Jerold L. Zimmerman

University of Rochester | UR · Simon Graduate School of Business

Effective leadership involves more than developing and communicating the right strategic vision for the company. To encourage employees to carry out the corporate vision, companies must ensure consistency among the following three main components of their organizational architecture: (1) the allocation of decision‐making authority; (2) performance...

Drawing on the work of Michael Jensen and William Meckling, the co‐formulators of “agency cost theory,” the authors argue that there are two main challenges in designing the structure of organizations: (1) the “rights assignment” problem—that is, ensuring that decision‐making authority is vested in managers and employees with the “specific knowledg...

One potential weakness of all divisional profitability schemes is their inability to capture synergies among business units. One way of managing this problem is to design a transfer pricing scheme that attempts to assign common costs and benefits to different business units. What makes transfer pricing both so interesting, and such a challenge, is...

We present an economic analysis of the American Mafia's organizational design elements that promote its survival. Over nearly one hundred years, Mafia crime syndicates adapted their task assignments, performance measures, rewards and punishments, and culture to constantly shifting external threats and opportunities. Consistent with Chandler (1962),...

This article discusses the rise of intangibles‐intensive companies and private equity (PE) since the late 1970s, and the role of both in bringing about the creation of a streamlined, more flexible set of accounting rules that, since their approval by the IASB and FASB in 2009, have been used by private companies and their investors. The PE industry...

Economics challenge the specification of discretionary accrual models. Since rent-seeking firms pursue differentiated business strategies, firms in the same industry experience idiosyncratic shocks due to heterogeneous economic fundamentals and hence have different accrual-generating processes. We present evidence that idiosyncratic shocks are wide...

I explore the evolving role of accounting information in allocating capital. Accounting arose to control conflicts of interest in organizations (stewardship role). The industrial revolution spawned capital-intensive firms and public capital markets with dispersed shareholders to finance these firms. The regulation of these public capital markets sh...

I explore the evolving role of accounting information in allocating capital. Accounting arose to control conflicts of interest in organizations (stewardship role). The industrial revolution spawned capital-intensive firms and public capital markets with dispersed shareholders to finance these firms. The regulation of these public capital markets sh...

Prior research generally argues that managers issue management earnings forecasts (MFs) to secure capital market benefits (i.e., reduce information asymmetry between managers and investors to lower a firm’s cost of capital), to reduce the firm’s litigation costs, or to allow managers to trade opportunistically in their firm’s stock. We discuss and...

Basic economics challenge the specification of discretionary accrual models. Since rent seeking firms pursue differentiated business strategies, firms in the same industry have heterogeneous accrual generating processes. Moreover, technological innovation, regulatory changes, and entry of new firms force existing firms to revise their extant busine...

I argue that external financial reporting quality has at best a 2nd order effect on firm value of U.S. publicly traded companies and that attempts to improve a firm’s external reporting quality has a 3rd order effect on these firms’ value. Recognizing that external financial reporting quality is at best a 2nd order effect on firm value imposes an i...

Prior studies identify several motives for why firms release management earnings forecasts (MFs). A common feature of such studies is they pool MFs when drawing inferences about a specific motive. By ignoring the heterogeneous rationales managers have to issue MFs, pooling could lead to biased inferences. To address the issue, we develop an approac...

Extant literature views management earnings forecasts (MEFs) as voluntary corporate disclosures designed to increase transparency or allow managers to trade opportunistically in their firm's stock based on inside information. We offer and test a unified framework of management guidance that incorporates these two reasons along with a manager's affi...

This paper argues that academics, politicians, and the media have six commonly held but misguided beliefs about corporate governance. While Armstrong et al. (2010) discuss some of these misconceptions, a wider recognition that these beliefs are actually “myths” is important. They include: (1) a common definition of “corporate governance” exists; (2...

Under GAAP, SEC and exchange listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers’ obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is o...

This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations-these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) for "non-accelerated filers" (firms with public float less than $75 m...

Effective leadership involves more than developing and communicating the right strategic vision for the company. To encourage employees to carry out the corporate vision, companies must ensure consistency among the following three main components of their “organizational architecture:” The authors illustrate the application of this framework with t...

