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Coordination of Supply Chains with risk-averse agents

Coordination of Supply Chainswith Risk-Averse AgentsXianghua Gan,Suresh P.Sethi,and Houmin YanAbstract The extant supply chain management literature has not addressed the issue of coordination in supply chains involving risk-averse agents.We take up this issue and begin with deﬁning a coordinating contract as one that results in a Pareto-optimal solution acceptable to each agent.Our deﬁnition generalizes the standard one in the risk-neutral case.We then develop coordinating contracts in three speciﬁc cases(1)the supplier is risk neutral and the retailer maximizes his expected proﬁt subject to a downside risk constraint,(2)the supplier and the retailer each maximizes his own mean-variance trade-off,and(3)the supplier and the retailer each maximizes his own expected utility.Moreover,in case(3)we show that our contract yields the Nash Bargaining solution.In each case,we show how we can ﬁnd the set of Pareto-optimal solutions,and then design a contract to achieve the solutions.We also exhibit a case in which we obtain Pareto-optimal sharing rules explicitly,and outline a procedure to obtain Pareto-optimal solutions. Keywords Capacity•Coordination•Nash bargaining•Pareto-optimality•Risk averse•Supply chain managementX.Gan(*)Department of Logistics and Maritime Studies,The Hong Kong Polytechnic University,Hung Hom,Kowloon,Hong Konge-mail:lgtxgan@.hkS.P.SethiSchool of Management,SM30,The University of Texas at Dallas,800W.Campbell Road, Richardson,TX75080-3021,USAe-mail:sethi@H.YanDepartment of Systems Engineering and Engineering Management,The Chinese University of Hong Kong,Shatin,NT,Hong Konge-mail:yan@.hkT.-M.Choi and T.C.Edwin Cheng(eds.),Supply Chain Coordination under Uncertainty,3 International Handbooks on Information Systems,DOI10.1007/978-3-642-19257-9_1,#Springer-Verlag Berlin Heidelberg20114X.Gan et al. 1IntroductionMuch of the research on decision making in a supply chain has assumed that the agents in the supply chain are risk neutral,i.e.,they maximize their respective expected proﬁts.An important focus of this research has been the design of supply contracts that coordinate the supply chain.When each of the agents maximizes his expected proﬁt,the objective of the supply chain considered as a single entity is unambiguously to maximize its total expected proﬁt.This fact alone makes it natural to deﬁne a supply chain to be coordinated if the chain’s expected proﬁt is maximized and each agent’s reservation proﬁt is met.A similar argument holds if each agent’s objective is to minimize his expected cost.In this paper we consider supply chains with risk-averse agents.Simply put,an agent is risk averse if the agent prefers a certain proﬁt p to a risky proﬁt,whose expected value equals p.In the literature,there are many measures of risk aversion; see Szeg€o(2004)for examples.Regardless of the measure used,when one or more agents in the supply chain are risk averse,it is no longer obvious as to what the objective function of the supply chain entity should be.Not surprisingly,the issue of coordination of supply chain consisting of risk-averse agents has not been studied in the supply chain management literature.That is not to say that the literature does not realize the importance of the risk-averse criteria.Indeed,there are a number of papers devoted to the study of inventory decisions of a single risk-averse agent.These include Lau(1980),Bouakiz and Sobel(1992),Eeckhoudt et al. (1995),Chen and Federgruen(2000),Agrawal and Seshadri(2000a),Buzacott et al. (2002),Chen et al.(2007),and Gaur and Seshadri(2005).There also have been a few studies of supply chains consisting of one or more risk-averse u and Lau(1999)and Tsay(2002)consider decision making by a risk-averse supplier and a risk-averse retailer constituting a supply chain.Agrawal and Seshadri(2000b) introduce a risk-neutral intermediary to make ordering decisions for risk-averse retailers,whose respective proﬁts are side payments from the intermediary.Van Mieghem(2003)has reviewed the literature that incorporates risk aversion in capacity investment decisions.While these papers consider risk-averse decision makers by themselves or as agents in a supply chain,they do not deal with the issue of the supply chain coordination involving risk-averse agents.It is this issue of coordination of supply chains consisting of one or more risk-averse agents that is the focus of this paper.That many decision makers are risk-averse has been amply documented in theﬁnance and economics literature;see, for example,Van Neumann and Morgenstern(1944),Markowitz(1959),Jorion (2006),and Szeg€o(2004).We shall therefore develop the concept of what we mean by coordination of a supply chain,and then design explicit contracts that achieve the deﬁned coordination.For this purpose we use the Pareto-optimality criterion,used widely in the group decision theory,to evaluate a supply chain’s performance.We deﬁne each agent’s payoff to be a real-valued function of a random variable representing his proﬁt,and propose that a supply chain can be treated as coordinated if no agent’s payoff can beCoordination of Supply Chains with Risk-Averse Agents5 improved without impairing someone else’s payoff and each agent receives at least his reservation payoff.We consider three speciﬁc cases of a supply chain(1)the supplier is risk neutral and the retailer maximizes his expected proﬁt subject to a downside risk constraint,(2)the supplier and the retailer each maximizes his own mean-variance trade-off,and(3)the supplier and the retailer each maximizes his own expected utility.We show how we can coordinate the supply chain in each case according to our deﬁnition.In each case we do this byﬁnding the set of Pareto-optimal solutions acceptable to each agent,and then constructing aﬂexible contract that can attain any of these solutions.Moreover,the concept we develop and the contracts we obtain generalize the same known for supply chains involving risk-neutral agents.The remainder of the paper is organized as the follows.In Sect.2we review the related literature in supply chain management and group decision theory.In Sect.3 we introduce a deﬁnition of coordination of a supply chain consisting of risk-averse agents.In Sect.4we characterize the Pareto-optimal solutions andﬁnd coordinating contracts for the supply chains listed as theﬁrst two cases.In Sect.5weﬁrst take up the third case using exponential utility functions for the agents,and design coordinating contracts as well as obtain the Nash Bargaining solution.Then we examine a case in which the supplier has an exponential utility followed by a linear utility.Section6provides a discussion of our results.The paper concludes in Sect.7 with suggestions for future research.2Literature ReviewThere is a considerable literature devoted to contracts that coordinate a supply chain involving risk-neutral agents.This literature has been surveyed by Cachon(2003). In addition,the book by Tayur et al.(1999)contains a number of chapters addressing supply contracts.In light of these,we limit ourselves to reviewing papers studying inventory and supply chain decisions by risk-averse agents.First we review papers dealing with a single risk-averse agent’s optimal inventory decision.Then we review articles dealing with decision making by risk-averse agents in a supply chain.Chen and Federgruen(2000)re-visit a number of basic inventory models using a mean-variance approach.They exhibit how a systematic mean-variance trade-off analysis can be carried out efﬁciently,and how the resulting strategies differ from those obtained in the standard analyses.Agrawal and Seshadri(2000a)consider how a risk-averse retailer,whose utility function is increasing and concave in wealth,chooses the order quantity and the selling price in a single-period inventory model.They consider two different ways in which the price affects the distribution of demand.In theﬁrst model,they assume that a change in the price affects the scale of the distribution.In the second model, a change in the price only affects the location of the distribution.They show that in comparison to a risk-neutral retailer,a risk-averse retailer will charge a higher price6X.Gan et al. and order less in theﬁrst model,whereas he will charge a lower price in the second model.Buzacott et al.(2002)model a commitment and option contract for a risk-averse newsvendor with a mean-variance objective.The contract,also known as a take-or-pay contract,belongs to a class of volumeﬂexible contracts,where the newsvendor reserves a capacity with initial information and adjusts the purchase at a later stage when some new information becomes available.They compare the performance of strategies developed for risk-averse and risk-neutral objectives. They conclude that the risk-averse objective can be an effective approach when the quality of information revision is not high.Their study indicates that it is possible to reduce the risk(measured by the variance of the proﬁt)by six-to eightfold,while the loss in the expected proﬁt is almost invisible.On the other hand,the strategy developed for the expected proﬁt objective can only be consid-ered when the quality of information revision is high.They show furthermore that theseﬁndings continue to hold in the expected utility framework.The paper points out a need for modeling approaches that deal with downside risk considerations.Lau and Lau(1999)study a supply chain consisting of a monopolistic supplier and a retailer.The supplier and the retailer employ a return policy,and each of them has a mean-variance objective u and Lau obtain the optimal wholesale price and return credit for the supplier to maximize his utility.However,they do not consider the issue of improving the supply chain’s performance,i.e.,improving both players’utilities.Agrawal and Seshadri(2000b)consider a single-period model in which multiple risk-averse retailers purchase a single product from a common supplier.They introduce a risk neutral intermediary into the channel,who purchases goods from the vendor and sells them to the retailers.They demonstrate that the intermediary, referred to as the distributor,orders the optimal newsvendor quantity from the supplier and offers a menu of mutually beneﬁcial contracts to the retailers.In every contract in the menu,the retailer receives aﬁxed side payment,while the distributor is responsible for the ordering decisions of the retailers and receives all their revenues.The menu of contracts simultaneously(1)induces every risk-averse agent to select a unique contract from it;(2)maximizes the distributor’s proﬁt; and(3)raises the order quantities of the retailers to the expected value maximizing (newsvendor)quantities.Tsay(2002)studies how risk aversion affects both sides of the supplier–retailer relationship under various scenario of relative strategic power,and how these dynamics are altered by the introduction of a return policy.The sequence of play is as follows:ﬁrst the supplier announces a return policy,and then the retailer chooses order quantity without knowing the demand.After observing the demand, the retailer chooses the price and executes on any relevant terms of the distribution policy as appropriate(e.g.,returning any overstock as allowed).Tsay shows that the behavior under risk aversion is qualitatively different from that under risk neutrality.He also show that the penalty for errors in estimating a channel partner’s risk aversion can be substantial.Coordination of Supply Chains with Risk-Averse Agents7 In a companion paper(Gan et al.2005),we examine coordinating contracts for a supply chain consisting of one risk-neutral supplier and one risk-averse retailer. There we design an easy-to-implement risk-sharing contract that accomplishes the coordination as deﬁned in this paper.Among these supply chain papers,Lau and Lau(1999)and Tsay(2002)consider the situation in which both the retailer and the supplier in the channel are risk averse.However,neither considers the issue of the Pareto-optimality of the actions of the agents.The aim of Agrawal and Seshadri(2000b)is to design a contract that increases the channel’s order quantity to the optimal level in the risk-neutral case by having the risk-neutral agent assume all the risk.Once again,they do not mention the Pareto-optimality aspect of the decision they obtain.Finally since our deﬁnition of coordination is based on the concepts used in the group decision theory,we brieﬂy review this stream of literature.From the early ﬁfties to the early eighties,a number of papers and books appeared that deal with situations in which a group faces intertwined external and internal problems.The external problem involves the choice of an action to be taken by the group,and the internal problem involves the distribution of the group payoff among the members. Arrow(1951)conducted one of the earliest studies on the group decision theory, and showed that given an ordering of consequences by a number of individuals,no group ordering of these consequences exists that satisﬁes a set of seemingly reasonable behavioral assumptions.Harsanyi(1955)presented conditions under which the total group utility can be expressed as a linear combination of individuals’cardinal utilities.Wilson(1968)used Pareto-optimality as the decision criterion and constructed a group utility function toﬁnd Pareto-optimal solutions. Raiffa(1970)illustrates the criterion of Pareto-optimality quite lucidly,and discusses how to choose a Pareto-optimal solution in bargaining and arbitration Valle(1978)uses an allocation function to deﬁne Pareto-optimality. Eliashberg and Winkler(1981)investigate properties of sharing rules and the group utility functions in additive and multilinear cases.3Deﬁnition of Coordination of a Supply Chainwith Risk-Neutral or Risk-Averse AgentsIn this section we deﬁne coordination of a supply chain consisting of agents that are risk neutral or risk averse.We use concepts developed in group decision theory that deals with situations in which a group faces intertwined external and internal problems.The external problem involves the choice of an action to be taken by the group,and the internal problem involves the distribution of the group payoff among the members.In group decision problems,a joint action of the group members is said to be Pareto-optimal if there does not exist an alternative action that is at least as acceptable to all and deﬁnitely preferred by some.In other words,a joint action is Pareto-optimal if it is not possible to make one agent better off without makinganother one worse off.We call the collection of all Pareto-optimal actions as the Pareto-optimal set .It would not be reasonable for the group of agents to choose a joint action that is not Pareto-optimal.Raiffa (1970)and LaValle (1978)illustrate this idea quite lucidly with a series of examples.A supply chain problem is obviously a group decision problem.The channel faces an external problem and an internal problem.External problems include decisions regarding order/production quantities,item prices,etc.The internal problem is to allocate proﬁt by setting the wholesale price,deciding the amount of a side payment if any,refund on the returned units,etc.Naturally,we can adopt the Pareto-optimality criterion of the group decision theory for making decisions in a supply chain.Indeed,in the risk-neutral case,the optimal action under a coordinating contract is clearly Pareto-optimal.In general,since the agents in the channel would not choose an action that is not in the Pareto-optimal set,the ﬁrst step to coordinate a channel is to characterize the set.Following the ideas of Raiffa (1970)and LaValle (1978),we formalize below the deﬁnition of Pareto-optimality.Let (O ;F ;P )denote the probability space and N denote the number of agents in the supply chain,N r 2.Let S i be the external action space of agent i ;i ¼1;...;N ,and S ¼S 1ÂÁÁÁÂS N .For any given external joint action s ¼s 1;...;s N ðÞ2S ,the channel’s total proﬁt is a random variable P s ;o ðÞ;o 2O .Let E and V denote the expectation and variance deﬁned on (O ;F ;P ),respectively.Now we deﬁne a sharing rule that governs the splitting of the channel proﬁt among the agents.Let Y be the set of all functions from S ÂO to R N .Deﬁnition 1.A function u ðs ;v Þ2Q is called a sharing rule if P i u i ðs ;v Þ¼1almost surely.Under the sharing rule u ðs ;o Þ,agent i’s proﬁt is represented byP i ðs ;v ;u ðs ;v ÞÞ¼u i ðs ;v ÞP ðs ;v Þ;i ¼1;...;N :Often,when there is no confusion,we write P ðs ;v Þsimply as P ðs Þ,u ðs ;v Þas u ðs Þ,and P i ðs ;v ;u ðs ;v ÞÞas P i ðs ;u ðs ÞÞ.A supply chain’s external problem is to choose an s 2S and its internal problem is to choose a function u ðs Þ2Y .Thus the channel’s total problem is to choose a pair ðs ;u ðs ÞÞ2S ÂY .Now we deﬁne the preferences of the agents over their random proﬁts.Let G denote the space of all random variables deﬁned on O ;F ;P ðÞ.For X ;X 02G ,the agent i ’s preference will be denoted by a real-valued payoff function u i ðÁÞdeﬁned on G .The relation u i ðX Þ>u i ðX 0Þ,u i ðX Þ<u i ðX 0Þand u i ðX Þ¼u i ðX 0Þindicate X is preferred to ,less preferred to ,and equivalent to X 0,respectively.It should be noted that this deﬁnition of payoff function allows for ordinal as well as cardinal utility functions.We provide following examples of payoff functions.Example 1.If agent i wants to maximize his mean-variance trade-off,then his payoff function is u i ðX Þ¼E ðX ÞÀl V ðX Þ;X 2G ,for some l >0.Example 2.Assume that agent i maximizes his expected proﬁt under the constraint that the probability of his proﬁt being less than his target proﬁt level a does not exceed a given level b ;0<b b 1.Then his payoff u i can be represented as8X.Gan et al.u iðXÞ¼EðXÞ;if P X b aðÞb b;À1;if P X b aðÞ>b:&Example3.Suppose agent i has a concave increasing utility function g i:R1!R1 of wealth and wants to maximize his expected utility.Then the agent’s payoff function is u iðXÞ¼E g iðXÞ½ ;X2G.Remark1.In Raiffa(1970)and LaValle(1978),each agent is assumed to have a cardinal utility function of proﬁt,and his objective is to maximize his expected utility.However,some preferences,such as the one in Example2,cannot be represented by a cardinal utility function.A point a2R N is said to be Pareto-inferior to or Pareto-dominated by another point b2R N,if each component of a is no greater than the corresponding compo-nent of b and at least one component of a is less than the corresponding component of b.In other words,we say b is Pareto-superior to a or b Pareto-dominates a.A point is said to be a Pareto-optimal point of a subset of R N,if it is not Pareto-inferior to any other point in the subset.With these concepts,we can now deﬁne Pareto-optimality of a sharing rule uðsÞand an action pairðs;uðsÞÞ.Deﬁnition2.Given an external action s of the supply chain,uÃðsÞis a Pareto-optimal sharing rule,ifðu1ðP1ðs;uÃðsÞÞÞ;ÁÁÁ;u NðP Nðs;uÃðsÞÞÞÞis a Pareto-optimal point of the setfðu1ðP1ðs;uðsÞÞÞ;ÁÁÁ;u NðP Nðs;uðsÞÞÞÞ;u2Y g;where u iðP iðs;uðsÞÞÞis the payoff of the i th agent.Deﬁnition3.ðsÃ;uÃðsÃÞÞis a Pareto-optimal action pair if the agents’payoffsðu1ðP1ðsÃ;uÃðsÃÞÞÞ;ÁÁÁ;u NðP NðsÃ;uÃðsÃÞÞÞÞis a Pareto-optimal point of the setfðu1ðP1ðs;uðsÞÞÞ;ÁÁÁ;u NðP Nðs;uðsÞÞÞÞ;ðs;uðsÞÞ2SÂY g:Clearly ifðsÃ;uÃðsÃÞÞis a Pareto-optimal action pair,then uÃðsÃÞis a Pareto-optimal sharing rule given sÃ.We begin now with an examination of the Pareto-optimal set in a supply chain consisting of risk-neutral agents.If an external action maximizes the supply chain’s expected proﬁt,then it is not possible to make one agent get more expected proﬁt without making another agent get less.More speciﬁcally,we have the following proposition.Coordination of Supply Chains with Risk-Averse Agents9Proposition1.If the agents in a supply chain are all risk neutral,then an action pairðs;uðsÞÞis Pareto-optimal if and only if the channel’s external action s maximizes the channel’s expected proﬁt.Proof.The proof follows from the fact that in the risk-neutral case,for each s,Xu iðP iðs;uðsÞÞÞ¼XE P iðs;uðsÞÞ¼EXP iðs;uðsÞÞ¼E PðsÞ:Thus,everyðsÃ;uðsÃÞÞ2SÂY is Pareto-optimal provided sÃmaximizes E PðsÃÞ.□Since agents in a supply chain maximize their respective objectives,the agents’payoffs might not be Pareto-optimal if their objectives are not aligned properly.In this case,it is possible to improve the chain’s performance,i.e.,achieve Pareto-superior payoffs.The agents can enter into an appropriately designed contract, under which their respective optimizing actions leads to a Pareto-superior payoff.In the supply chain management literature,a contract is deﬁned to coordinate a supply chain consisting of risk-neutral agents if their respective optimizing external actions under the contract maximize the chain’s expected proﬁt.Then,according to Propo-sition1,a coordinating contract is equivalent to a Pareto-optimal action in the risk-neutral case.It is therefore reasonable to use the notion of Pareto-optimality to deﬁne supply chain coordination in the general case.Deﬁnition4.Supply Chain Coordination.A contract agreed upon by the agents of a supply chain is said to coordinate the supply chain if the optimizing actions of the agents under the contract1.Satisfy each agent’s reservation payoff constraint.2.Lead to an action pairðsÃ;uÃðsÃÞÞthat is Pareto-optimal.Besides Pareto-optimality of a contract,we have introduced the individual-rationality or the participation constraints as part of the deﬁnition of coordination. The constraints ensure that each agent is willing to participate in the contract by requiring that each gets at least his reservation payoff.It is clear that each agent’s reservation payoff will not be less than his status-quo payoff,which is deﬁned to be his best payoff in the absence of the contract.Thus,we need consider only the subset of Pareto-optimal actions that satisfy these participating constraints.The reservation payoff of an agent plays an important role in bargaining,as we shall see in the next section.Now we illustrate the introduced concept of coordination by an example. Example4.Consider a supply chain consisting of one supplier and one retailer who faces a newsvendor problem.Before the demand realizes,the supplier decides on his capacityﬁrst,and the retailer then prices the product and chooses an order quantity.The supplier and the retailer may enter into a contract that speciﬁes the retailer’s committed order quantity and the supplier’s refund policy for returned items.In this channel,the external actions are the supplier’s capacity selection and the retailer’s pricing and ordering decisions.These are denoted as s.The internal 10X.Gan et al.Coordination of Supply Chains with Risk-Averse Agents11 actions include decision on the quantity of commitment,the refundable quantity, and the refund credit per item.These internal actions together lead to a sharing rule denoted by uðsÞ.Once the contract parameters are determined,the agents in the supply chain choose their respective external actions that maximize their respective payoffs.Ifðs;uðsÞÞsatisﬁes the agents’reservation payoffs and is Pareto-optimal, then the channel is coordinated by the contract.The deﬁnition of coordination proposed here allows agents to have any kind of preference that can be represented by a payoff function satisfying the complete and transitive axioms speciﬁed earlier.For example,all of the seven kinds of preferences listed in Schweitzer and Cachon(2000),including risk-seeking preferences,are allowed.Since often in practice,an agent is either risk neutral or risk averse,we restrict our attention to only these two types.Remark2.Our deﬁnition applies also to a T-period case.For this,we deﬁne the payoff function of player i asu iðP1iðsÃ;uÃðsÃÞÞ;P2iðsÃ;uÃðsÃÞÞ;ÁÁÁ;P T iðsÃ;uÃðsÃÞÞÞ:G T!R1;where P t iðsÃ;uÃðsÃÞÞis agent i’s proﬁt in period t.4Coordinating Supply ChainsEach Pareto-optimal action pairðs;uðsÞÞresults in a vector of payoffsðu1ðP1ðs;uðsÞÞÞ;ÁÁÁ;u NðP Nðs;uðsÞÞÞÞ;where u iðP iðs;uðsÞÞÞis the payoff of the i th agent.LetC¼fðu1ðP1ðs;uðsÞÞÞ;ÁÁÁ;u NðP Nðs;uðsÞÞÞÞjðs;uðsÞÞis Pareto-optimal;ðs;uðsÞÞ2SÂY g;denote the set of all Pareto-optimal payoffs,and let F&C be the subset of Pareto-optimal payoffs that satisfy all of the participation constraints.We shall refer to F as Pareto-optimal frontier.We will assume that F is not empty.To coordinate a supply chain,theﬁrst step is to obtain the Pareto-optimal frontier F.If F is not a singleton,then agents bargain to arrive at an element in F to which they agree.A coordinating contract is one with a speciﬁc set of parameters that achieves the selected solution.A contract is appealing if it has sufﬁcientﬂexibility.In Cachon(2003),a coordinating contract is said to beﬂexible if the contract,by adjustment of some parameters,allows for any division of the supply chain’s expected proﬁt among the risk-neutral agents.This concept can be extended to the general case as follows.12X.Gan et al. Deﬁnition 5.A coordinating contract isﬂexible if,by adjustment of some parameters,the contract can lead to any point in F:We shall now develop coordinating contracts in supply chains consisting of two agents:a supplier and a retailer.We shall consider three different cases.In each of these cases,we assume that agents have complete information.In Case1,the supplier is risk neutral and the retailer has a payoff function in Example2,i.e.,the retailer maximizes his expected proﬁt subject to a downside constraint.In Case2, the supplier and the retailer are both risk averse and each maximizes his own mean-variance trade-off.In Case3,the supplier and the retailer are both risk averse and each maximizes his own expected concave utility.We consider theﬁrst two cases in this section and the third case in Sect.5.In each case,let us denote the retailer’s and the supplier’s reservation payoffs as p r r0and p s r0,respectively.Weﬁrst obtain F and then design aﬂexible contract that can lead to any point in F by adjusting the parameters of the contract.4.1Case1:Risk Neutral Supplier and Retailer Averseto Downside RiskWe consider the supplier to be risk neutral and the retailer to maximize his expected proﬁt subject to a downside risk constraint.This downside risk constraint requires that the probability of the retailer’s proﬁt to be higher than a speciﬁed level is not too small.The risk neutrality assumption on the part of the supplier is reasonable when he is able to diversify his risk by serving a number of independent retailers,which is quite often the case in practice.When the retailers are independent,the supply chain can be divided into a number of sub-chains,each consisting of one supplier and one retailer.This situation,therefore,could be studied as a supply chain consisting of one risk-neutral supplier and one risk-averse retailer.We say that an action pairðs;uðsÞÞis feasible if the pair satisﬁes the retailer’s downside risk constraint.We do not need to consider a pairðs;uðsÞÞthat is not feasible since under the pair the retailer’s payoff isÀ1and he would not enter the contract.We denote PðsÞ,P rðs;uðsÞÞ,and P sðs;uðsÞÞas the proﬁts of the supply chain,the retailer,and the supplier,respectively.Other quantities of interest will be subscripted in the same way throughout the chapter,i.e.,subscript r will denote the retailer and subscript s will denote the supplier.Then we have the following result.Theorem1.If the supplier is risk neutral and the retailer maximizes his expected proﬁt subject to a downside risk constraint,then a feasible action pairðs;uðsÞÞis Pareto-optimal if and only if the supply chain’s expected proﬁt is maximized over the feasible set.Proof.ONLY IF:It is sufﬁcient to show that if E PðsÞis not maximal over the feasible set,thenðs;uðsÞÞis not Pareto-optimal.。

