosure is made under the voluntary mechanism. This mixed evidence Implies that It may be unwarranted to Impose a mandatory disclosure rule for the purpose of equitable and timely dissemination of forecast information without better knowledge of the formation of earnings expectations by investors. Any conclusion about the desirability of such a rule should not be reached until convincing evidence on the formation of earnings expectations by Investors Is revealed. With regard to the second question, the results of this study appear to Indicate that earnings uncertainty has no impact on the managers' disclosure patterns of earnings forecasts. These findings suggest that corporate managers whose firms' earnings are very volatile and unpredictable, do not provide misleadingly conservative forecasts because of their concern with the potential legal risk. However, these results should be interpreted with caution. Since the sample of this study includes only earnings forecasts voluntarily disclosed by corporate managers, such results may not necessarily hold true when a mandatory rule is imposed on all companies.Item The auditor's report and banker's credit decisions : a field experiment(1984) Jennings, David M.; Porter, Mattie C.; Francia, Arthur J.; Gamble, George O.; Kretlow, William J.The focus of the study was the effect of the auditor's report on the credit decision behavior of senior bank commercial loan officers. The mathematical Theory of Communication indicates that the message received may have a different meaning and result in a different response by the recipient than the meaning intended and response expected by the sender. The auditor's report represents a significant, if not the only, vehicle for the transportation of the auditor's intended message to the user of audited financial statements. To obtain evidence that the auditor's report influences credit decisions and that different forms of the report are differential in their effects on credit decisions, a field experiment was conducted. A posttest-only control group design was used to structure the field experiment. A sample of 600 senior bank commercial loan officers was randomly selected and then the subjects were randomly assigned to six groups. All of the subjects received identical case materials concerning a hypothetical firm representative of a medium size growth company in the electronics industry. The case materials Included a description of the company, a five-year financial summary, and a complete set of financial statements, including notes at December 31, 1982. The six groups were differentiated only by the inclusion of one of five forms of the auditor's report or the exclusion of the auditor's report entirely. Group 1 did not receive an auditor's report; Group 2 received an unqualified opinion; Group 3 received a "subject to" qualified opinion; Group 4 received an "except for" qualified opinion; Group 5 received an adverse opinion; and Group 6 received a disclaimer of opinion. Each subject was asked to complete and return a two-part questionnaire which included fourteen questions designed to obtain demographic data about the respondent and seven questions structured to determine the respondent's credit decision reaction to the case materials from different perspectives. The seven aspects of the credit decision probed were: 1) amount of the seven million dollar loan requested that was approved, 2) confidence in the credit decision, 3) interest rate appropriate for the loan approved, 4) estimate of the hypothetical firm's 1983 net income, 5) an evaluation of the firm's management, 6) an evaluation of the risk of fraud in the firm, and 7) an evaluation of the company's past success. [...]Item The Data Decision-Usefulness Theory: An Exploration of Post-1998 Reported Products and Services Segment Data Decision Usefulness(2012-05) Tollerson, Cynthia; Gamble, George O.; Francia, Arthur J.; Noland, Thomas; Chin, Wynne W.; Singer, RonaldThis study sets forth a conceptual theory–the Data Decision-Usefulness Theory–and explores it by surveying fundamental-equity analysts, to assay their decision-usefulness perceptions of post-1998 reported products and services segment data. Accordingly, a two-phased sequential exploratory mixed methods research design is employed. The initial phase is qualitative in nature comprising theory generation and questionnaire and taxonomy development. The conceptual theory is generated by drawing on prior accounting literature and two paradigms: formal classical grounded theory and value-focused thinking. The former is the theory development methodology and the latter is the over arching abstract model. The mail questionnaire is developed with the aid of Dillman’sTailored Design Method. Our fundamental-equity analyst taxonomy is developed, by drawing on: the descriptive literature about investment professionals, the United States security exchange regulations, and a non-public database, as well as the grounded theory paradigm. The second phase is quantitative in nature. One hundred and sixty-three questionnaire recipients mailed back their questionnaires (10% response rate). Fifty-five answered questions that measured their decision-usefulness perceptions. Overall, the measurement model findings for the questionnaire measures of the materiality and decision-usefulness models are moderately to highly reliable, exhibit both convergent and discriminate validity, and each has predictive relevance. In comparing our results for the two models, our most significant finding is that Ease of Comparing is the most important predictor for both Materiality and Decision Usefulness. However, surprisingly the relative importance of Relevance and Reliability shifts dramatically. Our Materiality model predicts that Relevance is the second most important predictor and Reliability is the least important. In contrast, our Decision Usefulness model predicts just the opposite Our results suggest that to have an impact on analysts’ understanding of firms, relevant disclosures are more important than reliable disclosures. However, to increase analysts’ understanding of firms, reliable information is more important than relevant information. Furthermore, the amount of post-1998 reported products and services segment data being disclosed is insufficient to improve analysts’ understandings of firms. These findings seem to support the dissenting FASB board member’s assertion that post-1998 reported segment disclosures are unlikely to facilitate better understanding firms’ performance, better assessing their prospects for future net cash flows, and making more