Under GAAP, SEC and exchange listing rules, managers must disclose material information. We construct a disclosure specification incorporating managers' obligation to disclose material information and voluntary disclosure incentives. We demonstrate that tests of the incentives to voluntarily disclose information must recognize such information is o...

U.S. business schools are locked in a dysfunctional competition for media rankings that diverts resources from long-term knowledge creation, which earned them global pre-eminence, into short-term strategies aimed at improving their rankings. MBA curricula are distorted by quick fix, look good packaging changes designed to influence rankings criteri...

We document that CEO cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns. Since stock returns include both unrealized gains and unrealized losses, we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains (positive returns) than when returns contain unrea...

Effective corporate leadership involves more than developing a good strategic plan and setting high ethical standards. It also means coming up with an organizational design that encourages the company's managers and employees to carry out its business plan and maintain its ethical standards. In this article, the authors use the term organizational...

We characterize the market for CEOs as consisting of value-maximizing boards of directors bidding for CEOs with varying personal traits (effort and risk aversion, expected horizon, and human capital) and CEOs gravitating to those firms that value their particular traits more highly than other firms. While boards select CEOs based on their traits, t...

U.S. business schools are locked in a dysfunctional competition for media rankings. This ratings race has caused schools to divert resources from investment in knowledge creation, including doctoral education and research, to short-term strategies aimed at improving rankings, such as placement offices and public relations campaigns. Curriculums are...

The empirical managerial accounting literature has failed to produce a substantive cumulative body of knowledge. This literature has not matured beyond describing practice to developing and testing theories explaining observed practice, like other areas of accounting research. While the lack of publicly available data is a popular reason for this l...

La estrategia óptima para una empresa suele depender de las previsiones de sus rivales y de las acciones que éstos emprendan. El principal valor de la teoría del juego se basa en la atención que se presta a la interacción estrategica. Esta teoría ofrece a sus directivos un conjunto práctico de instrumentos para reflexionar sobre las posibles actuac...

We suggest that economics can complement traditional ethics discussions with the respect to at least three basic points. First, economics provides a theory of how individuals make choices; including choices that have potential ethical dimensions. Second business ethics and the internal structure of the organization are inextricably linked they esta...

Sound managerial decision making often requires “putting yourself behind your rivals' desk.” Assuming rivals are rational and acting in their selfinterest, what decisions are they likely to make and how are they likely to respond to your actions? A complicating factor is that rivals' optimal choices typically will depend on their expectations of wh...

Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggrega...

This study focuses on changes in incentives at the William E. Simon Graduate School of Business Administration in the early 1990s to redirect effort from academic research to classroom teaching. We find a substantial and almost immediate jump in teaching ratings following the changes in incentives. Longer-run learning and turnover effects are prese...

We conjecture that accounting depreciation reduces the over- and under-investment problem in acquiring and utilizing fixed assets. By forcing the agent to cover depreciation charges of assets the agent proposes to buy, the agent commits to generate cash flows in excess of depreciation charges (through either additional revenues or cost savings). Mo...

This article applies and extends the three‐part organizational framework used in the preceding article to a broad range of management innovations. After furnishing some interesting evidence of the rise and fall of management techniques such as TQM, Reengineering, Just‐in‐Time Production, and Activity‐Based Costing, the authors raise and then attemp...

This article makes three basic points about divisional performance measurement that managers should keep in mind when attempting to choose between EVA and more conventional, accounting-based measures. First, no divisional performance measure, whether it be EVA, divisional net income, or ROA, is capable of capturing synergies among divisions—those s...

We argue that accounting depreciation either is the firm s calculation of the cost of a durable factor, or is information used in determining (implicitly or explicitly) the factor cost. Simple competitive-economic theory then implies a relation between accounting depreciation and product prices. We hypothesize that this relation is strengthened by...

Previous studies in organizational economics and international business research have not tested a property rights view on the allocation of decision rights (DR) in joint ventures (JVs). The paper offers a test of the property rights explanation by using data from Hungarian JVs. Our analysis derives the following hypothesis: The more important the...

This paper tests the relative importance of two competing explanations for why large firms use income-decreasing accounting methods: political costs and prior firm performance. We find that key empirical results in contracting-based theories of voluntary accounting choice vary with time period sample selection and the accounting method studied. Fur...

