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The Association Between the Establishment of Audit Committees Composed of Outside Directors and a Change in the Objectivity of the Management Results-Reporting Function: an Empirical Investigation Into Income Smoothing Patterns

Description: The purpose of this research was to empirically examine the effect of the establishment of outside audit committees on the objectivity of the management results-reporting practices of those companies that established such committees in response to the New York Stock Exchange mandate effective June 30, 1978. Management income smoothing behavior is taken as a measurable surrogate for the objectivity of the management results-reporting practices. This research involved the testing of one research problem. The research question asks, "Will the establishment of outside audit committees by companies that had no such committees prior to the New York Stock Exchange mandate effective June 30, 1978, be associated with a decrease in the degree of smoothing in the net income series for the period after that date relative to the degree of smoothing prior to that date?" The answer to this question required the selection of an experimental and a control group. Each group was composed of fifty New York Stock Exchange listed firms. Linear and semi-log regression models were used to measure each firm's degree of income smoothing (defined as reducing the variability of a net income series about its trend line). The change in mean square errors of the experimental and control groups was compared using the chisquare and median tests. Neither the chi-square or the median test found a statistically significant increase in the objectivity of the management results-reporting function for the firms that established outside audit committees in response to the NYSE mandate effective June 30, 1978.
Date: December 1985
Creator: Roubi, Raafat Ramadan

Combined Leverage and the Volatility of Stock Prices

Description: Much has been written during the past decade to explain the relationship between financial and operating leverage and stock-price volatility. However, the relationship between combined leverage and stock-price volatility has yet to be fully explored. Mandelker and Rhee's (MR) recent study uses both operating and financial leverage in a regression (equivalent to the traditional total leverage—DTL) and shows that both types of leverage are positively associated with common stock betas. Huffman recently demonstrated that there are interactions between operating leverage and financial leverage. Therefore, MR's model could be oversimplified. This study examines the relationship between firms' combined leverage and their stock-price volatility. The study also examines industry and industry growth to see if the relationship is influenced by these factors. The question is whether DOCL is a better risk measure than DTL and whether there is an interaction between operating and financial leverage. The inferences that can be drawn from the study's results are as follows: (a) Stock risk is a function of combined leverage; (b) Industry significantly influences the relationship between stock risk and DOCL; (c) High growth increases the relationship between stock risk and DOCL; (d) Combined leverage (DOCL) is a better risk measure than total leverage (DTL). Further, the problem with the traditional total leverage measure is the omission of the interaction between DOL and DFL. This is consistent with Huffman's theory and suggests Mandelker and Rhee's model is oversimplified.
Date: August 1985
Creator: Li, Rong-Jen

The Development and Evaluation of a Forecasting System that Incorporates ARIMA Modeling with Autoregression and Exponential Smoothing

Description: This research was designed to develop and evaluate an automated alternative to the Box-Jenkins method of forecasting. The study involved two major phases. The first phase was the formulation of an automated ARIMA method; the second was the combination of forecasts from the automated ARIMA with forecasts from two other automated methods, the Holt-Winters method and the Stepwise Autoregressive method. The development of the automated ARIMA, based on a decision criterion suggested by Akaike, borrows heavily from the work of Ang, Chuaa and Fatema. Seasonality and small data set handling were some of the modifications made to the original method to make it suitable for use with a broad range of time series. Forecasts were combined by means of both the simple average and a weighted averaging scheme. Empirical and generated data were employed to perform the forecasting evaluation. The 111 sets of empirical data came from the M-Competition. The twenty-one sets of generated data arose from ARIMA models that Box, Taio and Pack analyzed using the Box-Jenkins method. To compare the forecasting abilities of the Box-Jenkins and the automated ARIMA alone and in combination with the other two methods, two accuracy measures were used. These measures, which are free of magnitude bias, are the mean absolute percentage error (MAPE) and the median absolute percentage error (Md APE).
Date: May 1985
Creator: Simmons, Laurette Poulos

An Empirical Investigation of the Discriminant and Predictive Ability of the SFAS No. 69 Signals for Business Failure in the Oil and Gas Industry

