Unraveling the Black Box of Cost Behavior: An Empirical Investigation of Risk Drivers, Managerial Resource Procurement, and Cost Elasticity

2015 ◽  
Vol 90 (6) ◽  
pp. 2305-2335 ◽  
Author(s):  
Martin Holzhacker ◽  
Ranjani Krishnan ◽  
Matthias D. Mahlendorf
Keyword(s):  
Financial Risk ◽  
Demand Uncertainty ◽  
Empirical Investigation ◽  
Health Planning ◽  
Data Availability ◽  
Cost Elasticity ◽  
Cost Structures ◽  
Cost Behavior ◽  
Prior Literature ◽  
Contract Labor

ABSTRACT This paper extends prior literature on cost behavior by providing insights into how firms achieve changes to cost structure in response to two important risk drivers, i.e., demand uncertainty and financial risk. Using theory from labor economics, supply-chain management, and finance, we posit that demand uncertainty and financial risk influence cost management activities. Specifically, we argue that firms are likely to alter resource procurement choices to increase cost elasticity in response to these two risk drivers. We use data from California hospitals that allow for the calibration of three distinct resource procurement choices that increase cost elasticity: outsourcing, leasing of equipment, and hiring contract labor. Mediation analysis using 2,202 hospital year observations indicates that both demand uncertainty and financial risk influence cost elasticity. Importantly, these effects are mediated by the three aforementioned resource procurement choices. Overall, our findings support the view that firms make procurement choices to manage the risk associated with cost structures. Data Availability: Data used in this study are publicly available from the Office of Statewide Health Planning and Development (see: http://www.oshpd.ca.gov/). JEL Classifications: I18; M41.

Demand Uncertainty and Cost Behavior

2013 ◽  
Vol 89 (3) ◽  
pp. 839-865 ◽  
Author(s):  
Rajiv D. Banker ◽  
Dmitri Byzalov ◽  
Jose M. Plehn-Dujowich
Keyword(s):  
Demand Uncertainty ◽  
Manufacturing Sector ◽  
Cost Structure ◽  
Data Availability ◽  
Congestion Costs ◽  
Capacity Choice ◽  
Cost Behavior ◽  
Short Run ◽  
Using Data ◽  
The Relationship

ABSTRACT We investigate analytically and empirically the relationship between demand uncertainty and cost behavior. We argue that with more uncertain demand, unusually high realizations of demand become more likely. Accordingly, firms will choose a higher capacity of fixed inputs when uncertainty increases in order to reduce congestion costs. Higher capacity levels imply a more rigid short-run cost structure with higher fixed and lower variable costs. We formalize this “counterintuitive” argument in a simple analytical model of capacity choice. Following this logic, we hypothesize that firms facing higher demand uncertainty have a more rigid short-run cost structure with higher fixed and lower variable costs. We test this hypothesis for the manufacturing sector using data from Compustat and the NBER-CES Industry Database. Evidence strongly supports our hypothesis for multiple cost categories in both datasets. The results are robust to alternative specifications. Data Availability: All data used in this study are available from public sources.

Logistics Costs Behavior and Management in the Auto Industry

2015 ◽  
Vol 31 (4) ◽  
pp. 389-408 ◽  
Author(s):  
Marcela M. Porporato
Keyword(s):  
Real Life ◽  
Systems Design ◽  
Management Control ◽  
Data Availability ◽  
Manufacturing Companies ◽  
Bottom Line ◽  
Related Data ◽  
Profitability Analysis ◽  
Confidentiality Agreement ◽  
Cost Behavior

ABSTRACT This case, based on a real-life situation of how logistics costs function in daily operations, aims to provide students with the opportunity to understand how logistics costs are calculated and how the inter-organizational nature of these costs affects the profitability of two companies. The case hinges on understanding cost behavior (fixed and variable) and on management control systems design. Although logistics costs represent a small fraction of total costs in manufacturing companies, they can negatively affect the bottom line if left unattended. Students are presented with data relating to a three-year project in the automotive industry that shows that the project has been experiencing a sustained increase in costs that has eroded its profit margin. While it appears that logistics costs are the problem, it cannot be verified until the contracts are studied. In addition, the financial- and contract-related data provided are sufficient to extend the profitability analysis to the provider of logistics services. This case is suitable for management accounting courses at the master's or advanced undergraduate level; it has been tested and well received by students who want to gain a greater understanding of logistics costs—their nature, behavior, possible containment strategies, and inter-organizational effects. Data Availability: Some of the data are from public sources, but the logistics contracts and cost schedules are private; the confidentiality agreement with the two companies requires masking certain details and modifying the numeric data.

