Research Areas
Financial Reporting
(Prof. Dr. Ralf Ewert, Prof. Dr. Dr. Georg Schneider, Prof. Dr. Dr. h.c. Alfred Wagenhofer)
Financial reporting is crucial for the efficient functioning of capital markets and for management decisions to direct scarce resources to their best use. The objective of current developments of accounting standards and quality assurance institutions is to improve the quality of financial reporting. The fundamental discussions and analyses underlying the development of the revised IASB Conceptual Framework suggest that there is still much more to learn about principles of recognition, measurement, and disclosure. This project area focuses on the economic effects of these principles and concepts. Specifically, it examines the objective or objectives of financial reporting, long-standing principles such as conservatism, measurement bases, e.g., cost with impairment, fair value, and disclosure. More recently, non-financial reporting has gained in importance. Issues include how financial and non-financial information interact when it comes to informing stakeholders and to decision-making in companies. While there has been extensive literature on these issues, there is a demand for economics-based research that captures potential wider consequences of any such regulation on financial reporting quality. The way financial reporting is designed has also important implications for stewardship and contracting, including debt contracting and management performance measurement and compensation, and these effects co-determine the desired reporting quality in equilibrium.
Three faculty are particularly involved in research on different aspects of financial reporting. Ewert and Wagenhofer (2015, 2016) develop rational capital market models with earnings management to study effects of accounting standards, the quality of non-financial information, and changes in the operational environment on earnings quality. They also investigate if common empirical proxies for earnings quality capture the actual effects on earnings quality. In an empirical paper, Perotti and Wagenhofer (2014) empirically test an overall stock-based measure of earnings quality, based on absolute excess earnings. Göx and Wagenhofer (2009, 2010) show that conservatism is optimal in a setting when a firm wants to raise capital to invest. Gao and Wagenhofer (2017) study how conservative accounting and the monitoring of board directors interact in a corporate governance setting. Schneider and Scholze (2015) investigate economic effects of disclosure regulation on market entry, and Bertomeu, Magee and Schneider (2018) study the rise of disclosure standards through a political process.
Ewert and Wagenhofer (2011) survey the literature on earnings quality, earnings management and conservatism. Ewert and Wagenhofer (2012) published papers that deal with post-implementation reviews and show how research can inform this process (see also Trombetta, Wagenhofer, and Wysocki 2012).
Several DART students have been working in this area. For example, Boisits and Schantl examined on earnings management, analyst information generation and market prices. Kukec analyzed debt contracting, particularly performance covenants. Ferentinou studies conservatism in short-term and long-term debt contracting.
Auditing and enforcement
The quality of financial reporting depends crucially on the quality of audits and other enforcement mechanisms. There is extensive regulation of the audit profession worldwide such as, e.g., the Sarbanes-Oxley Act 2002, the EU Auditor Directive 2006 and the “Green Paper” 2010 of the EU. Auditing is no longer mainly self-regulated by the auditing profession but is now overseen by independent supervisory bodies (due to the status of its members, financing etc.). Regulation restricts services that audit firms may provide to their clients in addition to assurance, and the issue of auditor liability and market structure has come under scrutiny. It is still contentious whether the regulatory activities of standard setters in the auditing area are beneficial to improve audit quality. Research in this area aims to assess the effectiveness of recent trends in audit regulation with respect to audit quality and to develop proposals based on conceptual insights that lead to more appropriate regulatory actions.
Ewert coauthored an influential study commissioned by the DG Internal Markets and Services on limiting auditor liability and independent inspections (London Economics and Ewert 2006, 2008). Ewert (2013) extends work in this area by incorporating endogenous investor suing and derives new results on the relationship between increased auditor liability and client acceptance rates. Ewert and Wagenhofer (2017) examine auditing and its interaction with public enforcement, and Schantl and Wagenhofer (2018) study the interaction between public and private enforcement. These findings suggest that improving an enforcement mechanism does not always improve deterrence. In a research project at the Center for Accounting Research, which is funded also by the FWF, several DART faculty (Ewert, Niemann, Schneider, Wagenhofer) do research on better compliance together with a researcher in law.
Several DART students have worked in this research area. Kronenberger focused on strategic interactions between auditors and firms. Plietzsch and Schrank work on determinants of audit quality, such as the matching of clients and auditors. Niggemann analyzes tax information on auditors’ strategies, and Langbauer examines economic effects of auditor independence. Krneta studies earnings management, governance and enforcement. Attar analyzes auditing and audit oversight.
Accounting and corporate governance
In selecting governance mechanisms, decision makers in firms try to deal with conflicts of interests, incentive issues, dispersed and distorted information, and allocation of decision rights in an organization. The relation between the internal governance and the external environment is a special focus. It considers the link between the choice of the organizational mode/governance structure and the performance measures in firms in imperfectly competitive product markets. To analyze and evaluate how performance measurement and governance mechanisms relate to a firm’s competitive advantage, elements from agency theory, transaction cost theory, and property rights theory are combined with the rich arsenal of market models in industrial organization.
