Research Opportunities in Management Accounting

1. Research Opportunities in Management Accounting Journal of Management Accounting Research (1993) Robert S. Kaplan

2. Research Opportunities in Management Accounting (1) • Limitations of statistical analysis to test emerging theories • The role for analytical research • Role for design research vs. analysis research • The new research agenda for management accountants should encompass mode design and less analysis • The new research should like engineering and less like science • The new research should take basic principles and apply them to the new environment in which management accounting is being practiced • The researchers have to learn how to perform and evaluate research whose output is something new: a prototype, a management accounting system that seems to work, according to criteria they develop, in an actual setting

3. Research Opportunities in Management Accounting (2) • Role for Field Research • “What-is” research • Tested theories that had been influential and in existence long enough for company practice to have change based on the theories • “What’s new” research • Observing and documenting the changes and innovations now underway in organizations • Researchers associate themselves with the organization to become intimately familiar with the circumstances of such experiments and the process of implementation and change

4. Research Opportunities in Management Accounting (3) • Role for Field Research • “What’s new” research • The research output: • Describe what practitioners believe and the design principles that guided their action • Document the historical circumstances that led to the innovation, and the principles of learning the practitioner used • A priori predictions about the types of resistances the design innovation will encounter and its likelihood of success • The researcher must identify opportunistically innovating companies

5. Research Opportunities in Management Accounting (4) • Role for Field Research • “What’s new” research • Conduct in-dept observation and documentation to describe the management accounting innovation • Describe practice • Formulate theories that provide a conceptual framework to explain the successful innovations • The theories can then be tested using normal science investigative methods when widespread adoption of the innovation begins to pervade practice

6. Research Opportunities in Management Accounting (5) • Role for Field Research • “To-be” research • Active participants in the change process • Required when adoption of new methods is slow or unlikely • The researcher becomes like the practitioner, a part of the design and implementation process, and hence come closer to developing not only a more complete theory of management accounting, but contributing to a more general theory of management

7. Research Opportunities in Management Accounting (6) • Role for Field Research • “To-be” research • Longitudinal action-oriented research • Research on new settings • A management accounting innovation has yet to be tried in a particular setting • Active role of researcher: extend and customize the innovation to that setting • Design research: • Developing and evaluating new systems • Attempting to identify some of the different or unique features that arose in the new settings • Being sensitive to implementation concerns

8. Research Opportunities in Management Accounting (7) • Role for Field Research • “To-be” research • Research on implementation • Explore the wide set of issues that arise when attempting to implement new management accounting concepts • Research on integration • Who does what? • Situations still arise when normal science methods can and should be productively employed • The longitudinal and action research methods may require a greater maturity and knowledge of individual and organizational behavior

9. Field Research Methods in Management Accounting Accounting Horizons (1999) S. Mark Young

10. Introduction • Sources disciplines: anthropology, sociology and business • Unique characteristics: people interactions • Major influence: Kaplan (1983)

11. The Range of Field Research Methods (1) • Depends on levels of observation, interaction and participation with organizational members • Outsider vs. insider perception • Adler and Adler (1987): based on the degree of researcher involvement • The Chicago School of Sociology • Existential Sociology • Ethnomethodology

12. The Range of Field Research Methods (2) • The Chicago School of Sociology • Stages: • Direct observation (observe members) • Direct but detached interaction (interact with members) • Firsthand participation in member’s activities (participate with members) • Characters: • Researcher attempt to remain objective • Researcher adopt an overt role and acknowledge to organizational members that they are conducting a study • Strive to not become emotionally involved as organizational members to not risk influencing the environment they are studying

13. The Range of Field Research Methods (3) • The Existential Sociology • Investigates participation • Fundamental assumption: people in organizations tend to present (at least) two sides of their behavior and activities • Presented to outsiders (impression management) • Presented to insiders • Researcher rules: • Shed their objective detachment • Become an insider to the organization • Establish relationships with organization members to gather information and tp drwa on members’ subjective experiences • Use combination of overt and covert roles

