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AIM 7333 - Analytical Research in Accounting

Instructor Dr. Ram Natarajan Office: SOM 4.809 Ph: 972-883-2739 Fax: 972-883-6811 E-Mail: Office Hours: Fridays 9:00 AM to 11:00 AM or by appointment. Course Objectives The primary purpose of this course is to familiarize you with the analytical research in accounting. We will focus on analytical papers that discuss disclosure and contracting issues in the accounting literature. We will meet once a week. You are expected to come to the class fully prepared to discuss the assigned papers. About 1 to 2 selected papers in each topic will be covered in class. For each paper, one or two students (the lead students for the paper) will be assigned the responsibility for presenting the paper. The lead students for each paper should make his peers (and me) understand the structure and the major results of the paper. Papers will be assigned to students during the first class. For each paper that is assigned, the lead students will prepare summaries (no page limits) of the paper. The summary will include the following sections: 1. 2. 3. 4. 5. 6. Major Research Question(s) Model Description (highlighting key assumptions) Economic Concepts used Specific (Significant) Results (optional) A Simple Example (illustrating the key result). Conclusions and Limitations

We will distribute these summaries at the beginning of the class discussion. The rest of the class should submit (on an individual basis) one-page summaries of the papers discussed. These summaries should be word-processed. I expect these one-page summaries to be written in a way that a second year MBA student will be able to understand what the paper is about. When you read a paper, you should strive to understand the research question, the formulation of the analytical model, major assumptions and major results. You should also think about the

empirical implications and the generalizability of the results. Finally, it is always a useful exercise to think about the directions in which the analysis in the paper can be extended. The grades will be based on the in-class responsibility, paper summaries, homework assignments and a final term paper / final exam. The assignments in this course would include analytical/numerical problems based on the models discussed and written reviews of research papers. The term paper should demonstrate a sincere attempt to model an issue of interest to accounting researchers using an appropriate paradigm. Term papers can be worked on by groups consisting of no more than two members and proposals (one to two pages) are due by September 15th. Starting in the next page you will find a preliminary reading list for the course. I may add or remove papers as I see how the class is progressing. There are also some survey papers that you should read: the survey papers by Lambert (agency, and discussion by Magee), Verrecchia (disclosure), and Dye (disclosure). These papers provide a good overview of the relevant literatures and complement the other readings. The survey papers may be especially valuable as a review of the course at the end, and for future reference. It is not necessary to have read the entire Lambert paper before we start Agency, or the entire Verrecchia and Dye papers before we start Disclosure.

Reading List and Class Outline Survey Papers Verrecchia, R. 2001. “Essays on Disclosure” Journal of Accounting and Economics 32: 97180. Dye, R. 2001. “An Evaluation of `Essays on Disclosure’ and the Disclosure Literature in Accounting” Journal of Accounting and Economics 32: 181-235. Lambert, R. 2001. “Contracting Theory and Accounting” Journal of Accounting and Economics 32: 3-87. Magee, R. 2001. “Discussion of Contracting theory and accounting," Journal of Accounting and Economics 32: 89-96. Week # 1: Introduction to Analytical Research in Accounting. Week # 2: Introduction to Noisy Rational Expectations Models -- Information Aggregation and Acquisition in Perfectly Competitive Markets Diamond, D.W., and R. E. Verrecchia., “Information Aggregation in a Noisy Rational Expectations Economy,” Journal of Financial Economics 9 (1981): pp. 221-35. Verrecchia, R. E., “Information Acquisition in a Noisy Rational Expectations Economy,” Econometrica 50 (1982): pp. 1415-30. Week # 3: Accounting Applications of Noisy Rational Expectations Models Kim, O., and Verrecchia, R., “Trading Volume and Price Reactions To Public Announcements,” Journal of Accounting Research Vol.29, No.2, Autumn 1991, pp.302321. Indjejikian, R., “The Impact of Costly Information Interpretation on Firm Disclosure Decisions,” Journal of Accounting Research Vol.29, No.2, Autumn 1991, pp.277-301. Week # 4: Public Disclosures and Imperfectly Competitive Markets Kyle, A.S., 1985, “Continuous Auctions and Insider Trading,” Econometrica 53, 1315-1335.

Kim, O., and Verrecchia, R., “Market Liquidity and Volume around Earnings Announcements,” Journal of Accounting and Economics Vol.17, pp.41-67. Week # 5: Discretionary Disclosures -I Verrecchia, R. E., “Discretionary Disclosure,” Journal of Accounting and Economics 5 (1983): pp. 179-94. Verrecchia, R. E., “Information Quality And Discretionary Disclosure,” Journal of Accounting and Economics 12 (1990): pp. 365-80. Week # 6: Discretionary Disclosures - II Jung, W. and Y. Kwon. 1988. “Disclosure When the Market is Unsure of Information Endowment of Managers,” Journal of Accounting Research 26 (1): 146-153. Pae, Suil., 1999. “Acquisition and Discretionary Disclosure of Private Information and Its Implications for Firms’ Productive Activities,” Journal of Accounting Research 37 (2): 465474. Weeks # 7 and #8: Investment Decisions and Accounting Measurement -- Theory Dye and Sridhar. 2004. “Reliability-Relevance Trade-offs and the Efficiency of Aggregation,” Journal of Accounting Research 42 (1): 51-88. Kanodia, Sapra and Venugopalan. 2004. “Should Intangibles be Measured: What are the Economic Trade-Offs?” Journal of Accounting Research 42 (1): 89-120. Week # 9: Earnings Management -- Theory Sankar and Subramanyam. 2001. “Reporting Discretion and Private Information Communication through Earnings,” Journal of Accounting Research 39 (2): 365-386. Dutta, S., and Gigler, F. 2002. “The Effect of Earnings Forecasts on Earnings Management,” Journal of Accounting Research 40 (3): 631-655. Week # 10: Basic Agency Models Holmstrom, B., "Moral Hazard and Observability,” Bell Journal of Economics, Spring 1979, pp. 74-91. Grossman, S, and O, Hart, “An Analysis of the Principal-Agent Model,” Econometrica, 1983, pp. 7-45.

Weeks # 11 and #12: Analysis of Performance Measures Characteristics Banker, R. and S. Datar, “Sensitivity, Precision, and Linear Aggregation of Signals for Performance Evaluation,” Journal of Accounting Research 27(l) (Spring, 1989), pp. 21-39. Feltham, G., and J. Xie, “Performance Measure Congruity and Diversity in Multi-Task Principal/Agent Relations,” The Accounting Review, July 1994: 429-453. Datar, S., Kulp, S. and Lambert, R., “Balancing Performance Measures,” Journal of Accounting Research 39(l) pp. 75-92. Weeks # 13 and #14: Private Information and Communication in Agencies Baiman, S., and J. Evans, “Pre-Decision Information and Participative Management Control Systems,” Journal of Accounting Research, Autumn 1983, pp. 371-395. Kirby, A., Reichelstein, S., Sen, P.K., and T. Paik, “Participation, Slack, And Budget-Based Performance Evaluation,” Journal of Accounting Research, Vol.29, No.1, Spring 1991, pp.109-128. Rajan, M., 1992. “Management Control Systems and the Implementation of Strategies,” Journal of Accounting Research, Vol.30, No.2, Autumn 1992, pp.227-248. Melumad, N., Mookherjee, D., and S. Reichelstein, “A Theory Of Responsibility Centers,” Journal of Accounting and Economics, Vol.15, No.4, Dec 1992, pp.445-484. Week # 15: Student Paper Presentations