Kopel addresses these issues using agency theory and industrial organization models. A considerable part of his research focuses on the effect of organizational structure on the behavior of firms in imperfectly competitive markets. Kopel and Lambertini (2012) focus on incentive contracts based on market share and the strategic effects in a duopoly. Kopel and Brand (2012) study a mixed duopoly with a socially concerned firm where managers are given strategic incentives. Kopel and Brand (2013) and Kopel and Marini (2013) study why hybrid organizations rely on low-powered incentives and find requirements in corporate governance codes to disclose details of management compensation to be important. Kopel has also investigated the relation between the internal organization of a firm and an existing first-mover advantage (Kopel and Löffler 2008, 2012). Kopel, Löffler and Pfeiffer (2013) study the make-or-buy decision of multi-product firms which use multiple (complementary) inputs in manufacturing their products in the absence of strategic interactions on the final product markets and show that such strategic effects nevertheless have a considerable impact on the optimal sourcing strategy. Hinterecker, Kopel, and Ressi (2018) examine CEO activism and supply chain effects. Ewert and Wagenhofer (2017) examine how accounting characteristics affect management’s incentives to invest in internal controls as a major internal corporate governance mechanism. Schantl and Wagenhofer (2017) examine the optimal design of internal controls standards.
Several DART students have been working in this area. Brand studied the effect of firms’ social strategy on its corporate governance, Ressi analyzed individual preferences on the organization and governance, and Berger examined economic incentives and social norms. Hinterecker analyzes information transmission and supply-side effects.
Taxation and incentives
(Prof. Dr. Rainer Niemann, Prof. Dr. Dr. Georg Schneider)
Tax research plays a major role in linking the research agendas of economics and business research, particularly in accounting, finance, public economics, and law. Taxation is also becoming more international and intertwined with corporate governance. This research area focuses particularly on the interrelation of taxation and incentives with respect to business decisions. It studies the effects of income taxes on the results of agency models and examines the impact of taxation on managerial decisions, the design of optimal performance measurement systems and optimal incentive schemes in the presence of taxation, and optimal organizational structures under different international tax allocation rules. For example, tax effects under formula apportionment (as currently practiced in the U.S. and proposed in the EU) differ substantially from the effects under separate accounting.
Niemann (2008), Ewert and Niemann (2012, 2014), Martini and Niemann (2015), and Niemann and Simons (2016) have worked on the integration of taxes into agency models, which allows to analyze tax effects on managerial decisions under information asymmetry. These models also provide insights in tax planning and tax avoidance activities. Niemann has also investigated neutral tax systems under uncertainty and irreversibility using real option theory (Niemann 1999, Niemann and Sureth 2004, 2005, 2008, 2013). Schneider and Sureth (2010) find paradox tax effects in investment settings with entry and exit options. Diller, Kortebusch, Schneider, and Sureth-Sloane (2017) examine the costs and benefit of advanced tax rulings. In international taxation, Niemann (2006) studied the repatriation policy of multinational corporations using heuristics from production and logistics problems. The investment and production effects of formula apportionment within the EU are analyzed in Martini, Niemann, and Simons (2012). Martini, Niemann, and Simons (2016) compare the incentive effects of formula apportionment versus separate accounting in a principal-agent setting.
Several DART students have been working in this area include. Krenn studied the effect of taxation on management incentives and compensation, and Bauer and Kourouxous analyzed management accounting and coordination under taxes. Estebanez examines group structures for tax planning in international taxation.
Management accounting
(Prof. Dr. Thomas Pfeiffer, Prof. Dr. Dr. Georg Schneider)
A central issue in management accounting is the design of incentive systems for different hierarchical levels. A major concern is that managers may undertake investment decisions that are not in line with the firm’s overall objectives. Several consulting companies developed their own metrics and incentive systems, e.g., Stern Stewart’s Economic Value Added, McKinsey’s Economic Profit or the Boston Consulting Group’s Cash Value Added. Most of these approaches are based on rather restrictive assumptions. For example, they typically assume single-stage investment decisions, neglecting real options embedded in the investment and budgeting process, technological independence and simplified organizational contexts; many metrics include adjustments of financial reporting numbers.
Velthuis and Pfeiffer (2009) provide an integrative survey on incentive system design based on the goal-congruence and preference-similar approach. Johnson and Pfeiffer (2016) provide a survey on multi-divisional performance measures with a focus on multi-stage budgeting decisions and the inherent cooperation and competition between divisions at different stages. Pfeiffer and Schneider studied the impact of flexible investment technologies on incentive system design and budgeting systems (Pfeiffer and Schneider 2007, 2008, 2010, Johnson, Pfeiffer, and Schneider 2013, Bastian Johnson, Pfeiffer, and Schneider 2017). Dikolli, Hofmann, and Pfeiffer (2012) examine the relative performance evaluation hypothesis, according to which managers should be evaluated relative to a properly selected peer-group to measure the manager’s performance more exactly with reduced noise. Dikolli, Diser, Hofmann, and Pfeiffer (2018) provide insights for empirical investigations of the relative performance evaluation hypothesis when a powerful CEO can influence the design of the peer group. Recognizing that agency theory is based on gross performance measures (i.e. before compensation), while empiricists often use net performance measures (i.e. accounting for managerial compensation), Dikolli, Hofmann, and Pfeiffer (2017) study implications based on this observation for the pay-for-performance-sensitivities analytically as well as empirically. Pfeiffer (2010, 2013), Arya and Pfeiffer (2012), Löffler, Pfeiffer, and Schneider (2012), Arya, Löffler, Mittendorf, and Pfeiffer (2013) study supply chain coordination issues.
Several DART students have been working in this area. Weiskirchner-Merten studied participation in budgeting processes. Schmid examines multi-stage investment decisions and capital charge rates. Other students come along management accounting issues when examining performance measures and managerial incentives.
Contact
DART – Doctoral Program in Accounting, Reporting, and Taxation
Universitätsstraße 15/E4
A-8010 Graz
University of Graz,
Center for Accounting Research