14. The Range of Field Research Methods (4) • Ethnomethodology • The peripheral membership role • Researchers seek an insider’s viewpoint and take part in social activities • Researchers do not assume leadership roles or participate in the core activities of the group • Researchers may decide to restrict their involvement because they do not want to participate in some of the group’s activities • The Active Membership Role • Researchers moves into a more central role in the organization • Researchers ascend to a higher level of insider status by interacting with members as colleagues and co-participants in the groups’ core activities

15. The Range of Field Research Methods (5) • Ethnomethodology • The complete membership role • Researchers literally go native and become bona fide members of a group with co-equal status in all ways • Type: opportunist vs. convert • Management accounting • Chicago school • Field research in management accounting is still its infancy and many researchers are in a “learning-by-doing” phase of their own development • Many of researchers have been schooled in the logical empiricist tradition

16. Contributions of Field Research to The Management Accounting Literature • Testing and developing theories with data not obtainable using other research methods • Raising new research questions • Informing other research methods • Understanding the limitations of the outsider’s view

17. Advancing Our Use of Field Methods • Learning by doing • Apprenticeships with field researchers • Forge relation with managers and business people involved with their own institutions • Joint the practitioner forums • Formal coursework: field research, training in specific techniques, and study on philosophy of science

18. Directions in Accounting Research: NEAR and FAR Accounting Horizons (1996) William H. Beaver

19. Factors Affecting Directions in Accounting Research (1) • Exogenous factors: arise “outside” of the influence of the accounting academic community • Applications from other disciplines (Finance, Information Economics, Behavioral Sciences) • Greater data availability at lower cost (CRSP, COMPUSTAT, I/B/E/S, GLOBAL VANTAGE, OSIRIS) • Changes in the financial reporting environment (changes in event, transaction, and nature of the regulatory oversight: changes in accounting standards)

20. Factors Affecting Directions in Accounting Research (2) • Endogenous factors: are those that largely lie within the influence of the academic accounting community • Journals (Journal of Accounting Research – empirical accounting research; Journal of Accounting and Economics – positive accounting theory research) • Annual conferences • Sections of the profession association • Promotion policies at colleges and universities • Creative process of talented individuals

21. NEAR Directions • Sources: • Accounting doctoral seminar on security price research at Stanford • Research currently in progress • See Figure 1 at page 116 • Features of NEAR: • The number of nodes in which research is actively taking place • The proportion of research that is taking place in nodes that are subcategories of subcategories • There is an paucity of research that has opened “new” nodes at a higher level in the hierarchy (synthesis vs. fragmentation)

23. Personal Examples of NEAR (1) • The Pricing of Discretionary Accruals • “Accrual Management” node • Test the relationship of security prices and discretionary portion of loan loss • Discretionary and non-discretionary • Particular industry and particular accrual • Findings: indicate that the nondiscretionary portion is negatively priced and, as predicted, the discretionary portion is significantly less negative priced

24. Personal Examples of NEAR (2) • The Value-Relevance of SFAS No. 107: Fair Value Disclosures • “Accounting Data as Measurement” node • SFAS 107 vs. SFAS 33: similarities and differences • Dependent variable: the difference between market value and the book value of equity; Independent variable: the difference between SFAS 107 fair value and the respective book values of five categories, investment securities, loans, deposits, long-term debt and off-balance sheet items • Selection of dependent variable: level vs. event study • Old vs. new passion of estimation technique

25. Personal Examples of NEAR (3) • The price-earnings relation – A simultaneous equation approach • “Information Content of Prices” node and “Earnings Response Coefficients” node • New applications of econometrics tool: simultaneous equation approach • Relative Importance of Book Value and Earnings • “Accounting Data as Measurement” node • Initial findings: the importance of the balance sheet in explaining valuation increases with financial difficulty and is higher for industries where intangible assets are less likely • Conservatism and Delayed Recognition in Accrual Accounting