informed judgments about firms as a whole.Item The development of hospital cost regression models for use as analytical review tools by CPAs(1984) Thibadoux, Gregory M.; Seiler, Robert E.; Grimes, Richard M.; Alford, R. Mark; Gamble, George O.The objective of this study was to develop disaggregated hospital production cost models and to test the usefulness of such models as possible analytical review tools. Such models can theoretically be used as either substitutes for tests of details or as "attention getting" devices during the substantive testing phase of the financial audit. A sample population of 200 hospitals (located in New York, New Jersey, and Pennsylvania) was derived from the 1980 American Hospital Association data tape of the 1979 Annual Survey of Hospitals. The dependent variables were payroll, benefit, interest, depreciation, other, fee, and total expenses. The independent variables were either descriptors of output or product-mix. Seven models were developed by separately regressing a set of thirteen independent variables onto each of the seven expense variables. Five models had R2's of .70 or higher and were significant at the .05 level; payroll, benefit, depreciation, other, and total expenses. Interest and fee expense models were eliminated from further consideration. The predictive power of these five models was tested on a hold-out sample of 100 hospital (selected from the same data tape). The mean relative error for the models ranged from 24 to 64%. The models' standard errors were too large for these five models to be useful as substitutes for tests of details. With the exception of the depreciation model (which has a large mean relative error), the models appear to hold promise as "attention getting" analytical review tools.Item The Effects of Mandatory Audit Firm Rotation and Mandatory Audit Firm Retention on Opinion Shopping(2017-05-17) Lee, Beu; Gamble, George O.; Noland, Thomas R.; Zhao, Yuping; George, Thomas J.This paper examines the impact of mandatory audit firm rotation and mandatory audit firm retention on opinion shopping. Both regulations place statutory restrictions on a client’s authority to switch auditors with the aim to curb opinion shopping. However, one strand of the literature has argued that one of these regulations, namely mandatory audit firm rotation, could worsen opinion shopping by disguising client’s intent. This study predicts that these regulations may bring seven major changes to the dynamics of the audit market: (1) financial incentives, (2) detection risks, (3) litigation risks, (4) reputation effects, (5) auditor competency, (6) market competition, and (7) switching costs. These changes, in turn, may affect auditors’ incentives to compromise and clients’ willingness to engage in opinion shopping. Using hand-collected data based on the unique Korean setting where both mandatory audit firm rotation and mandatory audit firm retention have been implemented for all the listed companies, and where each regulation was adopted in a staggered manner, this paper finds that the level of opinion shopping for affected Korean firms during the mandatory audit firm retention period has decreased. Furthermore, this study finds that opinion shopping has increased once the Korean government started implementing mandatory audit firm rotation in the presence of mandatory audit firm retention. This study adds to the literature by examining whether regulations have a significant impact on opinion shopping and by highlighting the unintended consequences of regulatory attempts.Item The information content of the exposure draft of Accounting Principles Board opinion no. 31 and Accounting series release no. 147 : (an empirical investigation)(1984) Alam, Pervaiz; Khumawala, Saleha B.; Crockett, John H.; Gamble, George O.; Kretlow, William J.; Francia, Arthur J.Both the Exposure Draft of APB Opinion No. 31 and ASR No. 147 required the reporting of long term financial lease obligations in the general purpose statements of lessees. The economic consequences of these pronouncements have been debated since their issuance. This study assumes an efficient market; therefore, the economic effects of the accounting change resulting from the issuance of the Exposure Draft of APB Opinion No. 31 and ASR No. 147 are measured by examining security prices and changes in bond ratings. There is no prior research on the information content of the Exposure Draft of APB Opinion No. 31. Moreover, existing research on ASR No. 147 does not provide definite conclusions as to the effect of the disclosure requirements on lessee firms. The inconclusiveness of prior research on ASR No. 147 suggests that some of the information which it required may have been available in the securities market prior to the release of ASR No. 147. Hence, this study investigates security price reaction resulting from the earliest pronouncement of the new accounting change, the Exposure Draft of APB Opinion No. 31. [...]Item The relationship between pension disclosure and bond risk premium(1986) Tsay, Bor-Yi; Edmonds, Thomas P.; Grinaker, Robert L.; Gamble, George O.; Peixoto, Julio L.The information about employers' accounting for pensions is currently presented in the footnotes of financial statements rather than in the main body. This study examines vdiether or not the pension disclosure has information content. If it does have information content, pension liability and pension assets should be a factor determining a firm's financial risk. The financial risk, more specifically the default risk, is a factor determining a firm's cost of debt. The relationship between bond risk premium and pension disclosure is investigated by using a model of determinants of bond risk premium that originates from Fisher's study. The pension variable is defined as the net change of financial leverage resulting from the inclusion of the pension liability and pension assets in the determination of a firm's financial position. The vested pension benefit liability and the accumulated pension benefit liability are employed as measures of pension liability. In additional tests, the pension liability measures have been adjusted according to a discount rate determined by average market rate. The results of this study show that the pension disclosure does have unique information content. Some information is lost if pension assets and pension liability are presented as items on the balance sheet without a corresponding footnote disclosure. The results provide evidence that presenting information in aggregate form may not be as effective as presenting it in segregated form.