ACCT 6311 Seminar in Accounting Research
Fall 2013
Instructor(s): Bin Srinidhi
Office Number: COBA 428
Office Telephone Number: 817 272 1310
Email Address: [email protected]
Faculty Profile: https://www.uta.edu/mentis/public/#profile/profile/edit/id/10672
Office Hours: Wednesday 10:30 AM-12:30 PM
Section Information: ACCT 6311
Time and Place of Class Meetings: COBA 236; Wednesdays 1-4 PM; Aug. 22 – Dec. 04
Description of Course Content: This course introduces both the theoretical and empirical
developments in Contracting, Reporting and Corporate Governance. The focus is on the
conceptualization of issues in accounting studies.
Student Learning Outcomes: At the end of the course, you should have a framework for thinking
through contracting and governance issues in accounting. A framework is just that – a frame in which
you can structure your thought process. Practically, you will have some ideas and will develop your
own framework over years.
Philosophy of Learning: At the Ph.D. level, I expect you to be original, innovative, critical and
serious in your discussions and exchanges of ideas. Most of the learning takes place in one or both of
two ways: (i) by discussing and exchanging ideas with others and (ii) by introspection. Both these are
essential for advancing your thought process in these matters. In that respect, I will only be a “guide”
and direct you minimally. PLEASE NOTE THAT THE MAIN ACTIVITY IN THE CLASS AND
OUTSIDE IS LEARNING, NOT TEACHING. IF I FEEL IT MIGHT PROMOTE LEARNING, I
MIGHT EVEN CHOOSE TO BE A SILENT SPECTATOR AND NOT INTERVENE.
Required Textbooks and Other Course Materials:
For Module 1, the book will be Rasmusen (2007) first six chapters. The remaining chapters in the
book serve as a guide for Module 2 as well. For Module 2: principal-agent model, we will closely
follow the structure of Lambert’s review (Lambert 2001). For corporate governance research
(Module 4), we will briefly refer to the review by Armstrong et al. (2010). The papers for discussion
will be drawn from many journals and I will either make them available for you or provide you with
the reference so that you can download the paper from the journal or from SSRN.
Descriptions of major assignments and examinations: See the next section and the Schedule at
the end of this document.
Attendance: You are required to attend every session.
Classes and Assessment
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The classes SHOULD BE very informal. It is important to discuss and debate the issues in an
atmosphere with no formalities and inhibitions. You must understand that at this level, I might not
have answers for all your questions and you should treat it as a joint quest for knowledge that you and
I undertake together. For every class (other than perhaps the first one), there will be selected
discussion reading assignments. All of us must read the assignments and come prepared to discuss
not only the general issues in the paper but also the details such as the mathematical development of
the model (for analytical papers) or the econometric aspects of methodology (for empirical papers).
50% of the grade: Tentatively, I plan to give you problem-solving type of assignments in the first
few sessions (when I am discussing game theory etc.) that you should complete and submit
(electronically) to me before the next week. Thereafter, I will assign papers for discussion. For each
paper (or topic), one student will have the primary responsibility of starting or leading the
discussion and then interpreting the discussions with a small summary of the paper(s) and a liberal
dose of your innovative thinking (to be submitted to me in two weeks after the discussion). The
discussion reports will be distributed to all the other participants as well. 50% of the grade will be
based on the answers to problem-solving assignments and to discussion in class and discussion
reports. Note that each of you will have to lead the discussion for more than one paper.
The other 50% of the grade: This will be based on a research proposal that I will ask you to write.
Your proposal must be a developed one where you will identify an issue for empirical research; give
the current literature; provide your theory/conceptual framework; develop hypotheses and provide the
research design that is feasible in terms of data availability (not necessarily in UTA). It should clearly
tell me how you have conceptualized the idea (the players, their incentives, and the model for their
behavior in this context), the maintained hypothesis, your hypotheses, the research design and how it
relates to your conceptualization and hypotheses, where you are likely to get the data and what types
of methodology you might adopt. It should also tell me the incremental contribution to the literature
if your hypotheses are supported or not supported by the analysis. In fact, I would like you to identify
the parties that could use your research and how they will benefit from using your research. Your
grade will depend on these above criteria. The grade will have no relationship with irrelevant details
such as the length of the proposal, the spacing and formatting, the number of references etc. Your
proposal should be as long as it needs to be to give all the particulars above, nothing more, nothing
less.