26. Features of FAR • Trends in accounting research • Outstanding accounting research is likely to be a blend of theory, empirical analysis and institutional knowledge • The emphasis on contextual rather than generic research (need particular samples, specific reporting issues, and the collection of distinctive data bases) • The “wild card” factors: • Change in the financial reporting environment • The creativity of individual researchers • Syntheses

27. Perspectives on Recent Capital Market Research The Accounting Review (2002) William H. Beaver

28. Introduction • Market efficiency • Feltham-Ohlson modeling • Value relevance • Analysts’ behavior • Discretionary behavior

29. Market Efficiency [1] • Market efficiency and the regulation of financial reporting • Market efficiency and investment decisions – resource allocation and production efficiency • Market efficiency and researchers (set of inference, variable measurement, and interpretations) • Earlier studies: confirmed the market efficiency • Recent studies: post-earnings announcement drift; market-to-book ratios and its refinements; contextual accounting issues

30. Market Efficiency [2] • Post-Earnings Announcement Drift • Market-to-Book Ratios and Extensions • Abnormal return associated with portfolio strategies based on market-to-book ratios • Extensions: (1) market-to-value ratios; and (2) analysts’ biased forecasts • Contextual Accounting Issues • The price of accrual and cash flow information • The IPO puzzle • etc

31. Market Efficiency [3] • How can widely disseminated and examined data used with simple portfolio strategies that require no knowledge of accounting be associated with abnormal returns? • How can studies of arcane disclosure find that such disclosures are apparently reflected in prices, yet more visible variables, such as earnings and book value, are not? • How can studies of security return in the very short run shwo evidence of relatively rapid response, and yet have evidence of abnormal returns that appear to persist for year after the portfolio formation date? • How can the body of research in aggregate show that prices both lead and lag accounting data?

32. Feltham-Ohlson Modeling [1] • Key Feartures of F-O Modeling • Parsimonious assumptions – the value of equity = the present value of expected future dividends, the clean surplus relation, and some form of a linear information dynamic • Provides a role for many importance features of the accounting system: clean surplus, book value, earnings, transitory components of earnings, conservatism, delayed recognition

33. Feltham-Ohlson Modeling [2] • Key Feartures of F-O Modeling • Stimulated considerable empirical research • Both book value and earnings are significant pricing factors • The relative importance of book value is inversely related to the financial health of the firm • The coefficient on earnings is lower for firms with low return on equity • The coefficient on positive earnings is positive and significant, while the coefficient on losses is insignificantly different from zero • Accrual vs. cash flow components of earnings are priced significantly differently from one another. In general, the accrual components are associated with a lower coefficient

34. Feltham-Ohlson Modeling [3] • Criticisms of the F-O Approach • The model has no endogenous demand for accounting data vs. F-O models do not attempt to derive a demand for accounting • There is no information asymmetry and that hence no strategic uses of accounting data arise within the F-O framework • Some aspects of the models are unsupported by the empirical data

35. Value-Relevance Research [1] • Examines the association between a security price-based dependent variable and a set of accounting variables • What are the distinctive characteristics? • Value-relevance research demands an in-depth knowledge of accounting institutions, accounting standards, and the specific features of the reported numbers • Timeliness of information is not an overrding issue (event studies, level of stock prices and the accounting data)

36. Value-Relevance Research [2] • Why Is Timeliness Not the Key Issue? • Delayed recognition • Earnings announcements are largely preempted by the disclosure of other information vs. the cost of obtaining the prior information • Key role of financial statements is to summarize relevant information parsimoniously and in a manner consistent with the underlying concept • The financial statements are not intended to list only those assets, liablities, revenues, and expenses not preempted by other publicly available information • Timeliness is only one dimension • Implication for research: change vs. level