Description: In 1982, the Financial Accounting Board (FASB) issued Statment of Financial Accounting Standards No. 69 (SFAS No. 69) which required oil and gas producing companies to disclose supplementary information to the basic financial statements. These disclosures include, costs incurred, capitalized costs, reserve quantities, and a standardized measure of discounted cash flows. The FASB considered these disclosures to be necessary to compensate for the deficiencies in historical cost financial statements. The usefulness of the new signals created by SFAS No. 69, however, is an empirical question and research regarding that objective is lacking. The objective of the study is to test the usefulness of SFAS No. 69. The research strategy used to achieve that objective is to compare the discriminant and predictive power of SFAS No. 69 signals or SFAS No. 69 signals combined with financial signals to that of financial signals alone. The research hypothesized that SFAS No. 69 signals by themselves or as supplmentary to financial signals have more discriminant and predictive ability for business failure in oil and gas industry than do financial signals alone. In order to test that hypothesis, the study used the multiple discriminant analysis technique (MDA) to develop three equations. The first is based on SFAS NO. 69 signals, the second on financial statement signals, and the third on joint financial and SFAS No. 69 signals. Data were collected from the 10-K's arid the annual reports of 28 oil and gas companies (14 failed and 14 nonfailed). The analysis was repeated for four time bases, one year before failure, two years before failure, three years before failure, and the average of the three years immediately before failure. After assessing the discriminant and predictive ability of each equation in the four time bases, a t-test was used to determine a significant difference in the discriminant ...
Date: December 1985
Creator: Eldahrawy, Kamal

An Empirical Study of the Effectiveness of Independence Discrimination Resulting from the Application of Aicpa Ethical Interpretation 101-3--Accounting Services

Description: Interpretation 101-3 of the AICPA Code of Professional Ethics provides four independence requirements for certified public accountants performing bookkeeping services. As such, these requirements are largely thought of as rules requiring compliance. The purpose of this study was to provide empirical evidence related to the question, "Can the guidelines in Interpretation 101-3 be effectively interpreted?" Accordingly, the research objectives were twofold: (1) to make an estimate of the effectiveness of independence discrimination resulting from the use of Interpretation 101-3 , and (2) to identify variables related to differences in CPAs' judgements of impairment and non-impairment of CPA independence in situations covered by Interpretation 101-3. The research methodology for this study was based on a case approach. Twelve situations developed from analysis of Interpretation 101-3 and discussions with practitioners were organized into twenty-four cases in which a CPA firm provided a variety of accounting services. These twenty-four cases were divided into two case sets of twelve cases each and then combined with two cases from a previous study by David Lavin. These cases were submitted to an expert panel for validation as to their relationship to Interpretation 101-3, and a predetermined "correct" judgement was established for use in analysis. A mail survey of the licensees of the Texas State Board of Public Accountancy was used for collecting data. The CPAs were provided with a copy of Interpretation 101-3 and asked to base their judgements exclusively on the standard. Hypothesis testing was used to determine the effectiveness of the independence discrimination resulting from the use of Interpretation 101-3. Statistical models were developed for evaluating differences in the effectiveness of independence discrimination and differences in the CPAs' judgements themselves.
Date: May 1985
Creator: Steed, Steve A. (Steve Alan)

The Equity Method of Accounting and Unconsolidated Subsidiaries: An Empirical Study

Description: The objectives of this study are to determine the effect on certain financial statement relationships of using the equity method to account for subsidiaries in lieu of consolidation and to gather evidence to suggest whether or not bond rating agencies take into consideration these effects in rating corporate bonds. Sixty manufacturing companies listed in COMPUSTAT as having a subsidiary accounted for by the equity method compose the experimental group. The remaining manufacturing companies in COMPUSTAT compose the control group. Computation of eight variables from COMPUSTAT provided data from the companies' original financial statements. Consolidating the subsidiaries of the experimental companies using annual 10-K data made it possible to recompute the same eight variables with these subsidiaries consolidated into the parents' statements. Comparison of the variables for the companies before and after consolidation revealed that five of the eight variables were substantially different and that the differences were statistically significant. Horrigan's multiple regression bond rating model provided indirect evidence to examine which method (equity or consolidation) bond raters use in their rating process. The model is a surrogate for the rating process. Use of the model necessitated calculation of two sets of regression coefficients—one using data in which subsidiaries were accounted for by the equity method and a second when the subsidiaries are consolidated. A derivation sample drawn randomly from both the experimental and control groups provided the data for computation of the coefficients. Comparison of predictions using the two sets of coefficients and validation sample company data revealed that the consolidated method data generated predictions in greater agreement with Moody's bond ratings than did the equity method data. The N-probit technique indicated that the predictions of Horrigan's model are not biased. The research suggests that bond raters find data based on consolidation of subsidiaries more important in their analyses than ...
Date: August 1985
Creator: Rich, John C. (John Carr)

An Examination of an Integrative Expectancy Model for Auditors' Performance Behaviors Under Time Budget Pressure