It is understood that these requirements are for students registered in my class and not for
those who might attend the classes voluntarily for other reasons. However, it is my request to the
other attendees to enrich the discussion in the class by bringing in different perspectives. If you want
to work on the assignments and produce discussion reports, it would we welcomed but of course, no
grade would be assigned to it.
This is a tentative plan. Please understand that we will decide on the assessment process
together as a class.
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responsibility to officially withdraw if they do not plan to attend after registering. Students will not
be automatically dropped for non-attendance. Repayment of certain types of financial aid
administered through the University may be required as the result of dropping classes or withdrawing.
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I pledge, on my honor, to uphold UT Arlington’s tradition of academic integrity, a
tradition that values hard work and honest effort in the pursuit of academic excellence.
I promise that I will submit only work that I personally create or contribute to group
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shall not give any examinations constituting 10% or more of the final grade, except makeup tests and
laboratory examinations. In addition, no instructor shall give any portion of the final examination
during Final Review Week. During this week, classes are held as scheduled. In addition, instructors
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Course Schedule.
See the attached Schedule at the end of this document. “As the instructor for this course, I reserve
the right to adjust this schedule in any way that serves the educational needs of the students enrolled
in this course.
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This course consists of four modules
The first module (4 sessions) deals with conceptualization using loss functions and game theory.
This part of the course is NOT meant to replicate either an optimization course or a game theory
seminar and will NOT make you an expert in solving game theoretic problems. The purpose of this
module is to help you understand the different concepts of optima and equilibriums in the presence of
multiple players. To the extent I can, I will try to give examples from accounting research/ issues.
Hopefully, it will also provide the required theoretical background for you to understand the next
module on principal-agent framework. There will be no specific papers that will be prescribed for this
module. I will take most of the material from “Games and Information” by Eric Rasmusen.
The second module (3 sessions) deals with the principal-agent framework. The treatment is
analytical for this module. Agency Theory forms the theoretical basis for archival research in
Accounting. Therefore, having the theoretical foundation in agency models for your research is
extremely important.
The third module (3 sessions) deals with topical accounting issues such as conservatism, earnings
management, executive compensation etc. I will let you choose the topics and empirical papers in
each of these three areas for discussion/presentation in class. I will also require you to choose
theoretical papers in these areas.
The fourth module (4 sessions) is on corporate governance issues. We cover both analytical and
empirical literature on corporate governance from an internal control viewpoint.
It is unrealistic to expect to get a very deep understanding of all this literature in so short a
time. The more realistic objective of these sessions is to stimulate interest in identifying the
theoretical basis of your research in a formal way. I find that the reasoning in analytical work and the
frameworks that you can develop with analytical thinking help you much in formulating empirical
hypothesis and testing.
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MODULE 1: Conceptualization of Accounting Research Issues
8/28 Session 1: Introduction: Scientific evidence collection vs authority-based systems; Wholistic
and Reductionist approaches of evidence collection
Concept of maintained hypothesis in accounting research; The use of loss function and modeling
using loss function
9/04 Session 2: Basics of Game Theory: Dominated and dominant strategies: Prisoner’s dilemma;
Iterated dominance; Nash equilibrium; Ranked coordination
Information Strategic and extensive forms of representing a game; information sets; Perfect,
Certain, Symmetric and Complete Information games
9/11 Session 3: Mixed and Continuous Strategies The welfare game; The auditing game; Cournot
game; Bertrand Game; Stackelberg equilibrium
Dynamic games with Symmetric Information
Subgame perfectness; Credible threats
9/18 Session 4: Repeated games with Symmetric Information Finitely and infinitely repeated
games; Reputation ; Product quality in infinitely repeated game
Dynamic games with Incomplete Information
Bayes Theorem and Bayesian Nash; Perfect
Bayesian equilibrium; The Axelrod tournament and different strategies such as Tit-for-tat.
MODULE 2: THE PRINCIPAL-AGENT FRAMEWORK
9/25 Session 5: Some basic tools – review of probability distributions and stochastic settings,
stochastic dominance, Classical Economic Foundations, Preferences and choices, Risk premium and
Arrow-Pratt measure of risk aversion, Information sets, Decision making under uncertainty,
Overview of the agency literature, basic Agency model. (I will be leading the discussion). The papers
are the following: Stochastic dominance (Hanoch and Levy 1969), Risk Aversion (Pratt 1964). I will
explain the basic agency model and work out some small examples to explain the concept of moral
hazard.