Does Wrongdoer Reputation Matter? Impact of Auditor-Wrongdoer Performance and Likeability Reputations on Fellow Auditors' Intention to Take Action and Choice of Reporting Outlet

2011 ◽  
Vol 23 (2) ◽  
pp. 207-234 ◽  
Author(s):  
Jesse C. Robertson ◽  
Chad M. Stefaniak ◽  
Mary B. Curtis
Keyword(s):  
Two Dimensions ◽  
Data Availability ◽  
Good Performer ◽  
Reporting Decisions ◽  
Prior Literature ◽  
Reporting Channel ◽  
Channel Preferences ◽  
Main Effects ◽  
The Impact ◽  
Selection Of

ABSTRACT We investigate the effects of auditor-wrongdoer reputations for performance and likeability on fellow auditors' intentions to take action in response to a questionable audit act. We also use this context to explore auditor selection of reporting outlets, when they do choose to take action. In an experiment with 181 auditors, main effects suggest that likeability reputation is a significant determinant of intention to take action, while performance reputation is marginally significant. As expected, interaction results indicate that auditors have the greatest intention to take action against less likeable, poor performers. Contrary to expectations, intention to take action against a more likeable, good performer is no lower than the mixed conditions. Thus, the influence of the two dimensions of reputation is complex. Additionally, we find auditors are more likely to whistle-blow internally than externally, and through non-anonymous outlets than anonymous outlets. Our contributions include exploring the impact of reputation on the actions of third parties, and advancing prior literature by considering the influence of wrongdoer attributes on reporting decisions and auditors' reporting channel preferences. Data Availability: Data are available from the first author upon request.

The Influence of Country-Level Religiosity on Accounting Conservatism

2018 ◽  
Vol 18 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Matt Bjornsen ◽  
Chuong Do ◽  
Thomas C. Omer
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Positive Association ◽  
Accounting Conservatism ◽  
Data Availability ◽  
Country Level ◽  
Legal Enforcement ◽  
Prior Literature ◽  
Reported Earnings ◽  
High Degree

ABSTRACT This study investigates how religiosity (i.e., the strength of religion) differences across countries influence an important characteristic of financial reporting, accounting conservatism. Prior literature suggests that religious individuals are more risk averse and have higher ethical standards, while accounting conservatism has been shown to reduce various risks to the firm (e.g., bankruptcy and stock price crashes) at the expense of higher reported earnings. We find that managers in more religious societies report more conservatively. Specifically, our cross-country analysis reveals that firms headquartered in countries with higher levels of religiosity exhibit, on average, higher accounting conservatism in financial reporting. This positive association is stronger in countries following IFRS or U.S. GAAP, and weaker in countries with a high degree of uncertainty avoidance, strong legal enforcement, and countries with greater numbers of religions. JEL Classifications: G34; M41; Z12. Data Availability: Data are available from the public sources cited in the text.

How Internal Control Protects Shareholders' Welfare: Evidence from Tax Avoidance in China

2020 ◽  
Vol 19 (2) ◽  
pp. 19-39
Author(s):  
Hsihui Chang ◽  
Xin Dai ◽  
Yurun He ◽  
Maolin Wang
Keyword(s):  
Control Systems ◽  
Internal Control ◽  
Agency Costs ◽  
Tax Avoidance ◽  
Positive Association ◽  
Data Availability ◽  
Corporate Tax ◽  
Controlling Shareholders ◽  
The Public ◽  
Prior Literature

ABSTRACT This paper investigates how effective internal control protects shareholders' welfare in the context of corporate tax avoidance. Prior literature documents a positive association between internal control weakness and low tax avoidance. In this paper, we re-examine this association and complement prior research by finding that the direction of the association between internal control and tax avoidance depends on the level of tax avoidance. Specifically, for firms with low (high) levels of tax avoidance, internal control quality is positively (negatively) associated with tax avoidance. In additional analyses, we further explore how internal control mitigates agency costs for state-owned enterprises and tunneling activities. We show that for state-owned enterprises, which have lower incentives to avoid tax, effective internal control prevents managers from paying more taxes to cater to the controlling shareholders' interests. We also find that the association between tax avoidance and tunneling is reduced by effective internal control systems. Data Availability: Data are available from the public sources cited in the text.