Return models (returns regressed on scaled earnings variables) are commonly preferred to price models (stock price regressed on earnings per share). We provide a framework for choosing between these models. An economically intuitive rationale suggests that price models are better specified in that the estimated slope coefficients from price models,...

Corporate takeovers are assumed to control the non-value-maximizing (opportunistic) actions of managers. We examine takeover targets prior to the initial control action for evidence of opportunistic, income-increasing accounting methods. These tests attempt to determine the relative importance of two non-mutually exclusive competing hypotheses for...

We document the behavior of a variety of financial variables surrounding CEO departures, and estimate the extent to which changes in potentially discretionary variables are explained by poor economic performance rather than direct managerial discretion. We conclude that turnover-related changes in R&D, advertising, capital expenditures, and account...

This paper reviews and critiques the positive accounting literature following the publication of Watts and Zimmerman (1978, 1979), The 1978 paper helped generate the positive accounting literature that offers an explanation of accounting practice, suggests the importance of contracting costs, and has led to the discovery of some previously unknown...

This book reviews the theory and methodology underlying the economics-based empirical literature in accounting. An accounting theory theory is an explanation for observed accounting and auditing practices. Such an explanation is necessary for interpretation of empirical associations between variables. The book discusses the role of theory in empiri...

The papers in this volume and briefly summarized in this introduction document that: (1) executive compensation is positively related to share price performance: (2) poor firm performance is associated with increased executive turnover; (3) managers choose accounting accruals in ways that increase the value of their bonus awards; (4) the adoption o...

Firm size has been used as a proxy for the firm's political costs and hence managers' proclivity to choose income reducing accounting procedures. This study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates. The latter are one component of a firm's political costs. The roughl...

This paper examines the history of auditing in the U.K. and the U.S. to test whether audits of companies arose as the consequence of governmental regulation or as a voluntary monitoring activity to reduce agency costs and increase firm value. The paper finds that audits existed early in the development of the modern corporation (as early as 1200) a...

This paper addresses the questions of why accounting theories are predominantly normative and why no single theory is generally accepted. Accounting theories are analyzed as economic goods, produced in response to the demand for theories. The nature of the demand is examined, first in an unregulated, then in a regulated economy. Government regulati...

This article provides the beginning of a positive theory of accounting by exploring those factors influencing management's attitudes on accounting standards that are likely to affect a firm's cashflows and in turn are affected by accounting standards. These factors are taxes, regulation, management compensation plans, bookkeeping costs and politica...

Management science has not produced useful (operational) models for managers of basic research. This paper attempts to model the decision process of individual scientists. A number of models are developed and their applicability discussed, including their ability to generate insights and testable hypotheses. In order to increase the model's applica...

"The set of conditions that led to (New York City's) situation are (1) the unusually liberal borrowing power granted to the city by the state, and (2) the city's use of budgetary and accounting procedures that even experts find baffling. The second condition helped to conceal the fiscal abuses engendered by the first" (Robertson [1975, p. 144]). "T...

Prior research characterizes management earnings forecasts (MEFs) as voluntary corporate disclosures designed to increase transparency (i.e., reduce information asymmetry between managers and investors, satisfy analysts" demand for information, lower a firm"s cost of capital, reduce a firm"s litigation risk) or allow managers to trade opportunistic...

This paper investigates sales quota dynamics at a Fortune 500 firm. We offer theoretical justifications for observed quota updating processes and test three particular hypotheses related to the issue. First, current year quotas are computed as a weighted average of last year's sales and last year's quota (Bayesian Updating). Second, this year's sal...

This paper develops the hypotheses that 1) auditing arose as a voluntarily supplied service and not because it was legally mandated and 2) auditors, operating in their own self-interest face incentives to be independent of the managers of the firms they audit. The historical evidence from the U.K. and U.S. is consistent with these hypotheses. Volun...

This paper explores the reasons for and the extent of auditor/ client disagreements over proposed accounting standards. The conventional wisdom predicts that auditors and their client-managers' positions will be positively associated because the client coerces their auditor to take similar positions. An alternative hypothesis developed in this pape...