37. Value-Relevance Research [3] • What Is the Conceptual Foundation of Value-Relevance Research? • Combination of a valuation theory plus contextual accounting arguments that allow researchers to predict how accounting variables relate to the market value of equity • Valuation models • Earnings-only approach – MM (1996): present value of permanent future earnings • Balance-sheet approach • F-O models: book value of equity and the present value of expected future abnormal earnings

38. Value-Relevance Research [4] • What Have We Learned? • Is it priced? • Is it priced consistently with some theoretical value? • Is a particular accounting number priced equal to or differently from similar accounting numbers? • Addressess questions relating to footnote information and nonfinancial intangle assets

39. Value-Relevance Research [5] • The Role of Value-Relevance Research • Help articulate the nature of the issues and provide a paradigm or language with which to frame the questions of interest • Provide a theory • Provide empirical evidence • Unresolved Issues • Market efficiency • Econometric issues • Other puposes of financial statements

40. Research on Analysts’ Behavior [1] • Analysts are among the major information intermediaries who use and interpret accounting data • Security prices reflect the results of their analysis • Analysts rely on a rich set of publicly available data – assess the importance of accounting data relative to the total mix of information

41. Research on Analysts’ Behavior [2] • What Have We Learned? • Analysts’ forecasts are optimistics • Analysts employed by investment firms that are associated wth the underwriting of the firm’s securities issue more optimistic forecasts • Analysts’ forecasts tend to be revised downward during the year • Analysts with better forecasting ability appear to have a higher profitability of survival

42. Research on Analysts’ Behavior [3] • What Have We Learned? • Analysts’ forecast outperform the best statistical models • Analysts’ forecast do not reflect all of the information in the past earnings series (the forecast errors are serially correlated and analysts underestimate the persistency of earnings) • Capital markets appera to reflect naively analysts’ forecast in prices – abnormal returns associated with MTB and MTV strategis • Analysts’ forecasts appear to be a parsimonious way to capture “other information” • Analyst coverage is greater for firms with more institutional investor and more intagible assets

43. Research on Analysts’ Behavior [4] • Unresolved Issues • Need a better understanding of the incentives of analysts with respect to forecasting • Identification the other information besides accounting data that influences analysts’ forecasts

44. Research on Discretionary Accruals [1] • Motives for Accrual Management • Opportunistics vs. signaling • Compensation contracts, debt covenants, capital market pricing, taxes, litigation, and regulatory behavior • Multiple motives: opposing or reinforcing?

45. Research on Discretionary Accruals [2] • What Have We Learned? • Earnings management identification: • Generic models of discretionary accruals • Tests based on discontonuities in the reported earnings distribution • Account-specific models of discretionary behavior • Combination

46. Research on Discretionary Accruals [3] • What Have We Learned? • Earnings management motivation: • Avoid a loss • Avoid an eanrings decline • Avoid falling below analysts’ forecasts • Meeting the earnings forecasts • EM appears to be widespread and relatively easy to detect, at least as estimated by extant techniques

47. Research on Discretionary Accruals [4] • What Have We Learned? • EM: • Accrual management • Hedging activities • Altering research and development expenditures • Combination • Capital markets appear to price differently the nondiscretionary and discretionary components of an accrual

48. Research on Discretionary Accruals [5] • Estimation of Discretionary and Nondiscretionary accruals • Jones (1991) model: parsimonious model • Use sector-specific variables for investigating sector-specific accruals • Unresolved Issues • Identification of discretionary accruals • The nature of the discretion may be known but not contractible • Incentives and costs to eliminate discretionary behavior are unclear, and discretionary behavior may be an equilibrium outcome, albeit not a “first best” solution

49. Empirical Research on Accounting Choice Journal of Accounting and Economics (2001) Thomas D. Fields Thomas Z. Lys Linda Vincent

50. Introduction [1] • Market imperfections and accounting choice • Definition of accounting choice • The motives behind the accounting choice decision • Accounting research: the determinants and implication of accounting choice • Literature review