A Further Empirical Investigation of German Firms’ Financial Structure and Ensuing Risks / Finanzierungsstrukturen und Risiken im Unternehmenssektor der Bundesrepublik Deutschland – Weitere Ergebnisse anhand von Unternehmensdaten

2001 ◽  
Vol 221 (5-6) ◽  
Author(s):  
Kai Kirchesch ◽  
Marc Sommer ◽  
Peter Stahlecker
Keyword(s):  
Financial Risk ◽  
Empirical Investigation ◽  
Empirical Distribution ◽  
Risk Measures ◽  
Balance Sheet ◽  
Financial Risks ◽  
Firm Level ◽  
Industrial Enterprises ◽  
Level Data ◽  
The Empirical Analysis

SummaryThe changes in the financial structures of West German industrial enterprises have been investigated in Größl/Stahlecker/Wohlers (2001). The empirical analysis confirmed the hypothesis that small and medium-sized enterprises are confronted with higher - and even rising - financial risks than larger enterprises. Thresholds were introduced to serve as signals for lenders to tighten credit conditions or even file for bankruptcy. Unfortunately, the empirical distribution of the financial ratios could not be quantified, because the analysis has been - due to reasons of availability - based on aggregate data. The present paper’s aim is to check the robustness of the results and to quantify the development of the financial risk measures by using firm-level data that have been the base for the Bundesbank’s special evaluation of the balance sheet statistic of West German enterprises. Our results confirm the higher risk position of small and medium-sized enterprises in the period 1987-1996.

The Impact of PCAOB AS5 and the Economic Recession on Client Portfolio Characteristics of the Big 4 Audit Firms

2013 ◽  
Vol 32 (4) ◽  
pp. 95-127 ◽  
Author(s):  
Joseph H. Schroeder ◽  
Chris E. Hogan
Keyword(s):  
Financial Risk ◽  
Economic Recession ◽  
Data Availability ◽  
Publicly Traded ◽  
Audit Firm ◽  
Big 4 ◽  
Audit Firms ◽  
Risk Characteristics ◽  
The Impact

SUMMARY We examine the impact of PCAOB Auditing Standard No. 5 (AS5) and the economic recession on risk characteristics and degree of auditor/client misalignment in the publicly traded client portfolios of Big 4 firms. AS5 and the economic recession both likely resulted in an increase in audit firm personnel capacity as well as a decline in current and future revenue prospects, leading to concerns that the Big 4 firms may pursue clients that present greater risk to the portfolio. We find that the overall portfolio in 2009 presents greater financial risk, attributable to the impact of the recession on continuing clients. A net decrease in audit and auditor business risks is also attributable to continuing clients over this period, as increases for new clients are offset by reductions due to departing clients. Overall, the results, which should be of interest to regulators, indicate that Big 4 firms continued to balance their portfolio with risk in mind. Data Availability: Data are publicly available from sources identified in the paper.

The Effect of Multiple Auditors on Deception Detection in a Client Inquiry Setting

2017 ◽  
Vol 30 (1) ◽  
pp. 39-58 ◽  
Author(s):  
Holderness D. Kip
Keyword(s):  
General Practice ◽  
Path Analysis ◽  
Deception Detection ◽  
Data Availability ◽  
Accounting Students ◽  
Master's Level ◽  
Entry Level ◽  
Behavioral Cues ◽  
Auditor Judgments ◽  
Prior Literature

ABSTRACT Auditors frequently gather information by conducting client inquiries. During these inquiries, auditors should be alert to verbal and nonverbal cues emanating from members of client personnel that might be indicative of deception. Extant literature on deception suggests that the general practice of using a single auditor to conduct client inquiries may limit the ability of auditors to detect deception. Using Master's-level accounting students as a proxy for entry-level auditors, I examine how the use of one or two auditors affects the behavioral cues (nervousness and discussion) of client personnel that may indicate deception during inquiries, and whether two auditors are more likely to act upon deceptive cues than a single auditor (as measured by subsequent audit judgments). Results of a path analysis suggest that deceptive behavioral cues are more apparent in the presence of two auditors, and that two auditors are more likely than a single auditor to successfully incorporate behavioral cues into subsequent auditor judgments. This paper contributes to prior literature on client inquiries and interpersonal deception theory. Data Availability: Data used in this study are available from the author upon request.

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