Dhaliwal_2011_TAR_Internal Control Disclosures, Monitoring, and the Cost of Debt

THE ACCOUNTING REVIEW American Accounting Association Vol.86,No.4DOI:10.2308/accr-10043 2011pp.1131–1156Internal Control Disclosures,Monitoring,and the Cost of DebtDan DhaliwalThe University of Arizona and Korea UniversityChris HoganMichigan State UniversityRobert TrezevantUniversity of Southern CaliforniaMichael WilkinsTexas A&M UniversityABSTRACT:We test the relationship between the change in a firm’s cost of debt andthe disclosure of a material weakness in an initial Section404report.We find that,onaverage,a firm’s credit spread on its publicly traded debt marginally increases if itdiscloses a material weakness.We also examine the impact of monitoring by creditrating agencies and/or banks on this result and find that the result is more pronouncedfor firms that are not monitored.Additional analysis indicates that the effect of bankmonitoring appears to be the primary driver of these monitoring results.This finding isconsistent with the argument that banks are effective delegated monitors for the debtmarket.The results of this study suggest the need for future research,particularly to testthe differential effects of monitoring on the cost of debt compared to the cost of equity.Keywords:cost of debt;monitoring of debt;bank monitoring;Section404reporting.Data Availability:Data are publicly available from the sources identiﬁed in the text.I.INTRODUCTIONS ection404of the Sarbanes-Oxley Act of2002(hereafter,Sarbanes-Oxley)requires a publicly tradedﬁrm’s Form10-K to contain an audited report concerning the effectiveness of theﬁrm’s internal control overﬁnancial reporting.Under the Securities and Exchange Commission’s(SEC)Final Rule on management’s reporting on the effectiveness of internal controlWe are very grateful to Steven Kachelmeier(the Senior Editor)and two anonymous referees for their valuable and constructive suggestions.We also acknowledge the helpful comments received from workshop participants at The Ohio State University and Monash University.Editor’s note:Accepted by Steven Kachelmeier.Submitted:April2009Accepted:September2010Published Online:April20111131over ﬁnancial reporting,and under Public Company Accounting Oversight Board (PCAOB)Auditing Standard No.2(AS 2),which were in effect during the time period examined in our study,ﬁrms are required to disclose in the Section 404report any material weakness in internal control over ﬁnancial reporting (SEC 2003;PCAOB 2004).By deﬁnition in AS 2,a material weakness indicates a more than remote likelihood that a material misstatement will not be prevented or detected in a ﬁrm’s ﬁnancial statements.1,2Section 404became effective for ﬁscal years ending on or after November 15,2004,for accelerated ﬁlers,deﬁned as panies with an equity market capitalization exceeding $75million that ﬁle Form 10-K.In this study,we use the release of an initial Section 404report as a natural experiment to test whether the cost of a ﬁrm’s publicly traded debt increases if it discloses a material weakness (hereafter,MW)in internal control over ﬁnancial reporting.We have several reasons to expect that weak internal control over ﬁnancial reporting is associated with a higher cost of debt.For example,weak internal control over ﬁnancial reporting leads to a decrease in the precision of ﬁnancial reporting numbers.This decrease in precision means that debt investors have less reliable information to assess default risk and to determine compliance with debt covenants (i.e.,estimation risk increases),which leads investors to charge a higher cost of debt (Bhojraj and Sengupta 2003).Moreover,weak internal control over ﬁnancial reporting suggests that managers ﬁnd it easier to misappropriate a ﬁrm’s cash ﬂows (Lambert et al.2007),thus increasing default risk,which again leads investors to charge a higher cost of debt.If weak internal control over ﬁnancial reporting is associated with a higher cost of debt,then we predict that the disclosure of a MW in an initial Section 404report is associated with an increase in the cost of a ﬁrm’s publicly traded debt.We ﬁnd marginal support for this prediction (p =0.099).Even though we ﬁnd that the disclosure of a MW is associated with an increase in a ﬁrm’s cost of debt,it is possible that this ﬁnding may not hold equally between ﬁrms that are monitored and ﬁrms that are not monitored by credit rating agencies and/or banks.To our knowledge,prior research has not studied the impact of monitoring on the response of markets to the information in a Section 404report.In Section II,we predict that the increased cost of debt associated with MW disclosure is more pronounced for ﬁrms that are not monitored than for ﬁrms that are monitored by credit rating agencies and/or banks.We ﬁnd strong support for this prediction.Additional analysis indicates that the effect of bank monitoring appears to be the primary driver of these monitoring results.This ﬁnding is consistent with the argument that banks have a comparative advantage in carrying out information search and monitoring activities.Ogneva et al.(2007)ﬁnd that the effect of Section 404requirements on a ﬁrm’s cost of equity is strongest for delinquent ﬁlers.Also,Moody’s Investors Service,Inc.(2005a)states that Moody’s views a ﬁling delay as indicating the most serious internal control over ﬁnancial reporting problems.Consistent with these observations,we ﬁnd that delinquent ﬁlers have an increase in their cost debt after the required initial Section 404report ﬁling date relative to ﬁrms that ﬁle a timely report.1More speciﬁcally,a material weakness is deﬁned as a signiﬁcant deﬁciency,or combination of signiﬁcant deﬁciencies,that results in more than a remote likelihood that a material misstatement of the annual or interim ﬁnancial statements will not be prevented or detected (PCAOB 2004).Firms are not required to disclose in a Section 404report control deﬁciencies or signiﬁcant deﬁciencies that do not rise to the level of a material weakness.2Based on feedback received,including criticism that AS 2was too costly and resulted in inefﬁcient audits of internal controls,AS 2was superseded by AS 5(PCAOB 2007).AS 5was effective for ﬁscal years ending on or after November 15,2007,with early adoption permitted.Like AS 2,AS 5continues to require disclosures of material weaknesses in internal control over ﬁnancial reporting.However,the deﬁnition of material weakness in AS 5is somewhat less inclusive than in AS 2.In particular,AS 5uses the terminology ‘‘a reasonable possibility ’’rather than ‘‘a more than remote likelihood ’’that a material misstatement will not be prevented or detected.We have no reason to believe that our results would have been different under AS 5.1132Dhaliwal ,Hogan ,Trezevant ,andWilkins The Accounting ReviewJuly 2011When we partition sampleﬁrms by their ex ante probability of reporting a MW in an initial Section404report,weﬁnd that low-probabilityﬁrms have a larger increase in their cost of debt in response to reporting a MW than high-probabilityﬁrms.This result is consistent with the notion that the debt market is more surprised when aﬁrm with a low ex ante probability of reporting a MW actually reveals a MW than when this occurs for a high ex ante probabilityﬁrm.Concurrent studies by Kim et al.(2011)and Costello and Wittenberg-Moerman(2011)use bank loan credit spreads to examine some of the same issues that we investigate.The major difference between these two studies and our study is that Kim et al.(2011)and Costello and Wittenberg-Moerman(2011)focus on the impact of Sarbanes-Oxley reporting requirements in the private debt market,while we focus on this impact in the public debt market.As further discussed in Section VI,all three studiesﬁnd that aﬁrm’s cost of debt increases after it discloses a MW.Thus, we view the three studies as complementary in that they collectively provide evidence that Sarbanes-Oxley reporting requirements can impact aﬁrm’s cost of debt in both the private debt market and the public debt market.Our study contributes to the literature by examining the effect of Section404disclosures on the cost of debt rather than on the cost of equity.3One beneﬁt to examining the cost of debt is that measures of the cost of debt are better deﬁned and easier to estimate than measures of the cost of equity.4A more important beneﬁt is that examining debt allows us to analyze the effect of monitoring,or a lack of monitoring,by two debt monitors(i.e.,credit rating agencies and banks)on the relationship between the cost of debt and the disclosure of a MW.This analysis allows us to assess the impact that monitoring has on the response of markets to the information in a Section404report.This assessment of monitoring effects is valuable because,to our knowledge,prior research has not examined this issue.Further,the introduction of monitoring effects into the analysis creates some tension in the prediction that aﬁrm’s cost of debt increases if it discloses a MW.Finally,this analysis also provides evidence regarding(1)the argument that banks are effective delegated monitors for the debt market, and(2)the importance of bank monitoring relative to monitoring by credit rating agencies.A third beneﬁt to examining the cost of debt is that we are able to compare our results to the corresponding cost of equity results in Ashbaugh-Skaife et al.(2009).Based on this analysis,we are able to offer several suggestions for future research.These suggestions involve comparing and contrasting the effect of various monitoring agents on(1)the change in aﬁrm’s cost of equity and the disclosure of a MW,and(2)the change in aﬁrm’s cost of debt and the disclosure of a MW.Section II develops the hypotheses.Section III provides a description of the sample.Section IV describes the primary test results.Section V compares these results to the cost of equity results in Ashbaugh-Skaife et al.(2009).Section VI reports the results of additional analyses.Section VII provides a summary of the majorﬁndings.II.HYPOTHESESInternal Control over Financial Reporting and the Cost of DebtWe have several reasons to expect that weak internal control overﬁnancial reporting is associated with a higher cost of debt.For example,cost of debt factors in the likelihood of default. At the same time,weak internal control overﬁnancial reporting leads to a reduction in the precision ofﬁnancial reporting numbers,which decreases the reliability of the information needed to assess 3Debt is an important source ofﬁnancing for manyﬁrms.For example,among our sampleﬁrms,long-term debt as a percentage of equity is,on average,almost60percent.4See Botosan and Plumlee(2005)for a discussion of the measurement of the cost of equity,as well as a comparison of different measures of the cost of equity.Internal Control Disclosures,Monitoring,and the Cost of Debt1133The Accounting Review July2011the likelihood of default (i.e.,estimation risk increases).This decrease in reliability would cause debt investors to charge a higher cost of debt to compensate for their decreased ability to accurately assess the likelihood of default (Bhojraj and Sengupta 2003).Similarly,since debt investors use ﬁnancial reporting numbers to determine compliance with debt covenants (DeFond and Jiambalvo 1994),this decrease in reliability would lead debt investors to charge a higher cost of debt to compensate for their decreased ability to determine this compliance.Lambert et al.(2007)observe,‘‘[W]hen accounting quality increases,however,managers steal less,so more of the payoff goes to shareholders,’’where payoff refers to a ﬁrm’s cash ﬂows.This observation suggests that weak internal control over ﬁnancial reporting,which decreases accounting quality,provides managers with more opportunities to misappropriate cash ﬂows (i.e.,misappropriation risk increases).This increased misappropriation risk increases default risk,thus increasing the cost of debt.The disclosure of a MW in an initial Section 404report indicates the potential for a material misstatement in a ﬁrm’s ﬁnancial statements due to weak internal control over ﬁnancial reporting.Thus,based on the preceding arguments,we predict that the disclosure of a MW in an initial Section 404report is associated,on average,with an increase in a ﬁrm’s cost of debt.The hypothesis used to test this prediction is:H1:Firms that initially disclose a MW under Section 404experience a larger increase in theircost of debt compared to ﬁrms with no such disclosure.Monitoring Effects and the Cost of DebtAlthough we predict that a ﬁrm’s cost of debt increases if it discloses a MW in an initial Section 404report,it is possible that this average prediction does not hold equally for ﬁrms that are monitored compared to ﬁrms that are not monitored by credit rating agencies and/or banks.When monitoring debt,a credit rating agency assesses the quality of a ﬁrm’s internal control over ﬁnancial reporting.This assessment is reﬂected in the credit rating assigned to the ﬁrm.Consistent with this notion,Moody’s Investors Service,Inc.(2005b)indicates that,for ﬁrms that report a Section 404MW,rating actions are not needed in most cases,as the Moody’s rating already reﬂects Moody’s impression of the control weaknesses that are eventually disclosed in a Section 404report.Based on the preceding,we expect that a ﬁrm’s credit rating provides the debt market with indirect information about the quality of a ﬁrm’s internal control over ﬁnancial reporting,thereby reducing the importance of the information provided to the debt market in a Section 404report.This reduced importance should lead to a smaller increase in a ﬁrm’s cost of debt upon the disclosure of a MW than the increase that would occur if no monitoring by credit rating agencies existed.If the preceding is the case,then we expect:H2a:The increased cost of debt associated with MW disclosure is more pronounced for ﬁrmswith unrated debt than for ﬁrms with rated debt.Diamond (1984)and Fama (1985),among others,argue that banks serve as effective monitors for the debt market because they have a comparative advantage in carrying out information search and monitoring activities.For example,bankers have an ongoing relationship with a borrower,allowing them access to information about a borrower that is not publicly available (Fama 1985).Also,bankers ﬁnd it easier to monitor a ﬁrm because other providers of corporate debt are more dispersed;thus,monitoring by these other providers suffers from free-rider problems (Diamond 1984).Many empirical studies document support for the notion that banks serve as effective delegated monitors (e.g.,James 1987;Datta et al.2000;Bharath et al.2008;Altman et al.2010).Given the preceding,we argue that ﬁrms without bank loans exhibit a larger increase in their cost of debt following the disclosure of a MW in an initial Section 404report than ﬁrms with bank1134Dhaliwal ,Hogan ,Trezevant ,andWilkins The Accounting ReviewJuly 2011loans.If a bank makes a loan to a givenﬁrm,the bank would assess the quality of theﬁrm’s internal control overﬁnancial reporting;this assessment would be reﬂected in the interest rate on the loan. In other words,banks would price protect against internal control overﬁnancial reporting problems. Further,aﬁrm that has bank loans must disclose information about the terms of these loans in Form 10-K.Also,there are databases that provide detailed information about the terms of aﬁrm’s bank loan agreements(e.g.,DealScan).This information would provide the debt market with indirect information about the quality of aﬁrm’s internal control overﬁnancial reporting,thereby reducing the importance of the information provided in a Section404report.Further,the debt market could use this information to mimic the behavior of banks and also price protect against internal control overﬁnancial reporting problems,thereby reducing(relative to ﬁrms not subject to bank monitoring)the reaction of the cost of debt to the disclosure of a MW.5 Based on the preceding arguments,we expect:H2b:The increased cost of debt associated with MW disclosure is more pronounced forﬁrms that are not subject to bank monitoring than forﬁrms that are subject to bankmonitoring.We initially test H2a and H2b separately.We then test these hypotheses jointly to determine if the monitoring effect of credit rating agencies and that of banks each has its own incremental effect on the relationship between the cost of debt and the disclosure of a MW,as opposed to one effect subsuming the other.Delinquent Filers and the Cost of DebtOgneva et al.(2007)ﬁnd that the effect of Section404on the cost of equity is strongest for delinquentﬁlers.Additionally,Moody’s Investors Service,Inc.(2005a,1–2)views a delay inﬁling a Section404report as indicating the most serious internal control overﬁnancial reporting problems for the following reasons:Lateﬁlers may heighten uncertainty about the nature and extent of their control deﬁciencies while the company and its auditor complete their evaluation of the company’s controls.This uncertainty,in turn,raises questions about the reliability of the company’sﬁnancial data,particularly un-audited data,the ultimate timing ofﬁling reports with the SEC,and the nature of the company’s plan to remediate control problems.Regarding liquidity,laterﬁlers may:Temporarily lose access to the public capital markets because their SECﬁlings are ‘‘delinquent’’;Also miss the deadline forﬁling auditedﬁnancial statements,which,in turn,could cause uncertainty among market participants and affect the amount and terms of capital available to the company;andViolate covenants in credit agreements and/or indentures.A common covenant requires timelyﬁling ofﬁnancial data with the SEC.Based on the preceding,we test the following hypothesis:H3:Firms that delayﬁling an initial Section404report experience an increase in their cost of debt relative to timelyﬁlers.5If the debt market did not behave in this manner,then it is possible that the cost of debt would signiﬁcantly increase when aﬁrm that a bank is supposed to be monitoring discloses a MW in an initial Section404report.However,our results suggest that this is not the case.Internal Control Disclosures,Monitoring,and the Cost of Debt1135The Accounting Review July2011The Ex Ante Probability of Reporting a MW and the Cost of DebtAshbaugh-Skaife et al.(2009)document that the increase in the cost of equity for ﬁrms with a low ex ante probability of reporting a MW is greater than the increase for high-probability ﬁrms when a Section 302material weakness (hereafter,Section 302MW)or a Section 404MW is disclosed.6This ﬁnding is consistent with the notion that the equity market is more surprised when a ﬁrm with a low ex ante probability of reporting a MW actually reveals a MW than when this occurs for a high ex ante probability ﬁrm.Based on this evidence,we expect:H4:The increased cost of debt associated with MW disclosure is more pronounced for low exante probability of reporting MW ﬁrms than for high ex ante probability ﬁrms.III.SAMPLE SELECTION AND DESCRIPTIVE STATISTICSThe initial sample of Section 404disclosures consists of 4,536ﬁrm-years identiﬁed as reporting or not reporting a Section 404MW in their Form 10-K ﬁlings between November 3,2004,and March 3,2006,according to the Audit Analytics Internal Controls (hereafter,Audit Analytics)database.We eliminate ﬁrm-years with erroneous or duplicate CIK codes (these are the ﬁrm-identiﬁer codes that Audit Analytics uses),duplicate or triplicate ﬁrm-years (e.g.,where a ﬁrm disclosed internal control status updates in a subsequent year’s Form 10-K),and ﬁrm-years not in the Compustat database.After applying these screens,we are left with 3,640(3,087non-MW and 553MW)unique ﬁrms making an initial Section 404disclosure.The ﬁrms come from a broad range of industries.For example,only four two-digit SIC industries comprise more than 5percent of the ﬁrms,with the greatest concentration in SIC 60(Depository Institutions,10.93percent of ﬁrms)and SIC 73(Business Services,10.27percent of ﬁrms).To obtain yield data,we use the National Association of Securities Dealers (NASD)Trade Reporting and Compliance Engine (TRACE)ﬁxed income securities transaction data.All brokers/dealers who are NASD members have an obligation to report transactions in corporate debt instruments via the TRACE system.TRACE should provide a relatively complete picture of trading in corporate debt instruments.For example,by the time of our sample period,(1)‘‘As a general rule,the vast majority of dollar denominated corporate debt instruments must be reported to TRACE ’’(NASD 2004,4),and (2)‘‘approximately 99%of all transactions and 95%of par value in the TRACE-eligible securities market are disseminated immediately ’’(SEC 2005,5).7Further,the data collected and disseminated on these transactions would cover the majority of all transactions in corporate bonds because ‘‘[m]ost corporate bonds trade in the over-the-counter (OTC)market ...The OTC market is much larger than the exchange markets,and the vast majority of bond transactions,even those involving exchange-listed issues,take place in this market ’’(Securities Industry and Financial Markets Association [SIFMA]2009,1).6Ashbaugh-Skaife et al.(2009)use both Section 302and Section 404disclosures in their analysis.Section 302,which was ﬁnalized and implemented on August 29,2002,requires management to certify in quarterly and annual reports that disclosure control processes and procedures have been designed and implemented,and to conclude on the effectiveness of disclosure controls.Both Sections 302and 404require the disclosure of material weaknesses in internal control over ﬁnancial reporting.Under Section 302,the disclosure is the responsibility of management,while under Section 404,the disclosure is the responsibility of the ﬁrm’s independent auditor,as well as management.7For example,in 2004TRACE was collecting data on secondary over-the-counter market transactions for approximately 23,000publicly traded corporate bond issues,including investment-grade debt,high-yield debt,and unrated debt,and on a typical day $20billion par value of corporate bonds turned over in approximately 25,000transactions (NASD 2004).In 2005,transactions not reported immediately were subject to a maximum ten-business-day reporting delay,except for trades of Rule 144A securities,which were not disseminated because of the limited transferability and tradability of securities sold pursuant to Rule 144A (SEC 2005).1136Dhaliwal ,Hogan ,Trezevant ,andWilkins The Accounting ReviewJuly 2011TRACE provides transaction-speciﬁc information,including price and ing this data, we calculate the transaction-speciﬁc credit spread as yield to maturity,or YTM,on a given corporate debt instrument transaction minus YTM(obtained from Federal Reserve Board[2006]) on a Treasury security matched on time to maturity.8We remove from the sampleﬁrms with missing required data,and fourﬁrms for which the absolute value of the test variable D DefaultRisk exceeds400percent.9We also remove43ﬁrms that report a Section302MW prior to their initial Section404report.10,11These procedures yield a sample of577(531non-MW and46MW)ﬁrms.Table1reports descriptive statistics for these ﬁrms.Similar to previous studies,MWﬁrms are smaller,less proﬁtable,and more distressed than non-MWﬁrms.12Also,for both MW and non-MWﬁrms,there is an increase in credit spreads in the time period following the initial Section404reportﬁling date,indicating that our tests should control for this general increase in credit spreads over the test period.Moreover,MWﬁrms have a higher pre-report credit spread than non-MWﬁrms,suggesting that the debt market,at least partially,can anticipate whichﬁrms are more likely to disclose a MW.This last observation indicates that our tests should control for pre-report credit spreads.Finally,if we partition the Spread(pre)data in Table1by bank monitoring status,weﬁnd that, for bank-monitoredﬁrms over days[À45,À3]relative to the initial Section404reportﬁling date, the mean spread for MWﬁrms in excess of the mean spread for non-MWﬁrms equals3.22percent. Forﬁrms not subject to bank monitoring,the corresponding difference is1.69percent.Finally, consistent with the notion that banks serve as effective monitors and that the debt market mimics bank behavior,the difference between3.22percent and1.69percent is marginally signiﬁcant(p= 0.062).IV.TEST DESIGN AND RESULTSTest of H1:Internal Control Disclosures and the Cost of DebtTest DesignTo examine ifﬁrms that initially disclose a Section404MW experience an increase in their cost of debt relative toﬁrms with no such disclosure,we estimate Model(1):138In these calculations,to eliminate outliers,we delete the top and bottom1percent of transaction-speciﬁc yield observations.9Our conclusions do not change if we estimate our models after setting D DefaultRisk for these fourﬁrms equal to the next most extreme value of D DefaultRisk observed in the distribution of D DefaultRisk.10Theseﬁrms are removed because(1)the disclosure of a prior Section302MW may preempt any information provided by the disclosure of a MW in an initial Section404report,and(2)we do not wantﬁrms that disclose a prior Section302MW,but disclose no MW in an initial Section404report,included in the sample because the remediation of a material weakness is not the primary interest of our study.11Approximately85percent of our sampleﬁrms have complete data on debt seniority.We do not want to reduce the sample size for our regression tests further by requiring data on debt seniority.If we estimate our models after adding the variable Seniority,coded1forﬁrms that have trades in only senior/senior secured debt instruments, and0forﬁrms that either have trades in at least some less senior debt instruments or have missing seniority data, the estimated coefﬁcient on Seniority is negative and not signiﬁcant at conventional levels(most signiﬁcant p=0.115).The only notable change in our results is that the estimated coefﬁcient on MW in Model(1)is positive atp=0.120(rather than p=0.099).Based on this analysis,we conclude that the seniority of debt does not appear to have an inﬂuence on our test results.12The previous studies that we refer to here are Ge and McVay(2005),Ashbaugh-Skaife et al.(2007,2009),Doyle et al.(2007),Ogneva et al.(2007),Beneish et al.(2008),Hogan and Wilkins(2008),Crabtree et al.(2009), Elbannan(2009),and Kim et al.(2011).13Appendix A summarizes the data sources used to calculate model variables.Internal Control Disclosures,Monitoring,and the Cost of Debt1137The Accounting Review July2011TABLE 1Descriptive StatisticsVariable531Non-MW Firms46MW Firms Mean Median Std.Dev .Mean Median Std.Dev .Yield (pre )4.982 4.822 2.2307.788* 6.042* 6.784Yield (post )5.520 5.260 2.6418.539*6.529* 6.844Spread (pre )1.308 1.0112.240 4.050* 2.487* 6.750Spread (post )1.676 1.3112.693 4.737* 2.634* 6.811DefaultRisk (pre )À1.800À1.841 2.039À0.578*À0.691* 2.045DefaultRisk (post )À1.431À1.652 1.685À0.415*À0.248* 2.010Assets (pre )7760.932878.4814151.944427.13*1317.92*7560.75Assets (post )7915.962978.4014411.514332.26*1298.93*7353.87CFO (pre )0.0540.0600.0780.016*0.016*0.055CFO (post )0.0860.0920.1010.037*0.041*0.082Leverage (pre )0.3190.2710.2030.2990.2900.169Leverage (post )0.3150.2660.2080.3100.2840.171CFVol (pre )0.0430.0360.0310.0450.0330.037CFVol (post )0.0450.0380.0320.0440.0360.036TrsYTM (pre )3.674 3.7540.640 3.738 3.9000.712TrsYTM (post )3.844 3.9330.604 3.802 3.9170.645Restructure (pre )0.31100.4630.478*00.505Restructure (post )0.38200.4860.47800.505WriteDown (pre )0.13000.3370.15200.363WriteDown (post )0.19600.3970.30400.465M&A (pre )0.04300.2040.02200.147M&A (post )0.05500.2270.02200.147Restate (pre )0.12200.3270.11100.318Restate (post )0.12700.3340.17800.387*Indicates that the ‘‘531Non-MW Firms ’’value is signiﬁcantly different from the ‘‘46MW Firms ’’value at the two-tailed 5percent level or better,based on a t-test of difference in means or a Wilcoxon two-sample test for medians.Table 1provides summary statistics for the 531sample ﬁrms that do not report a MW and the 46sample ﬁrms that do report a MW in an initial Section 404report.Variable Deﬁnitions:Yield (pre )=mean (for all TRACE-reported trades in a ﬁrm’s debt issues)YTM over days [À45,À3]relative to theinitial Section 404report ﬁling date;Yield (post )=mean (for all TRACE-reported trades in a ﬁrm’s debt issues)YTM over days [þ3,þ45];Spread (pre )=mean (for all TRACE-reported trades in a ﬁrm’s debt issues)credit spread over days [À45,À3],wherethe credit spread for each trade is YTM on the relevant debt issue minus YTM on a matched-by-maturity Treasury security;Spread (post )=mean (for all TRACE-reported trades in a ﬁrm’s debt issues)credit spread over days [þ3,þ45];DefaultRisk =score from the bankruptcy model of Ohlson (1980);Assets =total assets in $millions;CFO =cash ﬂow from operations scaled by total assets;Leverage =long-term debt scaled by total assets;CFVol =standard deviation over the last 20quarters of cash ﬂow from operations scaled by total assets;For each sample ﬁrm i ,TrsYTM i (pre )=the mean of all ‘‘YTM on a matched-by-maturity Treasury security ’’used tocalculate Spread i over days [À45,À3],and TrsYTM i (post )=the mean of all ‘‘YTM on a matched-by-maturity Treasury security ’’used to calculate Spread i over days [þ3,þ45];andRestructure (WriteDown ,M&A ,Restate )=an indicator variable equal to 1if restructuring (writedown,M&A,restatement)activity occurs in a given period,and 0otherwise.(continued on next page)1138Dhaliwal ,Hogan ,Trezevant ,andWilkinsThe Accounting ReviewJuly 2011。

