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Three Essays in Accounting

  • Author(s): Ross, Nicholas C.
  • Advisor(s): Saouma, Richard E
  • et al.
Abstract

The three chapters of this dissertation cover a broad spectrum of the accounting literature. The first chapter empirically addresses the question of whether top executives' consistent ability to profit from insider trading indicates talent that translates into superior firm operating performance. We find a short-term positive association between executives' relative trading profits and current performance measures. However, this association becomes negative over longer horizons, suggesting that insider trading profits are less a measure of managerial talent and more an exercise in rent extraction. The second chapter complements the ongoing empirical discussion surrounding participative budgeting by comparing a screening model of participative budgeting to a signaling model of top-down budgeting. Our contribution is to show that in the presence of sufficient ex-ante environmental uncertainty, private interim information availability or both, participative budgeting dominates the more centralized, top-down budgeting paradigm. Contrary to common belief, we find that the agency costs associated with participative budgeting largely persist under top-down budgeting; namely that the under either budgeting mode the agent's information preferences are single-peaked, while the principal favors either perfect information, or none at all. The final chapter presents a model of strategic intervention, where a principal contracts with an agent to exert effort and to ask for assistance should the latter receive unfavorable interim information. We find that the principal refrains from using intervention to provide incentives when communication between the two parties is undistorted. In an extension we conclude that the principal may use intervention inefficiently when the communication between the two parties is impeded.

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