Asia-Pacific Journal of Accounting & Economics
<< Previous Issue Next Issue >>

Volume 16, Issue No. 2, August 2009

Special Issue for the 2008 APJAE Symposium on Accounting

Guest Editors for the Special Issue:

Shu-Hsing Li, National Taiwan University
Shirley J. Daniel, University of Hawaii at Manoa

  • Shu-Hsing Li and Shirley J. Daniel, Introduction, iii-vi

  • Suresh Radhakrishnan and Bin Srinidhi, Information Sharing and Information Rents in a Two-level Supply Chain, 123-144

  • Michael Alles and Mahendra Gupta, Non-Production-Related Effort and the Limits of Contracting, 145-170

  • Daniel A. Cohen and Nisan S. Langberg, Venture Capital Financing and the Informativeness of Earnings, 171-190

  • Charles Chen, Jun Du, Gopal Krishnan and Xijia Su, Managerial Shareholding and Compensation Structure, Investment Opportunities and Non-Audit Service Purchases: An Alternative Explanation, 191-214

  • Flora Niu and Bixi Xu, Does Recognition Versus Disclosure Really Matter? Evidence from the Market Valuation of Recognition of Employee Stock Option Expenses, 215-234

  • Announcements, 235  

Information Sharing and Information Rents
in a Two-level Supply Chain

Suresh Radhakrishnana and Bin Srinidhib
aUniversity of Texas at Dallas
bHong Kong Polytechnic University


Advances in information technology have greatly facilitated information exchange in valuechains, and the resulting efficiencies from resource coordination have led to higher profits. However, in spite of the well-established advantages, not all value-chains have implemented such information exchanges. In this paper, we show that this lack of implementation could arise due to strategic behavior of value-chain partners. Specifically, allowing for strategic behavior, we examine the conditions under which information exchanges might or might not be implemented. The value-chain partners’ trade off their share of increased value-chain profits from information exchange against the loss of their information rent. We develop the model of a two-partner valuechain with a manufacturer and a privately informed retailer. We show that the value-chain partners will agree to move from the traditional (no information exchange) to the information exchange regime only if (a) the retailer is sufficiently large, (b) the demand variability is sufficiently high, and (c) the cost of manufacturing is sufficiently low. This provides a rationale for why information exchange is not prevalent with small retailers.

JEL Classifications: L22, M11, M21, M41

Keywords: Supply-chain, Value-chain, Information exchange, adverse selection, information rent


Non-Production-Related Effort and
the Limits of Contracting

Michael Allesa* and Mahendra Guptab
aRutgers Business School
bWashington University


Empirical and behavioral research suggests that workers don’t always see work only as a means of obtaining income in return for production-related effort. Rather, they also exert nonproduction-related effort in order to obtain greater control over their jobs, achieve balance with non-work activities and to further such personal goals as flexibility, self-growth and job satisfaction. By contrast, the large accounting literature on incentive mechanism design has focused solely on production-related effort, making the implicit assumption that omitting nonproduction-related effort is without loss of generality. In this paper we develop a model with both types of effort in order to endogenously determine whether non-production-related effort impacts the ability of the firm to achieve its goal through incentive contracts. We show that while introducing non-production-related effort to the principal/agent model limits the power of contracting – meaning that the firm cannot guarantee that it can achieve its desired production related effort and profit goals – that is not to say that the firm will always be worse off. Depending on the nature of the interaction between the two kinds of effort and their impact on the worker’s utility, it is also conceivable that both firm and worker become better off than the standard principal/agent model would predict.

JEL Classifications: D82, J33, M21

Keywords: Non-production-related effort, incentive compensation, resistance to change


Venture Capital Financing and the
Informativeness of Earnings

Daniel A. Cohena* and Nisan S. Langbergb
aNew York University
bUniversity of Houston


Are there long-term costs to obtaining venture capital financing? We explore the hypothesis that venture capital backed firms do not efficiently transform to the corporate structure of public firms and have difficulties publicly communicating with arm’s length investors. Our results are three-fold. First, we find that, on average, reported accounting earnings are less informative for venture capital backed firms. Second, the informativeness of reported earnings is a decreasing function of venture capitalists’ ownership of firm equity and a decreasing function of venture capitalists’ board representation. Third, stock prices of venture capital backed firms reflect future earnings to a lesser extent relative to non-venture capital backed firms. Our findings support the hypothesis that venture capitalists manage the flow of public information to capital markets and preserve short-term interests arising from specific investment and ownership horizons. This evidence suggests that the benefits of receiving venture capital financing are not without costs.

JEL Classifications: M41, G14, G32

Keywords: Venture capital, earnings informativeness, ownership structure, investment horizon


Managerial Shareholding and Compensation Structure,
Investment Opportunities and Non-Audit Service Purchases:
An Alternative Explanation

Charles Chen,a Jun Du,b Gopal Krishnanc and Xijia Sud*
aChina Europe International Business School (CEIBS)
bHong Kong Polytechnic University
cLehigh University, USA
dCity University of Hong Kong


The rise of fees paid to incumbent auditors for non-audit services (NAS) relative to audit fees has been actively debated by the accounting profession, investors, and regulators. Although accounting firms are banned by the Sarbanes-Oxley Act from providing non-auditing services to their auditees, the debate is far from over. Despite the negative publicity generated by NAS purchases, why do managers continue to purchase increasing quantities of NAS? We contribute to this debate by offering an alternative explanation on determinants of NAS purchase decisions. We find that (1) the association between NAS purchases and earnings management documented in extant literature is affected by the way top managers are compensated and by managers’ shareholdings, and (2) NAS purchases are positively associated with the proportion of performance-based compensation paid to the top five executives and this association is more pronounced for firms with high investment opportunities.
JEL Classifications: M41, G14

Keywords: Non-audit services, compensation, audit fees, performance, investment opportunities


Does Recognition Versus Disclosure Really Matter?
Evidence from the Market Valuation of Recognition of
Employee Stock Option Expenses

Flora Niu* and Bixia Xu
Wilfrid Laurier University, Canada


using the fair value approach under the Canadian Institute of Chartered Accounts Handbook section (CICA HB) 3870. Based on a sample of Canadian public firms traded on the Toronto Stock Exchange (TSX), we find that investors value employee stock option expenses differently prior to and after the implementation of the new standard. Specifically, pro forma compensation expenses disclosed prior to the new accounting regulation are negatively associated with annual stock returns, suggesting that the market interprets these expenses to have negative valuation consequences. In contrast, recognized stock option expenses from using the fair value approach mandated by the HB 3870 are positively associated with stock returns, indicating that the market now interprets these expenses as a type of “asset” that contributes positively to firm valuation. Overall, the evidence suggests that the mandatory expensing of employee stock options increases the perceived quality of financial statements and mitigates the perception that firms use stock options opportunistically. Consequently, the market is able to translate the incentive effect of employee stock options into firm value.

JEL Classifications: G14, G18, M48

Keywords: Employee stock options, market valuation, recognition, disclosure