Evidence on the Trade-Off between Real Activities Manipulation and Accrual-Based Earnings Management

Evidence on the trade-off between real activities manipulation and accrual-based earningsmanagementAmy Y. ZangThe Hong Kong University of Science and TechnologyAbstract: I study whether managers use real activities manipulation and accrual-based earnings management as substitutes in managing earnings. I find that managers trade off the two earnings management methods based on their relative costs and that managers adjust the level of accrual-based earnings management according to the level of real activities manipulation realized. Using an empirical model that incorporates the costs associated with the two earnings management methods and captures managers’ sequential decisions, I document large sample evidence consistent with managers using real activities manipulation and accrual-based earnings management as substitutes.Keywords:real activities manipulation, accrual-based earnings management, trade-off Data Availability:Data are available from public sources indicated in the text.I am grateful for the guidance from my dissertation committee members, Jennifer Francis (chair), Qi Chen, Dhananjay Nanda, Per Olsson and Han Hong. I am also grateful for the suggestions and guidance received from Steven Kachelmeier (senior editor), Dan Dhaliwal and two anonymous reviewers. I thank Allen Huang, Moshe Bareket, Yvonne Lu, Shiva Rajgopal, Mohan Venkatachalam and Jerry Zimmerman for helpful comments. I appreciate the comments from the workshop participants at Duke University, University of Notre Dame, University of Utah, University of Arizona, University of Texas at Dallas, Dartmouth College, University of Oregon, Georgetown University, University of Rochester, Washington University in St. Louis and the HKUST. I gratefully acknowledge the financial support from the Fuqua School of Business at Duke University, the Deloitte Foundation, University of Rochester and the HKUST. Errors and omissions are my responsibility.I.INTRODUCTIONI study how firms trade off two earnings management strategies, real activities manipulation and accrual-based earnings management, using a large sample of firms over 1987–2008. Prior studies have shown evidence of firms altering real activities to manage earnings (e.g., Roychowdhury 2006; Graham et al. 2005) and evidence that firms make choices between the two earnings management strategies (Cohen et al. 2008; Cohen and Zarowin 2010; Badertscher 2011). My study extends research on the trade-off between real activities manipulation and accrual-based earnings management by documenting a set of variables that explain the costs of both real and accrual earnings management. I provide evidence for the trade-off decision as a function of the relative costs of the two activities and show that there is direct substitution between them after the fiscal year end due to their sequential nature.Real activities manipulation is a purposeful action to alter reported earnings in a particular direction, which is achieved by changing the timing or structuring of an operation, investment or financing transaction, and which has suboptimal business consequences. The idea that firms engage in real activities manipulation is supported by the survey evidence in Graham et al. (2005).1 They report that 80 percent of surveyed CFOs stated that, in order to deliver earnings, they would decrease research and development (R&D), advertising and maintenance expenditures, while 55 percent said they would postpone a new project, both of which are real activities manipulation.1 In particular, Graham et al. (2005) note that: “The opinion of many of the CFOs is that every companywould/should take actions such of these [real activities manipulation] to deliver earnings, as long as the real sacrifices are not too large and as long as the actions are within GAAP.” Graham et al. further conjecture that CFOs’ greater emphasis on real activities manipulation rather than accrual-based earnings management may be due to their reluctance to admit to accounting-based earnings management in the aftermath of the Enron and Worldcom accounting scandals.Unlike real activities manipulation, which alters the execution of a real transaction taking place during the fiscal year, accrual-based earnings management is achieved by changing the accounting methods or estimates used when presenting a given transaction in the financial statements. For example, changing the depreciation method for fixed assets and the estimate for provision for doubtful accounts can bias reported earnings in a particular direction without changing the underlying transactions.The focus of this study is on how managers trade off real activities manipulation and accrual-based earnings management. This question is important for two reasons. First, as mentioned by Fields et al. (2001), examining only one earnings management technique at a time cannot explain the overall effect of earnings management activities. In particular, if managers use real activities manipulation and accrual-based earnings management as substitutes for each other, examining either type of earnings management activities in isolation cannot lead to definitive conclusions. Second, by studying how managers trade off these two strategies, this study sheds light on the economic implications of accounting choices; that is, whether the costs that managers bear for manipulating accruals affect their decisions about real activities manipulation. As such, the question has implications about whether enhancing SEC scrutiny or reducing accounting flexibility in GAAP, for example, might increase the levels of real activities manipulation engaged in by firms.I start by analyzing the implications for managers’ trade-off decisions due to the different costs and timing of the two earnings management strategies. First, because both are costly activities, firms trade off real activities manipulation versus accrual-based earnings management based on their relative costliness. That is, when one activity is relatively more costly, firms engage in more of the other. Because firms face different costs and constraints for the twoearnings management approaches, they show differing abilities to use the two strategies. Second, real activities manipulation must occur during the fiscal year and is realized by the fiscal year end, after which managers still have the chance to adjust the level of accrual-based earnings management. This timing difference implies that managers would adjust the latter based on the outcome of real activities manipulation. Hence, there is also a direct, substitutive relation between the two: if real activities manipulation turns out to be unexpectedly high (low), managers will decrease (increase) the amount of accrual-based earnings management they carry out.Following prior studies, I examine real activities manipulation through overproduction and cutting discretionary expenditures (Roychowdhury 2006; Cohen et al. 2008; Cohen and Zarowin 2010). I test the hypotheses using a sample of firms that are likely to have managed earnings. As suggested by prior research, earnings management is likely to occur when firms just beat/meet an important earnings benchmark (Burgstahler and Dichev 1997; DeGeorge et al. 1999). Using a sample containing more than 6,500 earnings management suspect firm-years over the period 1987–2008, I show the empirical results that real activities manipulation is constrained by firms’ competitive status in the industry, financial health, scrutiny from institutional investors, and the immediate tax consequences of manipulation. The results also show that accrual-based earnings management is constrained by the presence of high-quality auditors; heightened scrutiny of accounting practice after the passage of the Sarbanes-Oxley Act (SOX); and firms’ accounting flexibility, as determined by their accounting choices in prior periods and the length of their operating cycles. I find significant positive relations between the level of real activities manipulation and the costs associated with accrual-based earnings management, and also between the level of accrual-based earnings management and the costs associated with realactivities manipulation, supporting the hypothesis that managers trade off the two approaches according to their relative costliness. There is a significant and negative relation between the level of accrual-based earnings management and the amount of unexpected real activities manipulation, consistent with the hypothesis that managers “fine-tune” accruals after the fiscal year end based on the realized real activities manipulation. Additional Hausman tests show results consistent with the decision of real activities manipulation preceding the decision of accrual-based earnings management.Two recent studies have examined the trade-off between real activities manipulation and accrual-based earnings management. Cohen et al. (2008) document that, after the passage of SOX, the level of accrual-based earnings management declines, while the level of real activities manipulation increases, consistent with firms switching from the former to the latter as a result of the post-SOX heightened scrutiny of accounting practice. Cohen and Zarowin (2010) show that firms engage in both forms of earnings management in the years of a seasoned equity offering (SEO). They show further that the tendency for SEO firms to use real activities manipulation is positively correlated with the costs of accrual-based earnings management in these firms.2 Compared to prior studies, this study contributes to the earnings management literature by providing a more complete picture of how managers trade off real activities manipulation and accrual-based earnings management. First, it documents the trade-off in a more general setting by using a sample of firms that are likely to have managed earnings to beat/meet various earnings targets. The evidence for the trade-off decisions discussed in this study does not depend on a specific period (such as around the passage of SOX, as in Cohen et al. 2008) or a significant corporate event (such as a SEO, as in Cohen and Zarowin 2010).2 Cohen and Zarowin (2010) do not examine how accrual-based earnings management for SEO firms varies based on the costs of real and accrual earnings management.Second, to my knowledge, mine is the first study to identify a set of costs for real activities manipulation and to examine their impact on both real and accrual earnings management activities. Prior studies (Cohen et al. 2008; Cohen and Zarowin 2010) only examine the costs of accrual-based earnings management. By including the costs of real activities manipulation, this study provides evidence for the trade-off as a function of the relative costs of the two approaches. That is, the level of each earnings management activity decreases with its own costs and increases with the costs of the other. In this way, I show that firms prefer different earnings management strategies in a predictive manner, depending on their operational and accounting environment.Third, I consider the sequential nature of the two earnings management strategies. Most prior studies on multiple accounting and/or economic choices implicitly assume that managers decide on multiple choices simultaneously without considering the sequential decision process as an alternative process (Beatty et al. 1995; Hunt et al. 1996; Gaver and Paterson 1999; Barton 2001; Pincus and Rajgopal 2002; Cohen et al. 2008; Cohen and Zarowin 2010). In contrast, my empirical model explicitly considers the implication of the difference in timing between the two earnings management approaches. Because real activities manipulation has to occur during the fiscal year, but accrual manipulation can occur after the fiscal year end, managers can adjust the extent of the latter based on the realized outcomes of the former. I show that, unlike the trade-off during the fiscal year, which is based on the relative costliness of the two strategies, there is a direct substitution between the two approaches at year end when real activities manipulation is realized. Unexpectedly high (low) real activities manipulation realized is directly offset by a lower (higher) amount of accrual earnings management.Section II reviews relevant prior studies. Section III develops the hypotheses. Section IV describes the research design, measurement of real activities manipulation, accrual-based earnings management and independent variables. Section V reports sample selection and empirical results. Section VI concludes and discusses the implications of my results.II.RELATED LITERATUREThe extensive literature on earnings management largely focuses on accrual-based earnings management (reviewed by Schipper 1989; Healy and Wahlen 1999; Fields et al. 2001). A smaller stream of literature investigates the possibility that managers manipulate real transactions to distort earnings. Many such studies examine managerial discretion over R&D expenditures (Baber et al. 1991; Dechow and Sloan 1991; Bushee 1998; Cheng 2004). Other types of real activities manipulation that have been explored include cutting advertising expenditures (Cohen et al. 2010), stock repurchases (Hribar et al. 2006), sales of profitable assets (Herrmann et al. 2003; Bartov 1993), sales price reductions (Jackson and Wilcox 2000), derivative hedging (Barton 2001; Pincus and Rajgopal 2002), debt-equity swaps (Hand 1989), and securitization (Dechow and Shakespeare 2009).The prevalence of real activities manipulation as an earnings management tool was not well understood until recent years. Graham et al. (2005) survey more than 400 executives and document the widespread use of real activities manipulation. Eighty percent of the CFOs in their survey stated that, in order to meet an earnings target, they would decrease expenditure on R&D, advertising and maintenance, while 55 percent said they would postpone a new project, even if such delay caused a small loss in firm value. Consistent with this survey, Roychowdhury (2006) documents large-sample evidence suggesting that managers avoid reporting annual losses ormissing analyst forecasts by manipulating sales, reducing discretionary expenditures, and overproducing inventory to decrease the cost of goods sold, all of which are deviations from otherwise optimal operational decisions, with the intention of biasing earnings upward.Recent research has started to examine the consequence of real activities manipulation. Gunny (2010) finds that firms that just meet earnings benchmarks by engaging in real activities manipulation have better operating performance in the subsequent three years than do firms that do not engage in real activities manipulation and miss or just meet earnings benchmarks. Bhojraj et al. (2009), on the other hand, show that firms that beat analyst forecasts by using real and accrual earnings management have worse operating performance and stock market performancein the subsequent three years than firms that miss analyst forecasts without earnings management.Most previous research on earnings management examines only one earnings management tool in settings where earnings management is likely to occur (e.g., Healy 1985; Dechow and Sloan 1991; Roychowdhury 2006). However, given the portfolio of earnings management strategies, managers probably use multiple techniques at the same time. A few prior studies (Beatty et al. 1995; Hunt et al. 1996; Gaver and Paterson 1999; Barton 2001; Pincus and Rajgopal 2002; Cohen et al. 2008; Cohen and Zarowin 2010; Badertscher 2011) examine how managers use multiple accounting and operating measures to achieve one or more goals.Beatty et al. (1995) study a sample of 148 commercial banks. They identify two accrual accounts (loan loss provisions and loan charge-offs) and three operating transactions (pension settlement transactions, miscellaneous gains and losses due to asset sales, and issuance of new securities) that these banks can adjust to achieve three goals (optimal primary capital, reported earnings and taxable income levels). The authors construct a simultaneous equation system, in which the banks minimize the sum of the deviations from the three goals and from the optimallevels of the five discretionary accounts.3 They find evidence that some, but not all, of the discretionary accounts (including both accounting choices and operating transactions) are adjusted jointly for some of the objectives identified.Barton (2001) and Pincus and Rajgopal (2002) study how firms manage earning volatility using a sample of Fortune 500, and oil and gas, firms respectively. Both studies use simultaneous equation systems, in which derivative hedging and accrual management are simultaneously determined to manage earnings volatility. Barton (2001) suggests that the two activities are used as substitutes, as evidenced by the negative relation between the two after controlling for the desired level of earnings volatility. Pincus and Rajgopal (2002) find similar negative relation, but only in the fourth quarter.There are two limitations in the approach taken by the above studies. First, in the empirical tests, they assume that the costs of adjusting discretionary accounts are constant across all firms and hence do not generate predictions or incorporate empirical proxies for the costs. In other words, they do not consider that discretion in some accounts is more costly to adjust for some firms. Hence, these studies fail to consider the trade-off among different tools due to their relative costs. Second, they assume all decisions are made simultaneously. If some decisions are made before others, this assumption can lead to misspecification in their equation system.Badertscher (2011) examines overvaluation as an incentive for earnings management. He finds that during the sustained period of overvaluation, managers use accrual earnings management in early years, real activities manipulation in later years, and non-GAAP earnings management as a last resort. He claims that the duration of overvaluation is an important determinant in managers’ choice of earnings management approaches, but he does not model the3Hunt et al. (1996) and Gaver and Paterson (1999) follow Beatty et al. (1995) and construct similar simultaneous equation systems.trade-off between real activities manipulation and accrual-based earnings management based on their relative costliness, nor does his study examine the implication of the sequential nature of the two activities during the year.Two recent studies examine the impact of the costs of accrual-based earnings management on the choice of earnings management strategies. Cohen et al. (2008) show that, on average, accrual-based earnings management declines, but real activities manipulation increases, after the passage of SOX. They focus on one cost of accrual-based earnings management, namely the heightened post-SOX scrutiny of accounting practice, and its impact on the levels of real and accrual earnings management. Using a sample of SEO firms, Cohen and Zarowin (2010) examine several costs of accrual-based earnings management and show that they are positively related to the tendency to use real activities manipulation in the year of a SEO. Neither study examines the costs of real activities manipulation or considers the sequential nature of the two strategies. Hence, they do not show the trade-off decision as a function of the relative costs of the two strategies or the direct substitution between the two after the fiscal year end.III.HYPOTHESES DEVELOPMENTConsistent with prior research on multiple earnings management strategies, I predict that managers use real activities manipulation and accrual-based earnings management as substitutes to achieve the desired earnings targets. Unlike prior research, however, I investigate the differences in the costs and timing of real activities manipulation and accrual-based earnings management, and their implications for managers’ trade-off decisions.Both real activities manipulation and accrual-based earnings management are costly activities. Firms are likely to face different levels of constraints for each strategy, which will leadto varying abilities to use them. A manager’s trade-off decision, therefore, depends on the relative costliness of the two earnings management methods, which is in turn determined by the firm’s operational and accounting environment. That is, given the desired level of earnings, when discretion is more constrained for one earnings management tool, the manager will make more use of the other. This expectation can be expressed as the following hypothesis: H1: Other things being equal, the relative degree of accrual-based earnings management vis-à-vis real activities manipulation depends on the relative costs of each action.Accrual-based earnings management is constrained by scrutiny from outsiders and the available accounting flexibility. For example, a manager might find it harder to convince a high-quality auditor of his/her aggressive accounting estimates than a low-quality auditor. A manager might also feel that accrual-based earnings management is more likely to be detected when regulators heighten scrutiny of firms’ accounting practice. Other than scrutiny from outsiders, accrual-based earnings management is constrained by the flexibility within firms’ accounting systems. Firms that are running out of such flexibility due to, for example, their having made aggressive accounting assumptions in the previous periods, face an increasingly high risk of being detected by auditors and violating GAAP with more accrual-based earnings management. Hence, I formulate the following two subsidiary hypotheses to H1:H1a: Other things being equal, firms facing greater scrutiny from auditors and regulators have a higher level of real activities manipulation.H1b: Other things being equal, firms with lower accounting flexibility have a higher level of real activities manipulation.Real activities manipulation, as a departure from optimal operational decisions, is unlikely to increase firms’ long-term value. Some managers might find it particularly costly because theirfirms face intense competition in the industry. Within an industry, firms are likely to face various levels of competition and, therefore, are under different amounts of pressure when deviating from optimal business strategies. Management research (as reviewed by Woo 1983) shows that market leaders enjoy more competitive advantages than do followers, due to their greater cumulative experience, ability to benefit from economies of scale, bargaining power with suppliers and customers, attention from investors, and influence on their competitors. Therefore, managers in market-leader firms may perceive real activities manipulation as less costly because the erosion to their competitive advantage is relatively small. Hence, I predict the following: H1c: Other things being equal, firms without market-leader status have a higher level of accrual-based earnings management.For a firm in poor financial health, the marginal cost of deviating from optimal business strategies is likely to be high. In this case, managers might perceive real activities manipulation as relatively costly because their primary goal is to improve operations. This view is supported by the survey evidence documented by Graham et al. (2005), who find that CFOs admit that if the company is in a “negative tailspin,” managers’ efforts to survive will dominate their reporting concerns. This reasoning leads to the following subsidiary hypothesis to H1: H1d: Other things being equal, firms with poor financial health have a higher level of accrual-based earnings management.Managers might find it difficult to manipulate real activities when their operation is being monitored closely by institutional investors. Prior studies suggest that institutional investors play a monitoring role in reducing real activities manipulation.4 Bushee (1998) finds that, when4 However, there is also evidence that “transient” institutions, or those with high portfolio turnover and highly diversified portfolio holdings, increase managerial myopic behavior (e.g., Porter 1992; Bushee 1998; Bushee 2001). In this study, I focus on the average effect of institutional ownership on firms’ earnings management activities without looking into the investment horizon of different institutions.institutional ownership is high, firms are less likely to cut R&D expenditure to avoid a decline in earnings. Roychowdhury (2006) also finds a negative relation between institutional ownership and real activities manipulation to avoid losses. Unlike accrual-based earnings management, real activities manipulation has real economic consequences for firms’ long-term value. Institutional investors, being more sophisticated and informed than other investors, are likely to have a better understanding of the long-term implication of firms’ operating decisions, leading to more effort to monitor and curtail real activities manipulation than accrual-based earnings management, as predicted in the following subsidiary hypothesis:H1e: Other things being equal, firms with higher institutional ownership have a higher level of accrual-based earnings management.Real activities manipulation is also costly due to tax incentives. It might be subject to a higher level of book-tax conformity than accrual-based earnings management, because the former has a direct cash flow effect in the current period, while the latter does not. Specifically, when firms increase book income by cutting discretionary expenditures or by overproducing inventory, they also increase taxable income and incur higher tax costs in the current period.5 In contrast, management of many accrual accounts increases book income without current-period tax consequences. For example, increasing the estimated useful lives of long-term assets, decreasing write-downs for impaired assets, recognizing unearned revenue aggressively, and decreasing bad debt expense can all increase book income without necessarily increasing current-year taxable income. Therefore, for firms with higher marginal tax rates, the net present value of the tax costs associated with real activities manipulation is likely to be higher than that of accrual-based earnings management, leading to the following prediction:5Other types of real activities manipulation, such as increasing sales by discounts and price cuts, and sale of long-term assets, are also book-tax conforming earnings management.H1f: Other things being equal, firms with higher marginal tax rates have a higher level of accrual-based earnings management.Another difference between the two earnings management strategies that will influence managers’ trade-off decisions is their different timing. H1 predicts that the two earnings management strategies are jointly determined and the trade-off depends on their relative costliness. However, a joint decision does not imply a simultaneous decision. Because real activities manipulation changes the timing and/or structuring of business transactions, such decisions and activities have to take place during the fiscal year. Shortly after the year end, the outcome of the real activities manipulation is revealed, and managers can no longer engage in it. Note that, when a manager alters real business decisions to manage earnings, s/he does not have perfect control over the exact amount of the real activities manipulation attained. For example, a pharmaceutical company cuts current-period R&D expenditure by postponing or cancelling development of a certain drug. This real decision can include a hiring freeze and shutting down the research site. The manager may be able to make a rough estimate of the dollar amount of the impact on R&D expenditure from these decisions, but s/he does not have perfect information about it.6 Therefore, managers face uncertainty when they execute real activities manipulation. After the fiscal year end, the realized amount of the real activities manipulation could be higher or lower than the amount originally anticipated.On the other hand, after the fiscal year end but before the earnings announcement date, managers can still adjust the accruals by changing the accounting estimates or methods. In addition, unlike real activities manipulation, which distorts earnings by executing transactions6 Another example is reducing travelling expenditures by requiring employees to fly economy class instead of allowing them to fly business class. This change could be suboptimal because employees might reduce the number of visit they make to important clients or because employees’ morale might be adversely impacted, leading to greater turnover. The manager cannot know for certain the exact amount of SG&A being cut, as s/he does not know the number of business trips taken by employees during the year.。