Description: In recent years there has been a growing use of expectancy theory to study motivation and performance in accounting environments. Such research efforts have resulted in reporting some inconsistent findings and low explanatory power for the expectancy model. In an attempt to increase the explanatory power of the model, several researchers have suggested the inclusion of nonexpectancy components in the model. This research was undertaken to develop an integrative expectancy model by incorporating some elements of goal setting theory and attribution theory into the expectancy formulation. The study was also designed to provide empirical evidence on the validity of a within-subject design of the proposed model through an empirical investigation of auditors* performance behaviors to meet budgeted time in public accounting firms. Alternative performance behaviors to meet budgeted time were modeled in three choice processes. The first deals with auditors choice to report unfiltered time (i.e. report actual time worked) as opposed to filtered time worked (i.e., underreporting and sign-off behaviors). The second process deals with auditors' choice to engage in underreporting as opposed to sign-off behaviors. The third process deals with auditors' choice to reduce or overrule some audit procedures based on professional judgment. Data were collected using an anonymous questionnaire from a sample of auditors at the staff, senior, and supervisory staff levels of fifty-three national, regional and local accounting firms in the Dallas- Fort Worth area. Data received from 671 participants were analyzed using th Automatic Interaction Detector (AID3) and multiple regression techniques. The findings of this research support the expectancy formulation and its relevancy to the accounting environments. However, five nonexpectancy variables were found to have significant relationships with auditors' choice processes to meet budgeted time. These five variables were supervision, budget feasibility, length of experience, organizational level and firm size classification.
Date: May 1985
Creator: Ibrahim, Mohamed El Hady M.

The Impact of EEO Legislation Upon Selection Procedures for Transfer, Training and Development and Promotion

Description: Legislation, court decisions, and the changing political and social climate provide evidence of the importance of the outcomes of EEO litigation involving challenged selection procedures for transfer, training and development, and promotion. These selection procedures are being challenged by more informed employees and, in many cases, result in costly litigation. Thus, organizations must be aware of the continuing developments in employment law especially as found in court decisions and related legislation. This study investigates judicial and EEOC decisions in discrimination cases to provide answers to these questions: Are organizations aware of the outcomes of EEO litigation involving challenged selection procedures for transfer, training and development, and promotion? Are organizations aware of what constitutes a discriminatory practice in the selection of employees for transfer, training and development, and promotion? Does management recognize and follow nondiscriminatory procedures in selecting personnel for transfer, training and development, and promotion? The purposes of the study are 1. To analyze outcomes of EEO litigation involving challenged selection procedures for transfer, training and development, and promotion; 2. To develop a model set of guidelines to aid organizations in developing nondiscriminatory procedures for use in selecting employees for transfer, training and development, and promotion. This study concludes that many employers are aware of the outcomes of EEO litigation involving challenged selection procedures for transfer, training and development, and promotion. Many employers are also aware of what constitutes a discriminatory practice in the selection of employees for some employment advantage. However, management does not always recognize and follow nondiscriminatory procedures when selecting employees for transfer, training and development, and promotion. The number of cases in which selection procedures were found discriminatory supports this conclusion.
Date: May 1985
Creator: Rach, Margaret M. (Margaret Mannion)

Impact of Query Specification Mode and Problem Complexity on Query Specification Productivity of Novice Users of Database Systems

Description: With the increased demand for the utilization of computerized information systems by business users, the need for investigating the impact of various user interfaces has been well recognized. It is usually assumed that providing the user with assistance in the usage o-f a system would significantly increase the user's productivity. There is, however, a dearth of systematic inquiry into this commonly held notion to verify its validity in a scientific fashion. The purpose of this study is to investigate the impact of system-provided user assistance and complexity level of the problem on novice users' productivity in specifying database queries. The study is theoretical in the sense that it presents an approach adopted from research in deductive database systems to attack problems concerning user interface design. It is empirical in that it conducts an experiment in a controlled laboratory setting to collect primary data for the testing of a series of hypotheses. The two independent variables are system-provided user assistance and problem complexity, while the dependent variable is the user's query specification productivity. Three measures are used as separate indicators of query specification productivity: number of syntactic errors, number of semantic errors, and time required for completing a query task. Due to the lack of a well-defined metric for user assistance, the study first presents a generic classification scheme for relational query specification. Based on this classification scheme, two quantitative metrics for measuring the amount of user assistance in terms of prompts and defaults were developed. The user assistance is operationally defined with these two metrics. Four findings emerge as significant results of the study. First, user assistance has a significant main effect on all of the three dependent measures at the 1 percent significance level. Second, problem complexity also has a significant impact on the three productivity measures at the ...
Date: December 1985
Creator: Jih, Wen-Jang

The Impact of Strategic Management on Organizational Effectiveness in Jesuit Colleges and Universities