10/02 Session 6: Basic Agency Model (Holmstrom 1979). Because Holmstrom paper is fundamental
to your understanding of moral hazard. I expect you to have gone over the paper before class and
understand it fully by the end of this class. I will lead the discussion but I expect everyone of you to
be conversant with the paper.
10/09 Session 7: From this session onwards, the classes will be based on your lead discussions. I will
not call them presentations because that is not I want them to be. You are not presenting a result.
You are discussing a paper. In other words, the responsibility does not lie solely with the lead
discussant. It lies with EVERYONE in the class. We discuss the following papers:
(1) Antle and Demski paper on controllability (Antle and Demski 1988)
(2) Milgrom’s interpretation (Milgrom 1981)
(3) Decision making and decision facilitating roles of information in (Baiman and Demski 1980)
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10/16 Session 8: Aggregation of performance measures, LEN model and congruity - Lambert’s
review pages 21-36; Communication and the Revelation Principle
Papers for discussion:
(1) Aggregation model by Banker and Datar (Banker and Datar 1989)
(2) LEN model (Holmstrom and Milgrom 1987)
(3) Congruity (Datar et al. 2001)
(4) Performance measure congruity in multi-task P-A relations (Feltham and Xie 1994)
(5) Incentive – compatible mechanism design (Myerson 1979; Groves and Loeb 1979)
MODULE 3: CONSERVATISM AND EARNINGS MANAGEMENT (Empirical papers
chosen by you)
10/23 Session 9: Theory and Empirical research in Conservatism
Theory paper: How good is the Basu measure of conservatism? (Gigler and Hemmer 2001)
Examples of Empirical papers
Moral hazard and accounting conservatism (Lafond and Roychowdhury 2008)
Is conservatism driven by equity holders or by debt holders? (Ball et al. 2008)
10/30 Session 10: Earnings Management: Theory and Empirics
Theory paper: Earnings management and the Revelation Principle (Arya et al. 1998)
Smoothing income in anticipation of future earnings (DeFond and Chul 1997)
MODULE 3: CORPORATE GOVERNANCE
11/06 Session 11 Theory of Corporate Governance
(1) Some theory and implications (Hart 1995)
(2) Norms and the theory of the firm (Hart 2001)
11/13 Session 12: Survey of Corporate Governance
(1) Survey paper by Shleifer and Vishney (Shleifer and Vishny 1997)
(2) Legal Protection of investor rights and Corporate governance – prevalent in US and UK. The
small discussion in the Shleifer and Vishney paper should be supplemented by Gompers et al.
(2003) and Bebchuk and Cohen (2005)
(3) Family ownership, large investors and corporate governance. Again, the discussion in the
Shleifer and Vishney paper should be supplemented by other papers (Anderson and Reeb
2003; Anderson et al. 2003; Ali et al. 2007).
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11/20 Session 13: The Role of Information and Financial Reporting in Corporate Governance
Discussion of Armstrong et al. (2009) survey. Support the discussion with the following topics:
(1) The Role of Information in structuring corporate boards. Supplement section 3.1 of the paper
with the paper by Larcker et al.(2007).
(2) Mechanisms to commit to a transparent information environment. Supplement section 3.2 of
the paper with the paper by (Bushman et al. 2004)
11/27 Session 14: Expanding scope of Accounting Research. The transition from Accounting to
Accountability
We will discuss the current and future scope of accounting research.
12/04 Session 15: Your research ideas
In this session, we will discuss your ideas for research. Please come prepared with some thoughts on
the research that you would like to undertake and present them. Each one of you will present for
about 15 minutes and have a question and answer session for 5 minutes.
We can continue this on 12/11 if the classroom is available.
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References
Ali, A., T.-Y. Chen, and S. Radhakrishnan. 2007. Corporate disclosures by family firms. Journal of
Accounting & Economics 44 (1/2):238-286.
Anderson, R. C., S. A. Mansi, and D. M. Reeb. 2003. Founding family ownership and the agency
cost of debt. Journal of Financial Economics 68 (2):263-285.
Anderson, R. C., and D. M. Reeb. 2003. Founding-family ownership and firm performance: Evidence
from the S&P 500. The Journal of Finance 58 (3):1301-1328.
Antle, R., and J. S. Demski. 1988. The Controllability Principle In Responsibility Accounting. The
Accounting Review 63 (4):700.
Armstrong, C., W. Guay, and J. Weber. 2009. The Role of Information and Financial Reporting in
Corporate
Governance
and
Debt
Contracting;
http://proquest.umi.com/pqdweb?did=2001100091&Fmt=7&clientId=18977&RQT=309&VN
ame=PQD. In SSRN Working Paper Series.