BTBU_4.2 Audit Partner Specialization and Audit Fees_ Some Evidence from Sweden

Audit Partner Specialization and Audit Fees:Some Evidencefrom Sweden*MIKKO ZERNI,University of Vaasa1.IntroductionThe purpose of this study is to examine auditor specialization and pricing at the individual partner level.1In the aftermath of major accounting scandals such as ComROAD AG, Enron,Parmalat,Tyco,Waste Management,and WorldCom,regulators and investment communities have been seeking to restore investor conﬁdence in the capital markets.The response worldwide has been increases in regulation,and in these reforms accounting and auditing have been identiﬁed as priority areas to‘‘ﬁx’’.For instance,with the aim of increasing audit market transparency,the amended European Union’s(EU’s)8th Directive requires the disclosure of engagement partner identity.2Currently,the Public Company Accounting Oversight Board(PCAOB)in the United States is considering a similar requirement.On October6,2008,the U.S.Treasury’s Advisory Committee on the Audit-ing Profession(ACAP)issued itsﬁnal report,which recommends,among other things,‘‘urging the PCAOB to undertake a standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report’’(ACAP Report,October6,2008, at VII:19).3According to the ACAP’s recommendation,the requirement for the engage-ment partner to sign the audit report could improve audit quality in two ways:‘‘First,it might increase the engagement partner’s sense of accountability toﬁnancial statement *Accepted by Ferdinand A.Gul.An earlier draft of this paper was entitled‘‘Audit Partner Specialization, Audit Fees,and Auditor-Client Alignments’’.I appreciate the comments received from Ferdinand A.Gul (the associate editor),two anonymous reviewers,Pekka Alatalo(KPMG Finland),Jean C.Bedard(discus-sant),Andy Conlin,Ann Gaeremynck,Kaarina Halonen(PWC Finland),Seppo Ika heimo,Henry Jarva, Juha Joenva a ra,Juha-Pekka Kallunki,Eija Kangas(KPMG Finland),Robert Knechel,Anna-Maija Lantto, Christophe Van Linden,Lasse Niemi,Henrik Nilsson,Mervi Niskanen,Jukka Perttunen,Peter Pope, Markku Rahiala,Veijo Riistama(PWC Finland),Petri Sahlstro m,Stefan Sundgren,Risto Tuppurainen, Soﬁe Vandenbogaerde,Ann Vanstraelen,Markku Vieru,Marleen Willekens,and Erik A stro m(Ernst& Young Sweden).I would also like to thank the participants at the24th Contemporary Accounting Research Conference in Montreal Canada(2009),AFI seminar at Katholieke Universiteit Leuven(2011)and the AFAR workshop in Vaasa(2008)for their comments.I wish to thank Tuomas Anttila,Marja Kauppinen, and Harri Lempola for their excellent research assistance.Financial support received from the NASDAQ OMX Nordic Foundation,the Finnish Foundation for the Advancement of Securities Markets,the Founda-tion for Economic Education,the Ostrobothnia Cultural Foundation,and the Finnish Cultural Foundation is gratefully acknowledged.This research is part of research projects by the Academy of Finland(Grant Numbers140000and126630).All remaining errors are mine alone.1.The terms‘‘auditor specialization’’and‘‘auditor expertise’’,as well as the terms‘‘engagement partner’’,‘‘auditor’’,and‘‘audit partner in charge’’are used interchangeably in this study.2.The new EU directive obligesﬁrms to disclose the identities of individual auditor(s)responsible for theengagement.Speciﬁcally,Article28of the directive2006⁄43⁄EC states:‘‘Where an auditﬁrm carries out the statutory audit,the audit report shall be signed by at least the statutory auditor(s)carrying out the statutory audit on behalf of the auditﬁrm.’’3.The comment period on the concept release ended on September11,2009,and according to the PCAOB’sOfﬁce of the Chief Auditor’s standard-setting agenda,‘‘the Board’s consideration of next steps is pending further action’’(PCAOB,October2010,p.7).Available at:/News/Events/Documents/ 10132010_SAGMeeting/OCA_standards-setting_agenda.pdf.Contemporary Accounting Research Vol.29No.1(Spring2012)pp.312–340ÓCAAAdoi:10.1111/j.1911-3846.2011.01098.xAudit Partner Specialization and Audit Fees313 users,which could lead him or her to exercise greater care in performing the audit. Second,it would increase transparency about who is responsible for performing the audit, which could provide useful information to investors and,in turn,provide an additional incentive toﬁrms to improve the quality of all of their engagement partners.’’Some have compared the initiative to theﬁnancial statement certiﬁcation requirement by top manage-ment stipulated in Section302of the Sarbanes-Oxley Act,arguing that it should help focus engagement partners on their existing responsibilities(see,e.g.,Carcello,Bedard, and Hermanson2009:79).4Changes in legislation and initiatives requiring the disclosure of the identities of individ-ual auditors carrying out audits implicitly acknowledge that a public company audit involves a substantial amount of work by highly skilled individual practitioners exercising their own professional judgment.It is the lead engagement partners working in the city level audit ofﬁces who play a central role in planning and implementing the audit and ulti-mately in determining the appropriate type of audit report to be issued to the client(e.g., Ferguson,Francis,and Stokes2003).Consequently,the engagement partner may play an essential role in the(perceived)audit quality beyond auditﬁrm size and(industry)special-ization at the national and ofﬁce level and should hence not be ignored.The level of audit effort and fees depends on the client’s agency-driven demand for external auditing and on supply-side factors,such as auditﬁrm size,auditor expertise and auditor-perceived risk factors(e.g.,DeFond1992;O’Keefe,Simunic,and Stein1994; Gul and Tsui1998;Bell,Landsman,and Shackelford2001;Johnstone and Bedard2001, 2003;Gul and Goodwin2010;Causholli,De Martinis,Hay,and Knechel2011).From the supply-side perspective,auditors are expected to respond to the higher probability of any irregularities or accounting misstatements by increasing audit effort and charging higher fees.For instance,Gul and Tsui(1998)adopted a supply-side perspective and found that higher inherent risks associated with free cashﬂows are associated with higher audit effort and higher consequent fees.From the demand-side perspective,the appointment of a higher-quality auditor can serve as a signal of an enhanced quality of ﬁnancial disclosure,which will potentially lead to greater value for the audit client by reducing some agency costs.Firm insiders,especially those in the heart of monitoring function(e.g.,independent directors on the boards and audit committees),may be willing to increase audit coverage to create a positive perception about theﬁnancial reporting quality.The positive perception will possibly facilitate theﬁrm to attract investments and fund proﬁtable projects and allowﬁrm insiders to protect their reputation capital,avoid legal liability,and promote shareholder interests.Consistent with the demand-side per-spective,several studies report evidence suggesting that outside directors who act dili-gently demand high quality audits and pay higher audit fees(e.g.,Carcello,Hermansson, Neal,and Riley2002;Abbott,Parker,Peters,and Raghunandan2003;Knechel and Willekens2006).Auditing is generally viewed as a differentiated service with substantial variation observed in audit(effort)fees,even after controlling for observable factors such asﬁrm size and complexity.This differentiation allows clients some choice over the level of audit scrutiny even within audits conducted by the same(tier)auditﬁrms.An important means 4.Recent empirical evidence supports the view that the Sarbanes-Oxley Act Section302chief executive ofﬁ-cer(CEO)and chiefﬁnancial ofﬁcer(CFO)certiﬁcation requirement had a positive effect onﬁnancial reporting quality.For instance,Cohen,Krishnamoorthy,and Wright(2010)report that68percent of practicing auditors interviewed believe that the certiﬁcation requirement has had a positive effect on the integrity ofﬁnancial reports.Moreover,to the extent that the disclosure of engagement partner identity will increase accountability,it may thereby improve audit decisions and judgments.In particular,some studies in the auditing context report evidence indicating that accountability reduces information process-ing biases,and increases consensus and self-insight(e.g.,Johnson and Kaplan1991;Kennedy1993).CAR Vol.29No.1(Spring2012)314Contemporary Accounting Researchof audit product differentiation is through investments in specialization(Simunic and Stein1987;Liu and Simunic2005).By specializing in certain industries,certain size groups,or companies with similar risk proﬁles,individual auditors may be able to differ-entiate their product from those of nonspecialist audit partners(Simunic and Stein1987; Liu and Simunic2005).The Swedish Code for Corporate Governance,for instance, implicitly recognizes auditor specialization in large public companies as one relevant piece of information when assessing the quality of external auditing.5Speciﬁcally,the Code rec-ommends that information on‘‘the audit services performed by the auditor or the auditor in charge in other large companies...and other information that may be important to shareholders in assessing the competence and independence of the auditor,or auditor in charge must be disclosed in a corporate governance report on company’s homepage’’(Ori-ginal Code Sections2.3.2and2.3.3).To justify their presence in the audit market and the potential fee premiums attached to their services,the client must perceive some beneﬁt in hiring a specialist auditor.The premium may,for instance,be attributed to the signal value of hiring a specialist auditor or to the superior advisory or other services provided by that auditor(Titman and Trueman1986).Given that a demand exists for special-ist auditors,that demand gives those auditors a greater‘‘power’’in pricing relative to nonspecialists.This paper is motivated by the lack of archival research examining issues related to engagement partner specialization.In the present study,the use of Swedish data makes it possible to construct individual audit partner client portfolios because each audit report discloses the name of the audit engagement partner.Thus,information on the identity of the audit partner in charge is observable to users ofﬁnancial statements and thereby potentially affects market-assessed perception of ex ante audit rma-tion on the sizes and compositions of the Big4audit partner-speciﬁc client portfolios provides an interesting opportunity to contribute to a more thorough understanding of auditor specialization.More speciﬁcally,it is possible to examine whether the perceived audit quality is affected not only by the brand name of theﬁrm,but also by the charac-teristics and reputation of the engagement partner.In essence,if auditing expertise were wholly transferable and therefore uniformly distributed across audit partners within the ﬁrm,any clientﬁrm would be indifferent to having any audit partner within the Big4 auditors(within a particular Big4auditﬁrm⁄ofﬁce)to conduct the audit.Additionally, there would be no a priori reason why clients would be willing to pay any audit partner related premiums.The empiricalﬁndings indicate systematic differences between audit partner clienteles, suggesting audit partner specialization in different industries and in different size groups. Thisﬁnding is consistent with Liu and Simunic2005,who argue that auditor specializa-tion could be a competitive response by either an auditﬁrm or an individual audit part-ner to induce efﬁcient audits for different types of clients,thereby gaining a limited monopoly power(and earning rents)over the clients in which they specialize.Further-more,consistent with the view that there are returns on investing in specialization,analy-ses of audit fees indicate that both audit partner industry specialization and specialization in large public companies are recognized and valued byﬁnancial statement users and⁄or by corporate insiders,resulting in higher fees within these engagements.According to the empirical analyses,the highest fees are earned by engagement partners who are both 5.The Swedish Corporate Governance Board is responsible for promoting and developing the Code.On July1,2005,the Stockholm Stock Exchange began applying the Swedish Code of Corporate Governance.The Code applies to all Swedish companies listed at the Stockholm Stock Exchange and foreign companies that are listed at the same exchange and whose market capitalization exceeds SEK3billion.For more information,see http://www.corporategovernanceboard.se/.CAR Vol.29No.1(Spring2012)Audit Partner Specialization and Audit Fees315 industry and publicﬁrm specialists.The results may be interpreted to mean that the appointment of a specialist engagement partner is associated with higher(perceived)audit quality,thus justifying the fee premium.6Collectively,theﬁndings of this study support the view that clientﬁrms infer audit quality at least to some extent from the characteris-tics of the individual audit partner in charge.The remainder of the paper is organized as follows.Section2reviews the relevant lit-erature and describes some relevant features of the Swedish audit market.Section3pre-sents the hypothesis,and section4describes the data.Section5describes the methodology used,section6presents the empirical results,and section7concludes the study.2.Literature reviewNational versus local view of the auditor–client relationshipPrior audit research literature is dominated byﬁrm-wide analyses treating the whole accountingﬁrm as the focal point and investigating whether and how auditﬁrm char-acteristics,such as size and industry specialization at the nationalﬁrm level,affect the auditor–client relationship(e.g.,Simunic and Stein1987;Francis and Wilson1988;Bec-ker,DeFond,Jiambalvo,and Subramanyam1998;Francis and Krishnan1999).All these studies implicitly assume that through standardizedﬁrm-wide policies and knowl-edge sharing(e.g.,through training materials,industry-speciﬁc databases,internal benchmarks for best practices,audit system programs,and internal consultative prac-tices),all audits across practice ofﬁces and audit partners within an auditﬁrm are uniform.7However,in practice,it is the individual audit partners from city-level practice ofﬁces who are creating and taking care of the relationship,contracting with the client,adminis-tering the audit engagement,directing the audit effort,interpreting the audit evidence,and ﬁnally issuing the appropriate audit report(Ferguson et al.2003).Because of this decen-tralized organizational structure and because individual audit partners and their character-istics vary across engagements,a research approach allowing each individual partner to be a unique and relevant unit of analysis might be a more reasonable approach than assum-ing that all audits within an auditﬁrm are uniform.Consistent with this intuition,a growing number of recent audit studies have changed the direction from aﬁrm-wide to an ofﬁce-level view of auditﬁrms(e.g.,Reynolds and Francis2000;Ferguson et al.2003;Francis,Reichelt,and Wang2005;Francis and Yu 2009;Reichelt and Wang2010;Choi,Kim,Kim,and Zang,2010).The local stream of audit literature acknowledges the likelihood that part of an auditor’s expertise is uniquely held by individual professionals through their personal knowledge of clients and cannot be 6.From the risk-based audit supply view,an alternative explanation for the observed specialist audit partnerfee premium is that the clients of specialist audit partners are systematically riskier than the clients of non-specialists in dimensions other than those already controlled for in the empirical fee model(or in theﬁrst-stage selection model of the Heckman two-stage approach).Despite using a two-stage Heckman1978pro-cedure and including several audit risk-related control variables in the audit fee model,the empiricalﬁnd-ings remain susceptible to the concern that some of the omitted risk factors recognized and priced by the specialist audit partners that simultaneously determine the alignment of audit partners with engagements would explain the outcome.7.Examples of the information technology systems used in knowledge sharing include KPMG’s KWorld TM,PriceWaterhouseCoopers’s TeamAsset TM and KnowledgeCurve TM,and Ernst&Young’s Knowledge-Web TM.See Vera-Munoz,Ho,and Chow2006for factors affecting knowledge sharing within interna-tional accountingﬁrms,and Banker,Chang,and Kao2002for a detailed description of an international accountingﬁrm’s implementation of audit software and groupware for knowledge sharing.CAR Vol.29No.1(Spring2012)316Contemporary Accounting Researchreadily captured and distributed by theﬁrm to other ofﬁces and clients(e.g.,Ferguson et al.2003).8The results of the empirical studies adopting a local perspective tend to provide a bet-ter understanding of the operations of a Big4auditﬁrm than do studies taking a national perspective.For instance,there is evidence that auditors’reputation for industry expertise is neither strictly national nor strictly local in character.Auditors who are both city and industry leaders are reported to earn fee premiums both in Australia and in the United States,suggesting that there is both a national and local ofﬁce reputation effect in the pric-ing of industry expertise(Ferguson et al.2003;Francis et al.2005).Moreover,both these studiesﬁnd thatﬁrm-level industry specialists alone do not earn statistically signiﬁcant premiums.In another study,Reichelt and Wang(2010)use U.S.data and three proxies for audit quality(abnormal accruals,clientﬁrms’likelihood of meeting or beating ana-lysts’earnings forecasts by one penny per share,and the propensity to issue a going con-cern audit opinion)andﬁnd evidence consistent with the view that audit quality is higher when the auditor is both a national and city-speciﬁc industry expert.Recent and concurrent studies have pushed the local analysis still one step further to the engagement partner level.A growing number of studies use engagement partner data (mainly from Australia and Taiwan)and examine issues such as the relationship between engagement partner tenure and audit quality,producing mixedﬁndings(e.g.,Carey and Simnett2006;Chen,Lin,and Lin2008;Chi,Huang,Liao,and Xie2009).In a recent study,Chin and Chi(2009)use a sample of listedﬁrms in Taiwan to investigate the associ-ation between auditor industry expertise and restatement likelihood at the partner level and at the auditﬁrm level simultaneously.Their evidence suggests that the differences in restatement likelihood due to industry expertise is mainly attributable to the partner-level experts rather than to theﬁrm-level experts.In summary,the recent empirical evidence suggests that auditor expertise has a strong local dimension.The central conceptual question in all the national versus local studies relates to the degree to which there is a transfer of expertise from ofﬁce-based accounting professionals to other auditors and ofﬁces within theﬁrm(Ferguson et al.2003;Francis2004).There are several factors that may deter the transfer of expertise within organizations,including audit ﬁrms(see,e.g.,Szulanski1994,2000;Nonaka and Takeuchi1995).With respect to audit ﬁrms,Vera-Munoz et al.(2006)enumerate several reasons why it is difﬁcult for partners to share knowledge with other partners.First,a considerable amount of knowledge in audit ﬁrms can be difﬁcult to document or transfer.9Second,even if an auditﬁrm manages to 8.As noted by Francis2004,another reason for this development is that Big4market shares continue toexpand globally,leading to low power in research designs of studies comparing large and small auditors because there is such low variance in the experimental variable(i.e.,most observations are audited by large Big4auditors).For instance,according to a recent Government Accountability Ofﬁce(GAO) report,in2006the largest fourﬁrms collected94percent of all audit fees paid by public companies.More-over,according to the same report,82percent of the Fortune1000companies saw their choice of auditors as limited to three or fewerﬁrms,and about60percent viewed competition in their audit market as insuf-ﬁcient(GAO2008).9.According to Polanyi1966,knowledge comes in two types:explicit and tacit.The former is amenable tocodiﬁcation,while the latter is anchored in individual personal beliefs,experiences,and values.For exam-ple,knowledge of generally accepted accounting principles(GAAP)with regard to fair value requirements is explicit knowledge,while an auditor’s insights as to how a client’s management develops fair value esti-mates and whether those estimates conform to GAAP represents tacit knowledge(Vera-Munoz et al.2006).Tacit knowledge is subconsciously understood and applied and is therefore not easily articulated (Polanyi1966).Prior studies further show that most of the knowledge in any organization,including an auditﬁrm,is tacit knowledge(Bonner2000;Knechel2000).Consequently,because differences in knowl-edge between individual auditors within aﬁrm lie primarily in their respective tacit knowledge,which is not easily transferred,it is unlikely thatﬁrm-level practices completely smooth out the differences in the levels of individual audit partner expertise.CAR Vol.29No.1(Spring2012)Audit Partner Specialization and Audit Fees317 collect extensive databases and otherﬁrm-wide knowledge,individual auditors still need to use their own judgment in selecting and applying relevant pieces of information given the task at hand.Third,knowledge-sharing through information technology–based expert knowledge systems is not automatically embraced by everyone.Finally,evaluation appre-hension,performance-based compensation schemes and individual auditors’pursuit of per-sonal beneﬁts and power may deter auditors from sharing what they know.In essence, holding on to information that other peers do not have may ceteris paribus offer competi-tive advantage against those peers,when auditors,like other rational players in the econ-omy,attempt to maximize their own(economic)interests.Collectively,factors identiﬁed above may partly explain the tendency of local audit studies to provide a better understand-ing of the auditor-client relationship thanﬁrm-wide analyses.Factors affecting expertiseThe Merriam-Webster dictionary deﬁnes an‘‘expert’’as having,involving,or displaying a special skill or knowledge derived from training or experience.The psychological literature on expertise has reported two importantﬁndings relevant to the present study.First, domain-speciﬁc knowledge is the essential determinant of expertise.Second,expert knowl-edge is gained through many years of on-the-job experience(e.g.,Chi,Glaser,and Rees 1982;Glaser and Chi1988;Glaser and Bassok1989;Lapre,Mukkerjee,and Van Was-senhove2000).In other words,intensive practice and the repetition of similar tasks are required to build expertise.When applied to auditing,theseﬁndings suggest that having serviced many similar clients in the past may help auditors to develop a specialized knowl-edge of what these clients do and the challenges and issues they face,thereby creating in-depth knowledge of speciﬁc types of clients,leading to higher-quality audits and higher fees in these engagements.Consequently,in the present study,the terms‘‘auditor special-ization’’and‘‘auditor expertise’’are used to refer to the extent of auditors’prior audit experience with similar clients,for instance,clientﬁrms belonging to the same industry or size group.In other words,it is assumed that specialization is needed to gain deep exper-tise.By specializing in certain industries,certain size groups,or companies with similar risk proﬁles,individual auditors may be able to develop and supply the differentiated ser-vice that clients demand and that competitorsﬁnd difﬁcult to duplicate(Simunic and Stein 1987;Liu and Simunic2005).Moreover,auditors will only develop a specialist reputation if this increases the credibility ofﬁnancial reporting and attracts clients.Auditor specialization and audit qualityFor a long time,standard-setters,quasi-regulatory bodies,and empirical audit research have suggested that differences in the level of auditor industry expertise may be one source of variation in audit quality(Hogan and Jeter1999;Gramling and Stone2001;GAO 2008).This body of literature assumes that audit issues are nested within an industry and that accountingﬁrms or individual auditors with many clients within a particular industry have more opportunities to acquire the kind of profound industry knowledge that leads to industry expertise.It is also argued that the heavy investments of industry specialist audi-tors in technologies,physical facilities,personnel,and organizational control systems pro-vide them with both incentives and abilities that make them more likely than nonspecialist auditors to detect and report any irregularities or misrepresentations in clientﬁrms’accounts(Simunic and Stein1987).Prior archival studies tend to document a positive association between auditors’indus-try expertise and the quality ofﬁnancial reporting(e.g.,Carcello and Nagy2002,2004; Balsam,Krishnan,and Yang2003;Krishnan2003,2005;Gul,Fung,and Jaggi2009).Spe-ciﬁcally,industry specialist auditors have been found to be less likely to be associated with Securities and Exchange Commission enforcement actions(Carcello and Nagy,2004).CAR Vol.29No.1(Spring2012)318Contemporary Accounting ResearchTheir clients are also reported to have a lower probability ofﬁnancial fraud(Carcello and Nagy2004,2004),smaller amounts of abnormal accruals,and higher earnings response coefﬁcients(Balsam et al.2003;Krishnan2003,2005).In addition,a recent study by Gul et al.2009reports evidence suggesting that auditor industry specialization is likely to reduce the association between shorter auditor tenure and lower earnings quality.Behavioral research using experimental approaches has examined industry specializa-tion at the individual auditor level.The results of these studies suggest that an individual auditor’s expertise is tied not only to each individual professional and his or her deep per-sonal knowledge of clients but also to the innate abilities of each individual(e.g.,Bonner and Lewis1990;Libby and Tan1994;Owhoso,Messier,and Lynch2002).Overall,the results of studies on auditor specialization suggest that industry specialist auditors deliver higher-quality audits than do nonspecialists and that this difference in quality is also rec-ognized by the audit market.Even though the auditor specialization literature has focused almost entirely on indus-try specialization,it is plausible that there are also other types of auditor specialization besides industry specialization.Accordingly,an investigation of the(Swedish)homepages of the Big4ﬁrms reveals that each of theﬁrms has structured their national practices along both industry lines and client size.All have at least two business lines based on client size:small and medium-sized companies and large public⁄international companies. All fourﬁrms also market a wider variety of specialized expertise,such as specialization in owner-manager companies,family businesses,public sector organizations,and nonproﬁt organizations.Moreover,as noted already,the Swedish Code for Corporate Governance implicitly recognizes auditor specialization in working with different size groups by recom-mending the disclosure of‘‘the audit services performed by the auditor or the auditor in charge in other large companies’’,viewing this as a relevant piece of information for users ofﬁnancial statements.Performing audits of large,complex high-proﬁle clients is likely to require auditor expertise widely different from that required for audits of smaller and simpler closely held clients.A public listing is an important part of auditor business risk(Johnstone and Bedard2003).Because companies listed on a stock exchange receive more media attention and therefore pose a higher litigation and reputational risk,they may require a specialist auditor(Johnstone and Bedard2003).Another clear distinction between audits of public and private companies relate toﬁnancial reporting standards.10In Swe-den,as in all EU member countries,publicly listed companies are required to follow IFRS standards in theirﬁnancial reporting.Whereas Swedish private companies are also allowed to follow IFRS standards in their consolidatedﬁnancial statements,they tend to follow national standards(Bokfo ringsna mndens Anvisningar),which include several signiﬁcant simpliﬁcations compared to IFRS.Accordingly,in the present study,com-pany size and listing status in particular is used as a proxy for client complexity and risk proﬁle.The aforementioned differences between audits of public and private companies make it more likely that client companies will value auditor specialization in particular size groups(i.e.,public versus privateﬁrms).They may also suggest that specialization in a certain size group will overlap somewhat with industry specialization.It appears intuitively more valuable for publicly listed client companies seeking a higher level of audit assurance to hire an engagement partner with relevant industry experience on other large companies with similarﬁnancial reporting requirements,rather than hire an engagement partner with industry experience only on smaller private companies.This potential overlap is further addressed in the empirical results section below.10.I wish to thank an anonymous reviewer for making this point.CAR Vol.29No.1(Spring2012)。