Description: The organizational effectiveness and strategic management areas of organizational theory are the general focus of this study. Organizational effectiveness is defined as the extent to which an organization by the use of certain resources fulfills its objectives without depleting its resources and without placing undue strain upon its members and/or society. Strategic management is defined as an array of processes which leads to the development of an effective approach to achieve the organization's objectives. Little agreement appears to exist on how to evaluate organizational effectiveness and to what extent strategic management impacts organizational effectiveness. This is the problem this study addressed. This study presents an extensive review of the literature, formulates some syntheses and utilizes a questionnaire to gather pertinent data. The sample of respondents consisted of a group of key administrators from all the Jesuit colleges and universities in the United States. The questionnaire had a ninety percent response rate. This study was primarily a correlation study which emphasized the perceptions of the respondents regarding the elements and/or processes of strategic management and the concepts of organizational effectiveness. The Chi-Square and Spearman rank order tests were utilized for statistical measures. The analysis of data revealed any significant relationships between (1) the elements and/or processes of strategic management and (2) the concepts related to organizational effectiveness.
Date: December 1985
Creator: Favilla, Edward S.

An Investigation of Organizational Communication and Its Relationship to Two Organizational Models Involving Job Performance and Job Satisfaction

Description: The correlates of organizational communication to other organizational constructs have been scarcely researched. Two constructs of interest to management researchers and practitioners are job performance and job satisfaction. This interest arises from the fact that the quality of organizational life and effectiveness may be determined by the quality of the two constructs. This study investigates the moderating influence of organizational communication on two models involving the variables of performance and satisfaction: (1) the relationship between performance and satisfaction and (2) the relationship between the congruence of the individual and the job with performance and satisfaction. Organizational communication is assessed in terms of ten dimensions: trust in superiors; influence of superiors; accuracy of information; desire for interaction; communication satisfaction; overload and underload information; and upward, downward, and lateral communication. Executives, research and middle management people, office workers, and manufacturing individuals from two firms provided the data for the study. An expected moderating influence was evaluated through differential validity or differential predictability, as appropriate, and moderated regression analysis. Organizational communication received very weak support as a moderator of both the relationship between the target variables of performance and satisfaction and the individual-job congruence association with the same target variables. Accuracy of information, desire for interaction, and directionality of communication—upward, downward, and lateral—received support as moderators of particular performance/satisfaction relationships. Trust in superiors, influence of superiors, accuracy of information, and desire for interaction acted as moderators of specific individual-job congruence relationships with performance and satisfaction. Organizational communication received moderate-to-strong support as a predictor of the two relationships researched. Thus, either as a moderator or as a predictor, communication constitutes an avenue for improving the quality of organizational life and effectiveness; the performance and satisfaction of individuals may he fostered through communication.
Date: August 1985
Creator: Goris, Jose R. (Jose Rafael)

Machine Tool Spare Parts Provisioning for Manufacturers: A Study and Application for Industries Engaged in Aluminum Cutting and Shaping

Description: This study identifies the concepts of reliability, cost of downtime, cost of spare parts, and procurement lead time as the four key moderators of spare parts availability. These concepts are used to establish a model to manage spare parts inventories. Reliability was assessed in terms of developing failure predictions for major component categories. Cost of downtime was evaluated by identifying various methods for determining costs associated with downtime. Cost of spare parts was examined to find correlations with economic indicators. These correlations were used to predict future price movements. Yearly changes in lead time were identified and correlated with economic indexes to develop movement predictability.
Date: December 1985
Creator: Barker, David W.

The Prediction of Industrial Bond Rating Changes: a Multiple Discriminant Model Versus a Statistical Decomposition Model

Description: The purpose of this study is to investigate the usefulness of statistical decomposition measures in the prediction of industrial bond rating changes. Further, the predictive ability of decomposition measures is compared with multiple discriminant analysis on the same sample. The problem of this study is twofold. It stems in general from the statistical problems associated with current techniques employed in the study of bond ratings and in particular from the lack of attention to the study of bond rating changes. Two main hypotheses are tested in this study. The first is that bond rating changes can be predicted through the use of financial statement data. The second is that decomposition analysis can achieve the same performance as multiple discriminant analysis in duplicating and predicting industrial bond rating changes. To explain and predict industrial bond rating changes, statistical decomposition measures were computed for each company in the sample. Based on these decomposition measures, the two types of analyses performed were (a) a univariate analysis where each decomposition measure was compared with an industry average decomposition measure, and (b) a multivariate analysis where decomposition measures were used as independent variables in a probability linear model. In addition to statistical decomposition analysis, multiple discriminant analysis was used in duplicating and predicting bond rating changes. Finally, a comparison was made between the predictive abilities of decomposition analysis and discriminant analysis.
Date: December 1985
Creator: Metawe, Saad Abdel-Hamid