Arya, A., J. Glover, and S. Sunder. 1998. Earnings Management and the Revelation Principle. Review
of Accounting Studies 3:7-34.
Baiman, S., and J. S. Demski. 1980. Economically Optimal Performance Evaluation and Control
Systems. Journal of Accounting Research 18:184-220.
Ball, R., A. Robin, and G. Sadka. 2008. Is financial reporting shaped by equity markets or by debt
markets? An international study of timeliness and conservatism. Review of Accounting Studies
13 (2-3):168-205.
Banker, R. D., and S. M. Datar. 1989. Sensitivity, Precision, and Linear Aggregation of Signals for
Performance Evaluation. Journal of Accounting Research 27 (1):21-39.
Bebchuk, L. A., and A. Cohen. 2005. The costs of entrenched boards. Journal of Financial
Economics 78 (2):409.
Boschen, J. F., A. Duru, L. A. Gordon, and K. J. Smith. 2003. Accounting and stock price
performance in dynamic CEO compensation arrangements. The Accounting Review 78
(1):143-168.
Bushman, R., Q. Chen, E. Engel, and A. Smith. 2004. Financial accounting information,
organizational complexity and corporate governance systems. Journal of Accounting &
Economics 37 (2):167.
Datar, S., S. C. Kulp, and R. A. Lambert. 2001. Balancing performance measures. Journal of
Accounting Research 39 (1):75-92.
DeFond, M., and W. P. Chul. 1997. Smoothing income in anticipation of future earnings. Journal of
Accounting and Economics 23:115-139.
Feltham, G. A., and J. Xie. 1994. Performance measure congruity and diversity in multi-task
principal/agent relations. The Accounting Review 69 (3):429-453.
Gigler, F. B., and T. Hemmer. 2001. Conservatism, optimal disclosure policy, and the timeliness of
financial reports. The Accounting Review 76 (4):471-493.
Gompers, P., J. Ishii, and A. Metrick. 2003. Corporate governance and equity prices. The Quarterly
Journal of Economics 118 (1):107.
Groves, T., and M. Loeb. 1979. Incentives in a divisionalized firm. Management Science (pre-1986)
25 (3):221-230.
Hanoch, G., and H. Levy. 1969. The efficiency analysis of choices involving risk. Review of
Economic Studies:335-346.
Harris, M., C. H. Kriebel, and A. Raviv. 1982. Asymmetric Information, Incentives and Intrafirm
Resource Allocation. Management Science 28 (6):604-620.
Hart, O. 1995. Corporate governance: Some theory and implications. The Economic Journal 105
(430):678-689.
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———. 2001. Norms and the theory of the firm. University of Pennsylvania Law Review 149
(6):1701-1715.
Holmstrom, B. 1979. Moral Hazard and Observability. Bell Journal of Economics 10 (1):74.
Holmstrom, B., and P. Milgrom. 1987. Aggregation and linearity in the provision of intertemporal
incentives. Econometrica (1986-1998) 55 (2):303-328.
Lafond, R., and S. Roychowdhury. 2008. Managerial Ownership and Accounting Conservatism.
Journal of Accounting Research 46 (1):101-135.
Lambert, R. A. 2001. Contracting theory and accounting. Journal of Accounting & Economics 32 (13):3-87.
Larcker, D. F., S. A. Richardson, and I. Tuna. 2007. Corporate Governance, Accounting Outcomes,
and Organizational Performance. The Accounting Review 82 (4):963-1008.
Milgrom, P. R. 1981. Good News and Bad News: Representation Theorems and Applications. Bell
Journal of Economics 12 (2):380-391.
Murphy, K. J. 1986. Incentives, Learning, and Compensation: A Theoretical and Empirical
Investigation of Managerial Labor Contracts. The Rand Journal of Economics 17 (1):59-76.
Myerson, R. B. 1979. Incentive Compatibility and the Bargaining Problem. Econometrica 47 (1):6173.
Pratt, J. W. 1964. Risk Aversion in the Small and in the Large. Econometrica 32 (1/2):122-136.
Rasmusen, E. 2007. Games and Information. 4 ed. 350 Main Street, Madden MA 02148: Blackwell
Publishing.
Shleifer, A., and R. W. Vishny. 1997. A Survey of Corporate Governance. The Journal of Finance 52
(2):737-783.
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