(2000). ‘Investment-cash flow sensitivities are useful. A comment on Kaplan and Zingales’

INVESTMENT-CASH FLOW SENSITIVITIES ARE USEFUL:A COMMENT ON KAPLAN AND ZINGALES*S TEVEN M.F AZZARIR.G LENN H UBBARDB RUCE C.P ETERSENpaper in this Journal by Kaplan and Zingales reexamines a subset of ﬁrms ofFazzari,Hubbard,and Petersen and criticizes the usefulness of investment-cash ﬂow sensitivities for detecting ﬁnancing constraints.We show that the Kaplan and Zingales theoretical model fails to capture the approach employed in the literature and thus does not provide an effective critique.Moreover,we describe why their empirical classiﬁcation system is ﬂawed in identifying both whether ﬁrms are constrained and the relative degree of constraints across ﬁrm groups.We conclude that their results do not support their conclusions about the usefulness of investment-cash ﬂow sensitivities.In a recent paper in this Journal Kaplan and Zingales [1997,hereinafter KZ]argue that investment-cash ﬂow sensitivities do not provide useful evidence about the presence of ﬁnancing constraints.Because KZ use a subset of the same ﬁrms and the same regressions as Fazzari,Hubbard,and Petersen [1988,hereinafter FHP]and claim [page 176]that FHP ‘‘can legitimately be considered the parent of all papers in this literature,’’it is appropriate that we respond.Based on a simple theoretical model,KZ reach the provocative conclusion [page 211]that ‘‘the invest-ment-cash ﬂow sensitivity criterion as a measure of ﬁnancial constraints is not well-grounded in theory.’’In Section I we show that the KZ model does not capture the theoretical approach employed in FHP and many subsequent studies.Most of the KZ paper attempts to show that empirical investment-cash ﬂow sensitivities do not increase monotonically with the degree of ﬁnancing constraints within the 49low-dividend ﬁrms from the FHP sample.In Section II we explain why the KZ classiﬁcation of the degree of constraints is ﬂawed in identifying both whether or not ﬁrms are constrained (absolute constraints)as well as the relative degree of constraints across ﬁrms.As a argue in Section III that there is no expected ex ante for the *WethankMichaelAthey,Charles Calomiris,Robert Carpenter,RobertChirinko,Mark Gertler,Simon Gilchrist,Kevin Hassett,Charles Himmelberg,Anil Kashyap,Ronald King,Wende Reeser,Joachim Winter,and two referees,one of the editors (Andrei Shleifer),and participants in seminars at the London Schoolof Economics and the NBER Summer Institute Conference on Corporate Finance for comments and suggestions.௠2000by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.The Quarterly Journal of Economics,May 2000695 at Glasgow University Library on January 20, 2012/Downloaded frominvestment-cash ﬂow sensitivities across the KZ categories,mak-ing their empirical results uninformative about the usefulness of investment-cash ﬂow sensitivities.1I.T HE KZ M ODEL AND T ESTS OF F INANCING C ONSTRAINTSThe one-period KZ model consists of a return on investment F (I ),internal ﬁnancing (W )with constant opportunity cost,external ﬁnancing (E ),and a premium for external funds C (E ,k ),where k measures the cost wedge between internal and external funds.KZ show that the investment-cash ﬂowsensitivity is(1)dI dW ϭC 11C 11ϪF 11,where C 11is the slope of the supply curve for external ﬁnance and F 11is of the investment demand curve.KZ focus on ﬁrm heterogeneity in dI /dW as measured by the level of W .To analyze dI /dW at different levels of W they compute(2)d 2I dW 2ϭ3F 111F 11ϪC 111C 114F 112C 112(C 11ϪF 11)3.KZ note that d 2I /dW 2is negative only if the term in brackets is negative.They then point out that the bracketed term could be positive if F 111Ͼ0or C 111Ͻ0.This leads KZ to conclude that the theoretical foundation of previous research is weak because dI /dW may not fall as the degree of ﬁnancing constraints declines (with larger W ).Before we assess this conclusion,it is helpful to consider the intuition (which does not appear in KZ)behind why d 2may be positive.In Figure I investment is on the horizontal F 1is investment demand,W L or W H indicates the quantity ﬁnancing (with constant marginal cost as indicated by the horizon-tal line segment),and C 1is the supply of external funds.In the left panel of Figure I,F 111ϭ0and C 111Ͻ0(i.e.,linear demand and concave supply).Investment is more sensitive to small internal ﬁnance ﬂuctuations (⌬W )at high internal ﬁnance (W H )than at low internal ﬁnance (W L )because a ﬁrm at W H uses less external 1.Extensive empirical research since FHP (surveyed by Hubbard [1998])also addresses many of the issues raised in KZ.QUARTERLY JOURNAL OF ECONOMICS696 at Glasgow University Library on January 20, 2012/Downloaded fromﬁnancing,and thereforethe concavity of supply causes its C 11to be larger (see equation (1)).Alternatively,consider F111Ͼ0and C 111ϭ0(i.e.,convex demand and linear supply)as in the right panel of Figure I.Again,investment is more sensitive to W at W H than at W L because investment demand is more sensitive to the cost of capital as W rises.This focus in KZ on d 2I /dW 2does not provide an effective critique of the literature (including the FHP theoretical approach)because most studies do not use the level of W to classify ﬁrms.2Instead,FHP and much of the literature classify ﬁrms according to a priori criteria designed to give large differences in the slope of the external ﬁnancing schedule,C 11,across groups.The obvious testable implication of this approach,using equation (1),is that constrained ﬁrms with a large C 11should have a larger dI /dW than (relatively)unconstrained ﬁrms with a small (or zero)C 11,other things equal.3The necessary condition for dI /dW to be larger for constrained ﬁrms is(3)C 11Constrained /C 11Unconstrained ϾF 11Constrained /F 11Unconstrained .2.In fact,KZ never reference any speciﬁc study,including FHP ,to demon-strate the relevanceofd 2I /dW 2.3.To appreciate the intuition graphically,consider the effect of a small changein W on two ﬁrms with linear demand curves.If the ‘‘constrained’’ﬁrmfacesrelatively steepand the ‘‘unconstrained’’ﬁrm relatively ﬂat supply,the result isobvious.KZ implicitly assume away this possibility by positing that all ﬁrms face the same C 11for a given level of E . at Glasgow University Library on January 20, 2012/Downloaded fromWhile F 11may differ across ﬁrms,we can think of no reasons why F 11Constrainedshould be systematically greater thanF 11Unconstrained ,and KZ provide no reasons.Thus,as long as researchers separateﬁrms by a priori criteria in C 11Constrained ϾC 11Unconstrained inthe relevant range,the of dI /dW across ﬁrm groupshas a solid theoretical We also point out that as C 11Unconstrained approaches zero,as we argue below is the case in many studies,(3)almost certainly holds.In addition,if (3)holds,the issues that KZ raise about curvature and nonlinearity are not likely to be relevant.4The only remaining question is whether previous research has effectively classiﬁed ﬁrms in ways that generate large differ-ences in C 11.Consider the model and discussion in FHP [pages 146–157and Appendix A].In the supply of funds schedule in FHP Figure I,C 11equals zero for internal ﬁnancing (as in KZ)and C 11is greater than zero for external ﬁnancing.One group of ﬁrms faces C 11of zero at the margin because investment demand is less than internal ﬁnancing.In contrast,constrained ﬁrms exhaust inter-nal funds and ﬁnance marginal investment with external funds,and thus face a positive C 11.Operationally,as implied by the model,unconstrained ﬁrms are those with large dividend payouts,and constrained ﬁrms are those with low or zero dividends.Since FHP ,many other researchers have devised different approaches for separating ﬁrms into groups with low and high C 11.5A common separating criterion is access to public debt.Calomiris,Himmelberg,and Wachtel [1995]report that ﬁrms with debt ratings are very different from ﬁrms without rated debt.Firms that issue public debt,especially commercial paper,are far larger on average,have much lower volatility of sales and income,and therefore pose relatively little,possibly negligible,default risk.The case can be made that ﬁrms with commercial paper or high bond ratings face a C 11close to zero.Almost surely,ﬁrms that issue public debt tend to have a substantially lower C 11than those 4.KZ also mention the possibility of ‘‘nonmonotonicity’’with the wedge k as a proxy for the degree of ﬁnancing constraints.Thisapproach is not relevant to theFHP model,discussed in the next paragraph,because high-dividend ﬁrms,intheory,face no wedge at the margin.In general,if researchers effectively split theirsamples withcriteria that generate large differences in k that lead to large differences in C 11,the condition in equation (3)is likely to be satisﬁed.5.See Calomiris,Himmelberg,and Wachtel [1995];Gilchrist and Himmel-berg [1995,1998];Kashyap,Lamont,and Stein [1994];and Whited [1992].Hubbard [1998]provides many other references.Hoshi,Kashyap,and Scharfstein [1991]use association with a large bank to identify ﬁrms with a relatively low C 11.In addition,many studies split samples by ﬁrm size which is highly correlated with both dividend payout and access to public debt.QUARTERLY JOURNAL OF ECONOMICS698 at Glasgow University Library on January 20, 2012/Downloaded fromthat do not.In contrast,manyﬁrms without public debt also havearelikelyforcasecan be made that theseﬁrms face a high C11for externalﬁnancing.Empirical evidence from most studies is consistent with equation(1)in the sense thatﬁrms likely to have a priori high C11,(e.g.,ﬁrms with low dividends,no public debt,or small size)almost always have a larger dI/dW thanﬁrms likely to have a lowC11.Furthermore,many studies cannot reject dI/dW equals zerofor control groups selected to have a low(or zero)C11(e.g.,Gilchrist and Himmelberg[1995,1998]).6Thus,the implicationsof the theoretical approach in much previous research are sup-ported by the evidence.II.P ROBLEMS WITH THE KZ E MPIRICAL C LASSIFICATION A PPROACH KZ employ managerial statements and quantitative mea-sures fromﬁrms’ﬁnancial statements to sort the49FHP low-dividendﬁrms into one ofﬁve groups:7Not Financially Con-strained(NFC),Likely Not Financially Constrained(LNFC), Possibly Financially Constrained(PFC),Likely Financially Con-strained(LFC),and Financially Constrained(FC).This section summarizes our concerns about the effectiveness of their ap-proach for determining both absolute and relative constraintsacrossﬁrms.on Managers’Statements and Regulation S-KTo justify use of managerial statements to identify the degreeofﬁnancing constraints,KZ[p.180]rely on Securities and Exchange Commission Regulation S-K which they claim‘‘explic-itly requiresﬁrms to disclose whether or not they are havingdifficultyﬁnancing their investments.’’It is not obvious,however,that this regulation forces aﬁrm to revealﬁnancing constraints.We contacted Robert Lipe,Academic Fellow in the Office of theChief Accountant of the SEC and asked whether aﬁrm that is6.See also Kashyap,Lamont,and Stein[1994].Some Euler equations studiescannot reject C11equal to zero for control groups ofﬁrms[Gilchrist1991;Hubbard, Kashyap,and Whited1995;Whited1992].7.KZ do not explain how these diverse criteria are speciﬁcally combined toclassifyﬁrms into theﬁve groups.COMMENT ON KAPLAN AND ZINGALES699at Glasgow University Library on January 20, 2012/Downloaded fromunable to undertake a new,positive NPV project due to ﬁnancing constraints would be obliged to reveal this information.Lipe responded that this is not the case.Rather,he explained,Regula-tion S-K requires the ﬁrm to reveal the inability to invest due to ﬁnancing constraints only when the ﬁrm fails to act on a previ-ously announced investment commitment.As a result,we doubt the relevance of self-serving managers’statements as evidence of the absence of ﬁnancing constraints in most situations.B.Problems with the Quantitative Classiﬁcation CriteriaThe classiﬁcation criteria in KZ include cash stocks,unused lines of credit,and leverage.They report summary measures for these variables in Table III [KZ,pages 185–187]and argue that they support the success of their relative ranking of the degree of ﬁnancing constraints and their ﬁnding that the ﬁrms face abso-lute ﬁnancing constraints (PFC,LFC,or FC )in only 15percent of the ﬁrm-years.We begin by explaining why the summary statistics in KZ do not support their surprising ﬁnding about the infrequency of absolute constraints in the FHP sample.KZ suggest that both the cash ﬂow and the cash stock positions for NFC and LNFC ﬁrm-years are so large relative to ﬁxed investment that these ﬁrms could not be ﬁnancially constrained.Their numbers in Table III,however,are misleading because they implicitly assume that ﬁrms use sources of ﬁnancing only for ﬁxed investment when,in fact,growing companies invest heavily in both inventories and accounts receivable (see Fazzari and Petersen [1993,pages 330–331]).We recomputed the KZ ﬁgures with the proper comparison of cash ﬂow and cash stocks relative to total investment (ﬁxed investment plus the changes in inventories and accounts receiv-able).These new statistics change some of the KZ conclusions.For example,KZ [page 184]note that the median value of cash ﬂow less ﬁxed investment is positive for NFC ﬁrm-years and write ‘‘[t]his suggests that NFC ﬁrms could have increased their invest-ment without tapping external sources of capital.’’In sharp contrast,in our computations the median value of cash ﬂow less total investment is negative at the seventy-ﬁfth percentile for even the NFC and LNFC ﬁrms.Thus,most NFC and LNFC ﬁrms exhaust all internal ﬁnance for investment purposes.Further-more,while the median cash stock-ﬁxed investment ratio for NFC and LNFC ﬁrm-years is 0.66(similar to the statistics in KZ Table QUARTERLY JOURNAL OF ECONOMICS700 at Glasgow University Library on January 20, 2012/Downloaded fromIII)the median ratio of cash stocks to total investment is only 0.27.8ouropinion,this cash stock too small tosupport the in KZ of theﬁnancing constraints.constrained ﬁrms will maintain some buffer stock of cash to protect against having to cancel invest-ment projects as well as to avoid the costs with ﬁnancial distress.It is well-known that cash volatile in manufacturing,frequently declining by 50percent or more and often becoming negative during a recession.Suppose,for example,that cash ﬂow declined to zero.Our computations indicate that NFC and LNFC ﬁrms could maintain only about three months of median total investment from cash stocks,and then only if these stocks were (implausibly)driven to zero.We believe these statis-tics are consistent with the view that these ﬁrms face absolute ﬁnancing constraints.are to provide them with credit,perhaps due to lack low-debt ﬁrms may therefore face more severe example,small high-tech companies—much of to have little collateral value,and little debt,possibly because their assets are intangible or ﬁrm-speciﬁc (see,for example,Himmelberg and Petersen [1994]).In addition,comparatively large cash positions or unused lines of credit may indicate relatively severe constraints.As argued in recent papers[Fazzari and Petersen 1993;Carpenter,Fazzari,and Petersen 1994;Calomiris,Himmelberg,and Wachtel 1995],it is costly for constrained ﬁrms to adjust ﬁxed investment when internal funds ﬂuctuate.Forward-looking ﬁrms will therefore partially protect themselves with buffer stocks of cash or unused debt capacity.The more ﬁnancially constrained a ﬁrm is,the greater is its incentive to accumulate liquid buffer stocks.Such a ﬁrm may be able to invest more at the margin at a moment in time,but the ﬁrm is nonetheless ﬁnancially constrained.This dynamic perspective contrasts with the static view of ﬁnancing constraints employed by KZ,which creates problems in their classiﬁcation approach.8.This statistic excludes observations for which totalinvestment is less than or equalto zero.KZ also point out that unused lines of credit are larger for NFC and LNFC ﬁrms.We do not have these data,but the ratios of slack to investment reported by KZ on page 188would be similarly reduced by recognizing a broader measure of MENT ON KAPLAN AND ZINGALES 701at Glasgow University Library on January 20, 2012/Downloaded fromC.The Absence of Heterogeneity in the KZ ClassiﬁcationOne striking ﬁnding in KZ is that only 19of 719observations (2.6percent)are FC and another 34observations (4.8percent)are LFC.Given so few FC and LFC observations,how do KZ obtain enough FC ﬁrms for their regressions?KZ placed ﬁrms in the FC category if they had just a single year (out of 15)with an FC or LFC rating.In the FC category,14of the 22ﬁrms had an FC or LFC rating only one or two times,while six ﬁrms had FC or LFC ratings in just three or four of the ﬁfteen years.For this reason,the difference in cash ﬂow coefficients across the KZ regressions may have little to do with their relative ranking of ﬁnancing constraints.III.T HE KZ R EGRESSION R ESULTSKZ ﬁnd that the investment of NFC and LNFC ﬁrms displays a greater sensitivity to cash ﬂow than FC ﬁrms.Space does not permit a detailed discussion of this pattern of results.One possibility is that the FC ﬁrms include some years of ﬁnancial distress.KZ describe ﬁrms in FC years as having ‘‘liquidity problems,’’which is not surprising given that their criteria for receiving the FC classiﬁcation include violation of debt covenants and renegotiation of debt payments [page 182].The KZ summary statistics in Table III also strongly suggest that the FC ﬁrm-years are periods of ﬁnancial distress.9During years of ﬁnancial dis-tress,ﬁrms,possibly at the insistence of their creditors,are likely to use cash ﬂow to enhance liquidity and avoid bankruptcy resulting in little change in ﬁxed investment as measured in Compustat.A broader measure of investment,however,is likely to respond much more to cash ﬂow for such ﬁrms.10Financial distress is one possible explanation for the low cash ﬂow coefficient of the FC ﬁrms.Regardless of how one explains the 9.The mean cash ﬂow-net plant ratio for these observations is Ϫ0.047and the mean of interest coverage is only 1.650.While KZ recognizethepossibility ofﬁnancial distressin FC observations [page 208],the defense they offer is notconvincing.They note that ﬁrms increase rather than repay debt in the PFC,LFC,and FC years.This observation,however,may be due to creditors permitting illiquid,but growing,ﬁrms to rebuild liquidity.10.Financially distressed ﬁrms (with low or negativecash ﬂow)often disinvest assets with low adjustment costs such as working capital (see Fazzari and Petersen [1993]).In addition,such ﬁrms likely sell off existing ﬁxed assets.Neither oftheseresponsesare included in the Compustat measure of ﬁxedinvestment and ignoring them causes a downward bias in the cash ﬂow coefficient,especially at times of ﬁnancial distress.QUARTERLY JOURNAL OF ECONOMICS702 at Glasgow University Library on January 20, 2012/Downloaded frompattern of results in KZ,however,we argue that this pattern is not informative.As discussed in the previous section,the ﬁrms in the NFC and LNFC categories likely are ﬁnancially constrained and the relative degree of constraints across the KZ categories is far from clear.If there is no clear a priori difference in ﬁnancing constraints across the ﬁrm groups in KZ,their strategy does not meet the criterion (summarized by equation (3))necessary for meaningful tests of ﬁnancing constraints with ﬁrm heterogeneity.Finally,KZ [page 196]present additional tests with group-ings based on ‘‘quantitative/objective data.’’The only one of these tests consistent with their main ﬁndings shows that ﬁrms with high interest coverage have higher cash ﬂow coefficients than ﬁrms with low coverage.KZ imply that the pattern should be the opposite,but this need not be the case.As we discussed earlier,either low levels of debt or high interest coverage may indicate an inability to obtain debt ﬁnancing,possibly signaling relatively severe ﬁnancial constraints.KZ [page 211]themselves note that some studies use high leverage as an indicator of more severe ﬁnancing constraints,while other studies argue the opposite.Thus,these tests do little to bolster the KZ conclusions.11IV .C ONCLUSIONKZ argue that investment-cash ﬂow sensitivities do not provide useful evidence about the presence of ﬁnancing con-straints.We believe that this conclusion does not follow from their analysis for two reasons.First,their theoretical model fails to capture the approach of most previous research,making their theoretical analysis irrelevant as a criticism of FHP and most subsequent research.Second,the KZ empirical ﬁndings are difficult to interpret.The 49low-dividend FHP ﬁrms are a poor choice for such a study because they are relatively homogeneous for purposes of testing for capital-market imperfections,making it extremely difficult to classify these ﬁrms ﬁnely by degree of ﬁnancing constraints.Furthermore,some of the KZ classiﬁcation 11.Two new studies are relevant to the KZ results.In a sample of large,dividend-paying ﬁrms,Cleary [1999]argues that the ‘‘most ﬁnancially con-strained’’ﬁrms have the lowest investment-cashﬂow sensitivity.These FC ﬁrms,however,appear to be ﬁnancially distressed.Their mean net income is Ϫ4.8percent of sales compared with 9.6percent for NFC ﬁrms.Mean sales growth forFC ﬁrmsis Ϫ2.3percent versus 23.5percent for the NFC ﬁrms.Winter [1998],using the KZ sample,includes the KZ indicator ofﬁnancial constraint status inregressions for investment and ﬁrm exit.He ﬁnds that the KZ indicator is either statistically insigniﬁcant or,when signiﬁcant,has the wrong MENT ON KAPLAN AND ZINGALES 703at Glasgow University Library on January 20, 2012/Downloaded fromcriteria (e.g.,stock of cash and degree of leverage),may indicate high or low levels of constraints.We therefore believe their ﬁnding of nonmonotonic investment-cash ﬂow sensitivities is not informative.While the sweeping critical conclusions in KZ do not follow from their results,we believe their paper makes a contribution.Empirical work in this area has not always clearly identiﬁed the theoretical model under investigation.While FHP provided a model of investment behavior that described the criteria for separating ﬁrms into ‘‘constrained’’and ‘‘unconstrained’’catego-ries,not all papers have done so.In addition,while commonly used separating criteria have a solid theoretical foundation,not all criteria are as defensible.KZ (and we hope this comment)will lead future researchers to clearly state their model and to carefully choose the criteria used for deﬁning constrained and unconstrained groupings.W ASHINGTON U NIVERSITY AND J EROME L EVY E CONOMICS I NSTITUTEC OLUMBIA U NIVERSITY AND N ATIONAL B UREAU OFE CONOMIC R ESEARCHW ASHINGTON U NIVERSITYR EFERENCESCalomiris,Charles W.,Charles P .Himmelberg,and Paul Wachtel,‘‘Commercial Paper andCorporateFinance:A MicroeconomicPerspective,’’Carnegie-Rochester Conference Series on Public Policy,XLI (1995),203–250.Carpenter,Robert E.,Steven M.Fazzari,and Bruce C.Petersen,‘‘InventoryInvestment,Internal-Finance Fluctuations,and the Business Cycle,’’Brook-ings Papers on Economic Activity (1994:2),75–138.Cleary,Sean,‘‘The Relationship between Firm Investment and Financial Status,’’Journal of Finance,LIV (1999),673–692.Fazzari,Steven M.,R.Glenn Hubbard,and BruceC.Petersen,‘‘Financing Constraints and Corporate Investment,’’Brookings Papers on EconomicActivity (1988:1),141–195.Fazzari,Steven M.,and Bruce C.Petersen,‘‘Working Capital and Fixed Invest-ment:New Evidence on Finance Constraints,’’RAND Journal of Economics,XXIV (1993),328–342.Gilchrist,Simon,‘‘An Empirical Analysis of Corporate Investment and FinancingHierarchies Using Firm-Level Panel Data,’’mimeograph,Board of Governorsof the Federal Reserve System,1991.Gilchrist,Simon,and Charles P .Himmelberg,‘‘Evidence on the Role of Cash Flowfor Investment,’’Journal of Monetary Economics,XXXVI (1995),541–572.Gilchrist,Simon,and Charles P .Himmelberg,‘‘Investment,Fundamentals,andFinance,’’NBER Macroeconomics Annual,XIII (Cambridge,MA:MIT Press,1998).Himmelberg,Charles P .,and Bruce C.Petersen,‘‘R&D and Internal Finance:A Panel Study of Small Firms in High-Tech Industries,’’Review of Economicsand Statistics,LVI (1994),38–51.Hoshi,Takeo,Anil K.Kashyap,and David Scharfstein,‘‘Corporate Structure,Liquidity,and Investment:Evidence from Japanese Panel Data,’’QuarterlyJournal of Economics,CVI (1991),33–60.Hubbard,R.Glenn,‘‘Capital-Market Imperfections and Investment,’’Journal of Economic Literature,XXXV (March 1998),193–225.QUARTERLY JOURNAL OF ECONOMICS704 at Glasgow University Library on January 20, 2012/Downloaded fromHubbard,R.Glenn,Anil K.Kashyap,and Toni M.Whited,‘‘Internal Finance and Firm Investment,’’Journal of Money,Credit and Banking,XXVII (1995),683–701.Kaplan,Steven N.,and Luigi Zingales,‘‘Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?’’Quarterly Journal ofEconomics,CXII(1997),169–215.Kashyap,Anil K,Owen mont,and Jeremy C.Stein,‘‘Credit Conditions andthe Cyclical Behavior of Inventories,’’Quarterly Journal of Economics,CIX(1994),565–592.Whited,Toni M.,‘‘Debt,Liquidity Constraints,and Corporate Investment:Evi-dencefrom PanelData,’’Journal of Finance,XLVII (1992),1425–1460.Winter,Joachim K.,‘‘Does Firms’Financial Status Affect Plant-Level Investment and Exit Decisions?’’mimeograph,University of Mannheim,MENT ON KAPLAN AND ZINGALES 705at Glasgow University Library on January 20, 2012/Downloaded from。

GoldmanSachsUSLiquidReservesFund-Pref.Accum.

Fitch Rating Investor objectiveBoth capital preservation and income.Position in your overall investment portfolio*The fund can complement your portfolio.The fund is designed for:The fund is designed for investors who are looking toinvest their US$ cash in an alternative to cashdeposits and/or manage their daily cash ﬂows via afund vehicle which seeks to preserve capital andgenerate income by investing in investment gradegovernment and non-government money marketsecurities.31-Oct-11 - 31-Oct-1231-Oct-12 -31-Oct-1331-Oct-13 -31-Oct-1431-Oct-14 -31-Oct-1531-Oct-15 -31-Oct-16Fund (USD)0.00.00.00.00.3 Ongoing Charges (%)(3)0.303/11/131/12/131/1/129/2/131/3/13/4/131/5/13/6/131/7/131/8/13/9/131/1/1Cumulative AnnualisedSince Launch 1 Mth 3 Mths YTD 1 Yr 3 Yrs 5 Yrs10 Yrs Preferred Accumulation Class(4)21.220.050.120.300.310.110.070.90Y ear Performance (%)20112012201320142015 Preferred Accumulation Class0.00.00.00.00.0(5)Period (days)% Overnight26.1 2 - 78.9 8 - 30 5.4 31 - 60 5.2 61 - 9012.2 91 - 12013.9 121 - 150 5.7 151 - 18010.2 181 - 36512.5 365+0.0Please see Additional Notes. All performance and holdings data as at 31-Oct-16.* We identify two broad categories of funds to help investors think about how to construct their overall investment portfolio. We describe the following as “Core”: (A) Equity funds with a global investment remit or those mainly focused on US and European markets, given the size and transparency of these markets. (B) Fixed income funds with a global investment remit or those mainly focused on US, European and UK markets and invest predominantly in investment grade debt, including government. (C) Multi asset funds with a multi asset benchmark. All other funds we describe as “Complements”. Both Core and Complement funds can vary in risk level and those terms are not meant to indicate the risk level of the funds.For regionally focussed investment portfolios we understand that the categorisation may be different from the perspective of different investors. Consult your ﬁnancial adviser before investing to help determine if an investment in this fund and the amount of the investment would be suitable.Fitch RatingNet Asset Value (NAV) - PreferredAccumulation ClassUSD12,125.96 Total Net Assets (m)USD31,905 Weighted Average Maturity (days)35 Weighted Average Life (days)91Currency - Preferred Accumulation Class USD Inception Date - Preferred AccumulationClass27-Feb-02 Fund Domicile IrelandISIN - Preferred Accumulation Class IE0031297975 Bloomberg Ticker - PreferredAccumulation ClassGSUSLPA ID Dividend Distribution Frequency None Dealing and valuation Daily Reporting year end31 December Settlement T + 1 EU Savings Directive (In/Out of Scope)In ScopeA-1A-1+VARIABLE RATE OBLIGATIONS32.4TIME DEPOSIT20.1ASSET BACKED COMMERCIAL PAPER17.1CERTIFICATES OF DEPOSIT11.6REPURCHASE AGREEMENT (OTHER)8.9COMMERCIAL PAPER8.5REPURCHASE AGREEMENT0.7ASSET BACKED VARIABLE RATEOBLIGATIONS0.4MEDIUM TERM NOTES0.3Please see Additional Notes. All performance and holdings data as at 31-Oct-16. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will ﬂuctuate and can go down as well as up. A loss of capital may occur.(1) More information about the Standard and Poor's Ratings Services and its calculation can be found on the following website: https:///products-and-capabilities/principal-stability-fund-ratings.html. (2) The GS US$ Liquid Reserves Fund is classiﬁed as a “Short Term Money Market Fund” in accordance with the European Securities and Markets Authority (ESMA)’s Guidelines on a common deﬁnition of European Money Market Funds, dated May 2010. This classiﬁcation requires certain criteria to be met by the Fund, including sensitivity to interest rate risk (WAM), maximum maturity of instruments, portfolio liquidity, and level of credit risk. (3) The ongoing charges ﬁgure is based on expenses during the previous year. 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INTERNATIONAL JOURNAL OF ROBUST AND NONLINEAR CONTROL

INTERNATIONAL JOURNAL OF ROBUST AND NONLINEAR CONTROLInt.J.Robust Nonlinear Control2001;11:515}539(DOI:10.1002/rnc.596)Hybrid control of force transients for multi-pointinjection enginesAndrea Balluchi ,Luca Benvenuti ,Maria Domenica Di Benedetto * R,Alberto L.Sangiovanni-VincentelliPARADES,<ia San Pantaleo,66,00186Roma,ItalyDip.di Informatica e Sistemistica,;niversita degli Studi di Roma**La Sapienza++,<ia Eudossiana18,00184Roma,ItalyDip.di Ingegneria Elettrica,;niversita degli Studi de¸+Aquila,Poggio di Roio,67040L+Aquila,Italy Department of Electrical Engineering and Computer Science,Uni v ersity of California at Berkeley,CA94720,U.S.A.SUMMARYWe address the problem of delivering as quickly as possible a requested torque produced by a spark ignition engine equipped with a multi-point port injection manifold and with electronic throttle.The optimal control problem,subject to the constraint that the air}fuel ratio stays within a pre-assigned range around the stoichiometric ratio,is solved for a detailed,cycle-accurate hybrid model with a hybrid control approach based on a two-step process.In the"rst step,a continuous approximation of the hybrid problem is solved exactly.Then,the control law so obtained is adjusted to satisfy the constraints imposed by the hybrid model. The quality of the control law has been in part analytically demonstrated and in part validated with simulations.Copyright 2001John Wiley&Sons,Ltd.KEY WORDS:hybrid systems;engine control;optimal control1.INTRODUCTIONIn this paper,we deal with the problem of delivering as quickly as possible a requested torque produced by a spark ignition engine equipped with a multi-point port injection manifold and electronics to control the throttle-valve position.The control variables are the amount of injected fuel and the voltage given to the electric motor controlling the position of the throttle valve.The optimization problem is subject to the constraint that the air}fuel(A/F)ratio stays within a pre-assigned range around the stoichiometric value of14.64(the ratio that guarantees minimum emission).Air and fuel dynamics depend on the pressure in the intake manifold}that is controlled by throttle valve}and on second order phenomena,the most important of which is the#uid"lm dynamics[1].The#uid"lm is created during the injection process:after fuel is injected in the intake runner,part of the vapourized fuel turns into#uid that deposits onto the*Correspondence to:M.D.Di Benedetto,Dip.di Ingegneria Elettrica,Universita degli Studi de L'Aquila,Poggio di Roio, 67040L'Aquila,Italy.-E-mail:dibenede@ing.univaq.itContract/grant sponsor:PARADES,P.F.MADESS II CNRCopyright 2001John Wiley&Sons,Ltd.516 A.BALLUCHI E¹A¸.walls of the intake runner and,hence,it is not immediately available for combustion inside the cylinders.The#uid"lm on the intake walls evaporates again,thus contributing to the combus-tion process but with a noticeable delay.This phenomenon(unfortunately)cannot be ignored, since it has a de"nite e!ect on the performance of the combustion process.The most used solutions to this problem consist of feed-forward compensation of fuel dynamics [2}4],based on mean value engine models[5}7].However,the mean values of the engine variables of interest may not be accurate enough to guarantee small transient deviations from the optimal A/F ratio.In this paper,we propose an approach that yields very small deviations with respect to the optimal A/F ratio,by using a hybrid model of the cyclic behaviour of the engine. The hybrid model describes accurately the detailed behaviour of the actuated throttle,of the injection systems and of the torque-generation mechanism,and,at the same time,allows to develop powerful closed-loop control laws.Our goal is to design a control law for the fuel injection durations and the voltage supplied to the throttle valve motor to drive the evolution of the system from an initial condition character-ized by the delivery of a torque u to a"nal condition characterized by the delivery of a requested torque u in minimum time subject to constraints on emissions.Note that the control problem described above is new not only because we use a detailed hybrid model for the injection process but also because we consider the entire control chain,from throttle motor to engine. Minimum time is not the only relevant criterion to follow when considering control schemes that might be implemented for engine control.Preventing signi"cant over/undershoot of the reference value,and being able to hold the desired torque value within some bounds are also desirable.However,minimum-time control problems have well-known solutions that allow us to obtain powerful control laws.These additional criteria can be cast into constraints in the same way as we have done for the A/F ratio.Then,the optimal control problem can still be solved analytically even though the number of details and the notational complexity would become overwhelming.For this reason,we have chosen to ignore these additional considerations since handling them could cloud our approach.Our approach to the optimal control problem is a two-step process:(1)we"rst introduce and solve an auxiliary optimal control problem in continuous time,and(2)we then map the optimal control law back in the hybrid domain trying to maintain as muchas possible the properties of the solution.The mapping process is critical for obtaining a satisfactory solution to the hybrid problem. Several mappings are possible that satisfy the restrictions imposed by the hybrid model but we want to choose a mapping that satis"es the original constraints and is as close as possible to the optimal solution.In Reference[8],we have solved with the same approach a related,but simpler, problem where throttle actuation was not taken into account,the torque requested was zero and the cost function was the amount of undesired oscillations of the power-train(the cut-o!problem). In this case,we were able to prove that the hybrid control law obtained by the mapping process ensured stability and constraints satisfaction.In this paper,given the additional details that have been considered,the control law obtained by the two-step process is more complex and depends on several engine and car parameters.For this reason,the theoretical results are weaker,but,under conservative assumptions on the relative speed of the crankshaft at the time of successive injection points and ignoring the dynamics of the throttle control loop,we can still prove that the original constraints on the problem are satis"ed with the hybrid control law.Simulation data are used to validate the control laws for the full chain on power-trains of existing cars.Copyright 2001John Wiley&Sons,Ltd.Int.J.Robust Nonlinear Control2001;11:515}539It can be argued that a dual approach,relying on a discretized,crank-angle-based abstraction of the cylinder 's FSM (see for example Reference [9]),would solve the problem tackled in this paper as well.Since we assume small excursions in engine speed,then the phase of mapping the auxiliary optimal solution into the hybrid domain is likely to be easier when discrete }time abstractions are used with respect to continuous-time ones.Indeed,the cut-o !problem has also been solved using this approach [10],i.e.a discrete-time abstraction of the hybrid model of the plant was used.However,the weakness of this approach lies on the lack of theoretical results asserting properties of the control law since only numerical solutions to the auxiliary optimal discrete-time control problem can be obtained.2.PLANT MODEL AND PROBLEM FORMULATIONIn this section,a hybrid model for vehicles with four-stroke four-cylinder gasoline engine equipped with a multi-point injection system and electronic throttle is illustrated.The model (an expansion of the model in Reference [8])consists of four parts (see Figure 1):two continuous-time systems,modelling the power-train dynamics and the air dynamics,respectively,and two parts each composed of four hybrid systems modelling the behaviour of each cylinder and of each injection system.Air Dynamics :The model of the quantity of air entering the cylinder during the intake run is obtained from the air #ow balance equation of the manifold.The air mass m ,loaded during an intake run,is subject to the manifold pressure (p )dynamics which is controlled by the throttle valve actuated by a DC motor.Since we consider short control horizon,then we can assume small variations of the crankshaft speed and neglect the dependence from it in the air dynamics.The model is then(t )"a ? (t )#b ?v (t )(1)p (t )"a N p (t )#b N(t )(2)m ?(t )"c Np (t )(3)where v 3[!<,#<]is the DC motor voltage and is the throttle angle that is subject to the constraint0) (t ))90(4)Powertrain model :Powertrain dynamics are modelled by the linear system(t )"A (t )#bu (t )where "[ C , , N ]2represents the axle torsion angle,the crankshaft revolution speed and the wheel revolution speed.The input signal u is the torque produced by the engine and acting on the crankshaft.Model parameters A and b ,depend on the transmission gear which is assumed not to change.A single-state hybrid system emits the event dead }point ,when pistons reach either the top or bottom dead centers,and produces the crank angle .¹orque -generation :The behaviour of each cylinder in the engine is abstractly represented by a "nite state machine (FSM)and a discrete event system (DES)modelling torque generation.The FSM state S G of the i th cylinder assumes values in the set +H G ,I G ,C G ,E G ,which correspond to the exhaust,intake,compression and expansion strokes,respectively,in the four-stroke engine 517TRANSIENTS CONTROL FOR INJECTION ENGINES Copyright 2001John Wiley &Sons,Ltd.Int .J .Robust Nonlinear Control 2001;11:515}539518 A.BALLUCHI E¹A¸.Figure1.Engine hybrid model E.The hybrid models of the cylinders and injection systems2,3and4arenot reported due to space limitation.Copyright 2001John Wiley&Sons,Ltd.Int.J.Robust Nonlinear Control2001;11:515}539cycle.An FSM transition occurs when the piston reaches a dead center,that is when the event dead }point is emitted.The DES describing the torque generation process of the i th cylinder increments its sequence index k by one at each transition of the FSM.Its inputs are the masses m ?G and m TG of air and fuel loaded during the intake phase;its output is the torque u G (k )generated by the cylinder.At the transition I G P C G ,that is at time t 'G ,the event int }end G is generated and the DES reads its inputs,storing in q ?G and q TG their values.The amount of torque achievable during the next expansion phase,obtained by the fuel-to-torque gain G ,is stored in z G .The DES output u G (k )is always zero except at the C G P E G transition when it is set to the value stored in z G .Input u G (t )to the powertrain dynamics is obtained from u G (k )by a zero }order holder latched on the event dead }point .Injection process :The i th injection system is abstractly represented by a hybrid system,whose discrete state F G assumes values in the set +J G ,B G ,=G ,D G,described below:(1)J G :the injector is open and delivers a constant #ow P of vapourized fuel.A fraction of it condenses in a fuel puddle and increases the mass m JG of liquid fuel,fraction 1! increases the mass m TG of vapourized fuel in the intake runner.The mass of liquid fuel evaporates o !with a time constant .The injector remains open for G seconds modelled by timer t G .(2)B G :the injector is closed and the evaporation process continues.When the next dead }point event is emitted,the intake valve opens,and the air }fuel mix begins to enter the cylinder.Atthe I G P C G transition,the intake valve closes and the int }end G event is generated.The mass m TG of vapour is reset to zero since all the vapour fuel has been loaded in the cylinder.(3)=G :the injector is closed and evaporation proceeds.(4)D G :the beginning of fuel injection is synchronized with respect to the beginning of the exhaust phase with a time delay of t B seconds measured by timer t G .This delay allows to locate the injection interval with respect to the engine cycle.The value of t B ,which in general depends on the crankshaft speed,is considered constant since small engine speed variations are assumed.In this state,fuel dynamics is as in state =G.Engine hybrid model :The overall model E of the engine is the combination of four hybrid systems representing the behaviour of each cylinder and related injection system,and the powertrain and intake manifold models which are shared among all cylinders.The pistons are connected to the crankshaft,so that dead-points are synchronous and the cycle of each one is delayed one step with respect to the cycle of the previous one.Then,the dead }point events and the sequence index k are shared among all the cylinders and only one signal u G (t )may be di !erent from zero at any time.Input signals are:the input voltage v (t )to the DC motor actuating the throttle valve,a scalar continuous time signal in the class of functions 1> P [!<,#<];the injection intervals (k ),a scalar discrete time signal in the class of functions Z > P [0, ],which is sequentially distributed over the four injectors synchronously with the corresponding exp }end G event.The state of the overall hybrid systems is a triple (q ,z ,x )where:(1)q "[S ,F ,S ,F ,S ,F ,S ,F ]is the state of the FSMs associated to each cylinder and each injection system;(2)z "[z ,q T ,q ? ,2,z ,q T ,q ? ]is the cylinder DES state;(3)x "[ , , ,p ,t ,t ,m T ,m J ,2,t ,t ,m T ,m J ]is the continuous state associated to the powertrain,air dynamics,and to each injection system.The output of the overall system is the generated torque u .519TRANSIENTS CONTROL FOR INJECTION ENGINES Copyright 2001John Wiley &Sons,Ltd.Int .J .Robust Nonlinear Control 2001;11:515}539520 A.BALLUCHI E¹A¸.2.1.Problem formulationIn order to reduce tailpipe emissions,the air}fuel ratio A/F of each cylinder has to be kept in a range[¸ ,¸ ]around the stoichiometric value¸ "14.64.This corresponds to requiring the following constraint:¸q TG!(k))q?G!(k))¸ q TG!(k)(5) where i!denotes the index of the cylinder which enters the state C.Given a value u of torque produced by the engine,de"ne in the hybrid state space the set T(u) of all the hybrid states(q(0),z(0),x(0))for which there exist v(t):1> P[!<,#<]and (k):Z> P[0, ]such that for all t*0and for all k*0,u(t)"u and constraints(4)and(5) are satis"ed.Note that the set T(u)consists of all the state trajectories of the hybrid model E such that along the entire trajectories a constant torque u is generated while constraints on inputs v, and states ,q?,q T are satis"ed.Problem1Consider the engine hybrid model E,shown in Figure1.Let u and u be the initial value and the desired value of the torque,respectively.Assume that,at the initial time t"0,the hybrid state (q ,z ,x )belongs to T(u ).Find v(t):1> P[!<,#<]and (k):Z> P[0, ]such that(1)the initial state(q ,z ,x )is steered to T(u )at some unspeci"ed time tଙ;(2)for all t*0and for all k*0constraints(4)and(5)are satis"ed;(3)the time tଙis minimized.3.AUXILIARY CONTINUOUS-TIME OPTIMAL CONTROL WITHOUTTHROTTLE DYNAMICSIn this section,the interactions between fuel and air dynamics,subject to constraint(5),are analysed by considering a continuous-time model approximating the behaviour of the engine hybrid model E.The hybrid nature of the intake process is abstracted away by using average continuous-time models for fuel and air whose outputs are the average fuel#ow,f T(t),and air #ow,f?(t),entering the cylinders.Moreover,we abstract away the throttle actuation dynamics and consider the throttle valve to be the air dynamics input.To solve the continuous optimal problem,we follow a two-step process:in the"rst step,we"nd the minimum-time control for the air dynamics alone;in the second step,we introduce the fuel dynamics and appropriately modify the optimal control law found in the"rst step to solve the continuous optimal problem at hand.The intake manifold dynamics is described by Equation(2)and constraint(4).The#ow of air f?(t)entering the cylinders is expressed as:f?(t)"c?p(t)where c?"( /30)c N.Furthermore,fuel dynamics is modelled by the average modelm J(t)"a J m J(t)#b Jf T(t)"c J m J(t)#d J (t)(6) Copyright 2001John Wiley&Sons,Ltd.Int.J.Robust Nonlinear Control2001;11:515}539where f T denotes the average fuel#ow entering the cylinders,m J denotes the average mass of liquid fuel,and a J"! \ ,b J" P( /30),c J" \ ,d J"(1! )P( /30).The A/F constraints are rewritten for the#ows f?and f T as follows:¸p(t)#¸K m J(t)) (t))¸ p(t)#¸K m J(t)(7) where¸ "c?/¸ d J'0,¸ "c?/¸ d J'0,and¸K"!c J/d J(0.For the continuous-time model considered here,the target set corresponding to the desired torque u isT(u )" (m J,p)"p"p "14.64c N G u (8) so that Problem1reduces to the following one:Problem2Consider the engine continuous-time model described by Equations(2)and(6).Let u and u be the initial value and the desired value of the torque,respectively.Assume that,at the initial time t"0,the state(m J,p )belongs to T(u ).Find (t):1> P[0,90]and (t):1> P[0, ] such that(1)the initial state(m J,p )is steered to T(u )at some unspeci"ed time tଙ;(2)for all t*0,constraints(7)are satis"ed;(3)the time tଙis minimized.Constraints(7)de"ne a set of feasible values for(m J,p),obtained for ranging in the interval [0, ].Since the liquid fuel mass is non-negative,the set of feasible states for the control problem at hand are de"ned by the following linear inequalities:¸p#¸K m J*0¸p#¸K m J)p,m J*0(9)Note that,when the manifold pressure p is zero,the unique feasible state value is(m J,p)"(0,0), which is obtained with injection "0(neither fuel nor air is loaded by the cylinders).As a matter of fact,the evaporation of any liquid fuel m J'0would produce a rich mixture with f?/f T(¸ . Hence,if a fuel puddle is present,the manifold pressure has to be greater than zero.However,by injecting a proper amount of fuel,some values(m J,p)on the line m J"0may be feasible even if there is no fuel puddle.These values lay on the segment with extremum points(0,0)and (0, /¸ ).Note that only the segment from(0,p )to(!(¸ /¸K)p ,p )of the target set T(u ) belongs to the feasible set(9).Constraints(7)couples between the manifold dynamics(2)and the fuel dynamics(6).If one considers the manifold dynamics(2)alone,the straightforward min-imum-time control to the target point p"p is" 0if p'p90if p(p!(aN/b N)p when p"p (10) 521TRANSIENTS CONTROL FOR INJECTION ENGINESCopyright 2001John Wiley&Sons,Ltd.Int.J.Robust Nonlinear Control2001;11:515}539The minimum-time t ଙneeded to steer an initial manifold pressure p (0)to p ist ଙ"1a N ln p p (0) if p (0)'p 1a N ln a N p #90b N a N p (0)#90b Nif p (0)(p (11)Given an initial fuel value m J (0),the manifold control (10)remains optimal when the fuel dynamics (6)are also considered and constraints (7)are introduced,if there exists a fuel injection signal (t ):[0,t ଙ]P [0, ]such that constraints (7)are satis "ed along the trajectory.In fact,if this is the case,the trajectory (m J (t ),p (t ))starting from (m J (0),p (0))reaches the target set T (u )at time t ଙwithout leaving the feasible set de "ned by (9).In the following we will:(1)"nd the feasible initial conditions for which the control law (10)remains optimal;(2)give the optimal control law for the remaining initial conditions.Consider "rst the initial conditions (m J (0),p (0))in the region delimited by (9)and p (p ,where the control "90is applied.For these conditions it can be shown that there are always values of satisfying (7)along the entire trajectory to the target set.Then,the control law "90and equal to any value satisfying (7)steer the state to the target set in minimum time satisfying the constraints.In this case,the time required to drive the initial condition to the target set is determined only by the pressure dynamics and is given by (11).On the other hand,when p (0)'p and the control "0is applied,it can be the case that no value of satisfying (7)exists for some point of the trajectory.Since p (t )is decreasing,this corresponds to violating the constraint f ?/f T '¸ .To avoid (if possible)this situation,the amount of fuel #ow entering the cylinders has to be minimized,by choosing the minimum admissible value for ,i.e. "max +0,¸ p #¸K m J ,.Then,for the initial conditions (m J (0),p (0))in the region delimited by (9)and p 'p ,where the control "0is applied,there are always values of satisfying (7)along the entire trajectory to the target set provided that (m J (0),p (0))is on the left of the trajectory obtained by backwards integration of dynamics (2)and (6)from the point (!(¸ /¸K )p ,p )with "0and "max +0,¸ p #¸K m J ,.See Figure 2.Hence,for these initial conditions,applying the control law "0and equal to any value satisfying (7),the target set is reached in minimum time and the constraints are satis "ed.Also in this case,the time needed to steer the initial condition to the target set is determined only by the pressure dynamics and is given by Equation (11).In summary,for all the initial conditions in the feasible set (9)and on the left of ,the optimal controls are" 0if p 'p90if p (p and "max +0,¸ p #¸K m J,Fuel dynamics is steered in such a way that it tracks the intake manifold dynamics to satisfy the air }fuel constraint (7).Since the amount of fuel puddle is small with respect to the values of the manifold pressure,then the air dynamics can be controlled in minimum time to the target 522 A.BALLUCHI E ¹A ¸.Copyright 2001John Wiley &Sons,Ltd.Int .J .Robust Nonlinear Control 2001;11:515}539Figure 2.Minimum-time trajectories without throttle dynamics.pressure p ,without any interference due to the air }fuel constraint,which is handled by the injection signal only.For conditions (m J (0),p (0))in the region delimited by (9)and lying to the right of the curve ,the air dynamics has to track the slower fuel evaporation dynamics to achieve air }fuel constraint (7)satisfation.Hence,for these initial conditions,the optimal feedback controls are as follows:" 0if ¸ p #¸K m J '0a J !a N b N p if ¸ p #¸K m J "0and "max +0,¸ p #¸K m J ,(12)According to (12),these initial conditions are "rst steered by the controls "0and "max +0,¸ p #¸K m J ,to the line ¸ p #¸K m J "0.Then,under the action of the control signals "[(a J !a N )/b N ]p and "0,they follow a sliding motion along this constraint until they reach the extremum (!(¸ /¸K )p ,p )of the target set.It is worth noting that,during the sliding motion,the closed-loop system ism J (t )"a J m J(t )p (t )"a N p #b N [(a C !a N )/b N ]p "a Jp Since "a J "("a N ",the pressure dynamics is slowed down to make it follow the fuel dynamics and to satisfy constraints (7).Thus,the control law for given by (12)is optimal since it minimizes the length of the arc of trajectory over the constraint.Summarizing:523TRANSIENTS CONTROL FOR INJECTION ENGINES Copyright 2001John Wiley &Sons,Ltd.Int .J .Robust Nonlinear Control 2001;11:515}539Theorem 1If the initial state (m J ,p )belongs to the feasible set described by inequalities (9),then the optimal control (t ):1> P [0,90]and (t ):1> P [0,]solving Problem 2is: (t )"0if ¸ p (t )#¸K m J (t )'0and p (t )'p ,90if p (t )(p ,!(a N /b N )p if p (t )"p ,[(a C !a N )/b N ]p (t )if ¸ p (t )#¸K m J(t )"0and p (t )'p (13) (t )"max +0,¸ p (t )#¸K m J(t ),.(14)This result can be proved by applying the Pontryagin Maximum Principle.Figure 2shows some minimum-time trajectories to the target set (8)for dynamics (2)and (6),and constraints (7).4.HYBRID CONTROL WITHOUT THROTTLE DYNAMICSThe continuous control law described in Section 3,must be approximated to yield a feasible control law for the hybrid model E introduced in Section 2.More precisely,in the continuous-time model adopted in Section 3,the air }fuel constraints (7)are expressed in terms of the continuous evolutions of the manifold pressure and liquid fuel.Moreover,the control signals and are assumed to be continuous-time signals.When dealing with the hybrid model E ,the air }fuel constraints (5)are expressed in terms of the event-based signals q ?and q T .In addition,the amount of air q ?loaded in the cylinder depends on the manifold pressure p at the dead center corresponding to the end of the intake.The amount of loaded fuel q T depends on the evolution of the hybrid model describing the fuel injection system,which models the delay between the time at which the injection control signal is set and the time at which the fuel is loaded.Then,the main issues to address when we move from the continuous case to the hybrid case are:(1)in model E there is a delay between the time at which the injection control G is set (at the end of the expansion phase)and the time at which the vapourized fuel q T is loaded (at the end of the intake phase);(2)feasible control actions on G are discrete-time signals synchronized with the crank angle.This issue is the main cause of di $culty for devising a hybrid control strategy;(3)in model E ,there exist four independent fuel dynamics,controlled by inputs ,2, ,whose evolutions are constrained with respect to the same air #ow evolution by A /Fbounds.The measurements available for closing the control loop are:the pressure p ,the angle and the crankshaft speed .Since in the solutions derived in Section 3, is chosen as the maximum between 0and ¸ p #¸K m J ,then fuel injection is regulated so to maintain in (5)q ?"¸ q T ,when the cylinder is in the compression stroke.The injection control G for the i th cylinder is set at the end of the expansion stroke (i.e.when the exp }end G event is generated).Consider "rst the design of the fuel injection control.The continuous optimal injection control law (14)has only two possible actions:either no fuel is injected,that is "0;or "¸ p #¸K m J ,which corresponds to producing a mixture with maximum feasible value of A /F ratio,is injected.524 A.BALLUCHI E ¹A ¸.Copyright 2001John Wiley &Sons,Ltd.Int .J .Robust Nonlinear Control 2001;11:515}539Hence,our strategy is mapped into the hybrid domain as follows.At time t I,corresponding to the end of the expansion stroke,the value of is set to one of the two possible values on the basis of the estimated values of q?(k#2)and q T(k#2)at time t I> corresponding to the end of the next intake stroke:( 1)either (k)"0,i.e.if q?(k#2)(¸ q T(k#2)no fuel is injected;( 2)or (k)such that q?(k#2)"¸ q T(k#2),i.e.a mixture with maximum feasible value of A/F ratio is produced(see(5)).The estimations of q?(k#2)and q T(k#2)are non-trivial since they depend not only on the values of the state components (t I),m T(k),m J(k)and p(t I),but also on the chosen control actions (k)and (t)over[t I,t I> ].Consider now the design of the throttle control.The continuous minimum-time control (13)assumes only four possible values: "0, "90, "[(a C!a N)/b N]p and"nally "!(a N/b N)p when the target set has been reached.This strategy is mapped into the hybrid domain as follows:( 1) "90,if p(p ;( 2) "0,if p'p and q?(k#2)'¸ q T(k#2);( 3) "[(a C!a N)/b N]p,if q?(k#2)"¸ q T(k#2),so that the manifold dynamics tracks the fuel dynamics to obtain a mixture with minimum feasible value of A/F ratio.( 4) "!(a N/b N)p when the target set has been reached.We will now show how to calculate the values of (k)and (t).Consider the cases p(t I)(p (Case1)and p(t I)'p (Case2)separately.Case1:p(t I)(p .According to( 1)suppose (t)"90for all t3[t I,t I> ].Then,the value p(t I> )of the manifold pressure at time t I> obtained by integration of the pressure dynamics, would bep(t I> )"p(t I)e?N R I> \R I !(1!e?N R I> \R I )90b Na N(15)Two cases are possible:Case1a:p(t I> ))p .In this case,we can indeed set (t)"90for all t3[t I,t I> ]and only the value of (k)needs to be computed.In order to compute the value of (k)the amount of fuel q T(k#2)loaded in the cylinder at time t I> needs to be evaluated.Integration of the fuel dynamics givesq T(k#2)"(1!e\ R I> \R I\ O)m J(t I\ )#e\ R I> \R I O e R B O(1!e O) P #P (16) Hence,according to( 1)and( 2),(k)" 0if q?(k#2)"c N p(t I> )(¸ q T(k#2)such that c N p(t > )"¸ q T(k#2),otherwiseCopyright 2001John Wiley&Sons,Ltd.Int.J.Robust Nonlinear Control2001;11:515}539。

CHEMICAL VAPOUR DEPOSITED TUNGSTEN CARBIDE WEARRESISTANT COATINGS FORMED AT LOW TEMPERATURES

of tungsten carbide formation
The free energies of formation of tungsten hexafluoride and of various hydrocarbons and the carbides which might be formed from them show that there is no thermodynamic barrier to the formation of the carbides at temperatures less than 500 “C. Equally there is no barrier to the formation of metallic tungsten, so the exact products from a tungsten fluoride-hydrocarbon reaction system are entirely dependent upon the kinetic pathways available to the particular reagents. The work reported here has been concerned with the interaction between tungsten hexafluoride, hydrogen and various hydrocarbons, but principally benzene. This system might have been expected to form WC, W2C and mixtures of these with tungsten itself [4] . In practice it has been found that WC is not formed and that the major products are W2C and another carbide W3C which is not found in the high temperature chemistry of tungsten and carbon.

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15-09-0703-00-0007-tg-vlc-closing-report-for-waikoloa-september-2009

Submission
Slide 1
Euntae Won
September 2009
doc.: IEEE 802.15-09-0703-00-0007
TG-VLC 5th Meeting, Waikoloa Closing Report 24 September, 2009
Submission
Euntae Won
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Slide 3
Euntae Won
September 2009
doc.: IEEE 802.15-09-0703-00-0007
Meeting Achievements
1. Eight 2-hour time slots was held in Monday, Tuesday, Wednesday and Thursday. - Monday PM1,PM2 slot - Tuesday AM1, AM2 - Wednesday PM1, PM2 slot - Thursday AM1, AM2 2. One ad-hoc session was held in Tuesday. - Tuesday 6PM~7:30PM - VLC Call for Contributions: Link Budget Reference Signal and Noise Spectral Distributions 3. Proposals from 7 group - KH Univ ,SNUT, K Univ - InterDigital - Intel - Samsung - VLCC - ETRI [Tae-Gyu Kang] - ETRI [Myunghee Son], CSUS
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Product configurations cover a range of industry-standard connection systems, and handling systems are available for transport and storage.Standard productsStandard Labtainer BPCs are stocked for immediate delivery and are fully supported by our process and product validation program. For more information on our validation program, please refer to our validation guides for Aegis5-14 and CX5-14 films. Additionally, standard Labtainer BPCs have validated liquid shipping configurations.Standard configurations can be customized for optimal fit, form, and function to address process-specific applications using one of the industry’s largest libraries of qualified components.2D Labtainer BPCs are available with the Thermo Scientific ™ BioTitan ™ Retention Device. This universaltubing retention solution was designed to provide the best method for retaining flexible tubing on a barbed fitting and helps eliminate the risk of leaks and failure of the tubingconnection point.Table 1. Chamber information.50 mL–2 L, 2-port Labtainer BPC 2 L–50 L, 3-port Labtainer BPC2 L–50 L: Polyethylene ports are welded into the BPC seam: one 1/4 in. ID and two 3/8 in. ID ports on standard chamber.Table 2. Custom BPC options.Tubing type C-Flex™ (animal origin–free), silicone, PharMed™, or AdvantaFlex™Tubing size Specific lengths of 3.18–25.4 mm ID (1/8–1 in.); specific length depends on type of tubing chosenConnectors • Luer: 3.18–6.35 mm (1/8–1/4 in.) ID• CPC quick-connect: 6.35–19 mm (1/4–3/4 in.) ID• Steam-in-place connector: 6.35–19 mm (1/4–3/4 in.) ID• Tri-clamp: 3.18–25.4 mm (1/8–1 in.) ID• Mini tri-clamp: 3.18–12.7 mm (1/8–1/2 in.) ID• Aseptic connection and aseptic disconnection devices: all available sizes of Colder AseptiQuik™, Pall™ Kleenpak™, Cytiva ReadyMate™ DACOthers • Needle-free sample port (SmartSite™ or Clave™ products)• Filter capsule (Millipore™, Pall™, Sartorius™, Parker Bioscience™, Meissner™ products)Table 3. Presentation (as dry BPC systems).Outer packaging Supplied “flat-packed”—two polyethylene outer layersLabel • Description• Product code• Lot number• Expiration date on outer packaging and shipping containerSterilization Irradiation (25–40 kGy) inner side of outer packaging Shipping container Durable cardboard cartonDocumentation • Certificate of Analysis provided with each batch for each delivery • Certificate of Irradiation2 portsPack of 10Line 1Luer lock body connection, polypropyleneTubing: C-Flex; 30 cm (12 in.) lengthID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.)Line 2Luer lock insert connection, polypropyleneTubing: C-Flex; 30 cm (12 in.) lengthID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.) Line 1Luer lock body connection, polypropyleneTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 6.35 x 10.92 mm (0.25 x 0.43 in.)Line 2Luer lock insert connection, polypropyleneTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 6.35 x 10.92 mm (0.25 x 0.43 in.)Line 1Luer lock body connection, polypropyleneTubing: C-Flex; 30 cm (12 in.) lengthID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.)Line 2MPC insert, polycarbonateTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.)2 portsPack of 10Pack of 10Line 1Luer lock insert connection, polypropyleneTubing: C-Flex; 30 cm (12 in.) length ID x OD: 6.35 x 9.7 mm (0.25 x 0.38 in.)Line 2Luer lock body connection, polypropylene Tubing: C-Flex; 30 cm (12 in.) length ID x OD: 6.35 x 9.7 mm (0.25 x 0.38 in.)Line 3Luer lock body connection, polypropylene Tubing: C-Flex; 30 cm (12 in.) lengthID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.)Line 1MPC insert, polycarbonateTubing: C-Flex; 61 cm (24 in.) length ID x OD: 9.7 x 15.9 mm (0.38 x 0.63 in.)Line 2MPC body, polycarbonateTubing: C-Flex; 61 cm (24 in.) length ID x OD: 9.7 x 15.9 mm (0.38 x 0.63 in.)Line 3Luer lock body connection, polypropylene Tubing: C-Flex; 61 cm (24 in.) length ID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.)Line 1MPC insert, polycarbonateTubing: C-Flex; 30 cm (12 in.) length ID x OD: 9.7 x 12.7 mm (0.38 x 0.5 in.)Line 2MPC insert, polycarbonateTubing: C-Flex; 30 cm (12 in.) length ID x OD: 9.7 x 12.7 mm (0.38 x 0.5 in.)Line 3End plug, polypropyleneTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 6.35 x 10.92 mm (0.25 x 0.43 in.)3 portsSingle pack3 portsSingle packSingle pack—edge portsLine 1MPC insert, polycarbonateTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 9.6 x 12.7 mm (0.378 x 0.50 in.)Line 2MPC insert, polycarbonateTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 9.6 x 12.7 mm (0.378 x 0.50 in.)Line 3Injection portTubing: C-Flex; 8 cm (3 in.) lengthID x OD: 6.35 x 9.53 mm (0.25 x 0.375 in.)Note: Aegis5-14 film equivalents for this product areavailable as custom configurations.Line 1MPC insert, polycarbonateTubing: C-Flex; 46 cm (18 in.) lengthID x OD: 3.18 x 6.35 mm (0.125 x 0.25 in.)Line 2MPC body, polypropyleneTubing: C-Flex; 61 cm (24 in.) lengthID x OD: 9.53 x 15.875 mm (0.375 x 0.625 in.)Line 3Luer lock body connection, polypropyleneTubing: C-Flex; 61 cm (24 in.) lengthID x OD: 9.53 x 15.875 mm (0.375 x 0.625 in.)3 portsSingle pack—pillow design withpanel portsFind out more at /bpcFor Research Use or Further Manufacturing. Not for diagnostic use or direct administration into humans or animals.© 2021 Thermo Fisher Scientific Inc. All rights reserved. All trademarks are the property of Thermo Fisher Scientific and its subsidiaries unlessotherwise specified. C-Flex and PharMed are trademarks of Saint-Gobain Performance Plastics. AdvantaFlex is a trademark of NewAge Industries, Inc. AseptiQuik is a trademark of Colder Products Company. Pall and Kleenpak are trademarks of Pall Corporation. ReadyMate is a trademark of Cytiva. SmartSite is a trademark of Becton, Dickinson and Company. Clave is a trademark of Victus Inc. Millipore is a trademark of Merck KGaA, Darmstadt, Germany and/or its affiliates. Meissner is a trademark of Meissner Filtration Products. Parker Bioscience is a trademark of Parker Hannifin Corp. Rubbermaid is a trademark of Rubbermaid Incorporated. Sartorius is a trademark of Sartorius AG. Specifications, terms, and pricing are subject toIndustry-standard Rubbermaid ™ totes with corresponding lids are available. They can be used to protect Labtainer BPCs up to 20 L in size during use, transport, and storage. Use standard 50 L drums for 50 L Labtainer BPCs.Tray with lidFlat-bottom, linear low-density polyethylene (LLDPE) drum with lid。

Business Analysis and Valuation_ Using Financial Statements, Text and Cases

---------------------------------------------------------------最新资料推荐------------------------------------------------------Business Analysis and Valuation_ UsingFinancial Statements, Text and Casesc h a p t e r 1-1 A Framework for Business Analysis and Valuation Using Financial Statements T he purpose of this chapter is to outline a comprehensive frameworkfor fi nancial statement analysis. Because fi nancial statements provide the most widelyavailable data on public corporations economic activities, investors and other stake-holders rely on fi nancial reports to assess the plans and performance of fi rms and corpo-rate managers.A variety of questions can be addressed by business analysis using fi nancial state-ments, as shown in the following examples: A security analyst may be interested in asking: How well is the firm I am follow-ing performing? Did the firm meet my performance expectations? If not, why not?What is the value of the firms stock given my assessment of the firms current andfuture performance? A loan officer may need to ask: What is the credit risk involved in lending a certainamount of money to this firm? How well is the firm managing its liquidity and sol-vency? What is the firms business risk? What is the additional risk created by thefirms financing and dividend policies? A management consultant might ask: What is the1/ 2structure of the industry in whichthe firm is operating? What are the strategies pursued by various players in the in-dustry? What is the relative performance of different firms in the industry? A corporate manager may ask: Is my firm properly valued by investors? Is our in-vestor communication program adequate to facilitate this process? A corporate manager could ask: Is this firm a potential takeover target? How muchvalue can be added if we acquire this firm? How can we finance the acquisition? An independent auditor would want to ask: Are the accounting policies and accru-al estimates in this companys financial statements consistent with my understand-ing of this business and its recent performance? Do these financial reportscommunicate the current status and significant risks of the business?Financial statement analysis ...。

CDCS specimen C - collated simulation documents

Certificate for Documentary Credit Specialists (CDCS®) – 601/1159/8Session code: Specimen paper C (electronic)Length of examination: 3 hours__________________________________________________________________________Simulation Exercises 1–3Applicable current ICC rules apply throughout.Instructions to candidates1. You can print this document out before answering the Specimen Paper B questions. Pleasenote: Specimen Paper B is only available in an electronic format.2. The simulation documents will also be available within the specimen paper itself.The London Institute of Banking & Finance is a registered charity, incorporated by Royal Charter.SIMULATION 1DocumentsIssuing Bank in People’s Republic of China Irrevocable Documentary Credit Number 2451Place and Date of issue: 15 June XXXXExpiry Date and Place of Presentation for Documents: 31 August XXXX New York Applicant:China Machinery & Steel Co.Beijing (One Special Square)Advising Bank:Credit available with the ABC Bank New York by sight payment.Beneficiary:Export Machines, Inc.One PlazaNew York, NYFAX 347-111-2225Amount:About USD 800,000.00Partial Shipments: Not AllowedTranshipment: Not AllowedInsurance covered by applicant.Shipment from USA port to ShanghaiDocuments:•Original commercial invoice covering 2 compressors and 1 turbine for power plant CFR Shanghai Incoterms 2010•Full set bills of lading issued to order of shipper and endorsed in blank marked “notify applicant”Other conditions•Import licence 12345•Goods to be of US originWe hereby issue the documentary credit in your favour. It is subject to the UCP 600.Name and signature of the Issuing Bank in People’s Republic of China.P. J ChinP.J. ChinEXPORT MACHINES, INC.ONE PLAZANEW YORK, N.Y.FAX 347-111-2224/2228FINAL TAX INVOICESOLD TO:CHINA MACHINERY & COPPER CO.ONE SPECIAL SQUAREBEIJING, P.R. CHINAINVOICE NO. 913QUANITIES: 2 COMPRESSORS FOR ATOMIC/SOLAR PLANT1 TURBINE FOR SOLAR POWER PLANTCFR SHANGHAI USD 890,000.00TWO BOXES OF SPARE PARTS FREE OF CHARGESIMULATION 2DocumentsINCOMING SWIFT MT700FROM ISSUING BANK FIRST BANK OF NAPLES, NAPLES, ITALYTO ADVISING BANK INDIAN BANK, NEW ROAD, CALCUTTA, INDIA27: SEQUENCE OF TOTAL 1/140A: FORM OF DOCUMENTARY CREDIT IRREVOCABLE20: DOCUMENTARY CREDIT NUMBER DJM 23245640E: APPLICABLE RULES UCPURR LATEST VERSION31C: DATE OF ISSUE XX060231D: DATE AND PLACE OF EXPIRY XX0307, CALCUTTA50: APPLICANT CAESAR CONSTRUCTION, VIA ROMA, NAPLES, ITALY 59: BENEFICIARY BUILD-IT INDUSTRIES, 3RD FLOOR, STAR BUILDINGCALCUTTA, INDIA32: CURRENCY AND AMOUNT EUR30000,0041A: AVAILABLE WITH/BY INDIAN BANK, NEW ROAD, CALCUTTA, INDIABY PAYMENT41C: DRAFTS AT SIGHT42A: DRAWEE INDIAN BANK43P: PARTIAL SHIPMENTS NOT ALLOWED43T: TRANSHIPMENT ALLOWED44A: ON BOARD/TAKING IN CHARGE MUMBAI44B: FOR TRANSPORTATION TO NAPLES44D: SHIPMENT PERIOD FIRST HALF OF FEBRUARY45A: DESCP OF GOODS AND/OR SERVICES 35 TONNES OF FAST SETTING CONCRETE MIX46A: DOCUMENTS REQUIRED +COMMERCIAL INVOICE DULY SIGNED BY BENEFICIARYSHOWING CFR NAPLES+FULL SET 3/3 ORIGINAL BILLS OF LADING, NOTIFY THEAPPLICANT AND MARKED FREIGHT PREPAID.47A: ADDITIONAL CONDITIONS SHIPPING MARKS B 724 1-60 TO BE STATED ON ALLDOCUMENTS71B: CHARGES ALL BANKING CHARGES OUTSIDE OF ITALY ARE FORACCOUNT OF BENEFICIARY48: PRESENTATION PERIOD 21 DAYS49: CONFIRMATION INSTRUCTIONS WITHOUT53A: REIMBURSING BANK EURO BANK FRANKFURT78: INSTRUCTIONS TO THE PAYING/ YOU ARE AUTHORIsED TO CLAIM REIMBURSEMENT ACCEPTING/NEGOTIATING BANK FROM THE REIMBURSING BANK72: SENDER TO RECEIVER INFORMATION PLEASE ACKNOWLEDGE RECEIPT****MESSAGE PASSED AUTHENTICATION****Name of signatoryK DevK. DevSignature For Build-It IndustriesShipper:Build-It Industries: New Road Calcutta, IndiaConsignee: Caesar Construction, Via Roma, Florence, ItalyABC LINEBILL OF LADING FOR COMBINED TRANSPORT SHIPMENT OR PORT TO PORTB/L Reference number: AP213/25Marks & No. of Goods description: Gross weightMeasurement Numbers:Packages:Kg: cubic metres: B 72460 Cases CaseCasaes CONCRETE MIX33,000 375 MADE IN UK 1-60No. of original Bills of Lading: TWO (02)Place and date of issue:Calcutta, 15 February XXNotify: Port of discharge NAPLESOcean vesselThe Pride of MumbaiPort of loading: MumbaiShipped on board the vessel, the goods orpackages said to contain the cargo described inapparent good order unless otherwise stated herein.Signed:A McCleishFor ABC Line as the carrierSIMULATION3Documents Irrevocable Standby Credit Application FormApplicant:Enterprise Electronics Company North Point StreetHong Kong Issuing Bank: Premium Bank Kennedy Town Road Hong KongDate of Application: 01 December 2XX1 Expiry Date and Place for Presentation of documentsIssue by:Airmail Courier Expiry Date: 30 June 2XX2Place for Presentation: Buenos Aires, ArgentinaTeletransmissionBeneficiary:Buenos Aires Port AuthorityBuenos Aires, ArgentinaAdvising Bank:Big Apple Bank New York, New York Amount in figures and words (Please use ISO Currency Codes):USD 500,000 (US dollars five hundred thousand)Confirmation of the Credit:not requested requested authorised if requestedby Beneficiary Credit available with Nominated Bank: Big Apple BankNew York, New YorkCredit is to contain an automatic extension clause with (specify all that apply): i. a notification period of (__45__) days in the event of non-extension;ii. multiple renewal period(s) of (__6 months__);iii. a final expiration date of _1 July 2XX4_________________. by payment at sightby deferred payment at:by acceptance of drafts at: by negotiation:All banking charges, other than Issuing Bank’s charges, are for account of: BeneficiaryApplicant Against the documents detailed herein: and Beneficiary’s drafts(s) drawn on:Description of transaction:Backstop for issuance of a Bank Guarantee by Gaucho Bank on behalf of Enterprise Electronics Argentina S.A. based on the local standard format to guarantee lease payment obligations at the Buenos Aires Port Authority under a certain Lease Agreement. The Standby credit will be effective after the Lease Agreement is signed.Documents:Beneficiary’s authenticated SWIFT/Telex or written statement stating the amount of any drawing hereunder represent funds due and payable because:A) it has become necessary for Gaucho Bank to make payment under its garantia bancaria issued on behalf of Enterprise Electronics Argentina S.A., in favor of the Port Authority, Buenos Aires, ArgentinaORB) we received a notice of non-renewal of expiry date of Standby Letter ofCredit No. ____ issued by Premium Bank and substitute Letter of Credit orsecurity has not been providedORC) we received a notice of non-renewal of the expiry date for the confirmationof Standby Letter of Credit issued by Premium Bank and substitute Letter ofCredit or security has not been provided.Additional Instructions:1. The letter of credit is assignable.2. Letter of credit to be confirmed by Premium Bank Hong Kong.3. Incorporate the following clause in the Standby credit:Each presentation honored by us shall immediately reduce the amount available to be drawn hereunder by the amount of the payment made in respect of such presentation. In addition, the amount available to be drawn under this letter of credit shall be reduced, automatically and without amendment, on each date (each, an “Automatic Reduction Date”) set forth in the following automatic reduction schedule by the amount (the “Reduction Amount”) set forth opposite such date. However, such scheduled reduction amount(s) shall be reduced, or offset, by the amount of any payment made by us against a drawing made on or prior to the relevant automatic reduction date. We request you to issue on our behalf and for our account your Irrevocable Standby Credit in accordance with the above instructions (marked ( ) where appropriate). This Credit will be subject to the International Standby Practices (1998 Revision) Publication No. 590 of the International Chamber of Commerce, Paris, France, insofar as they are applicable.AUTOMATIC REDUCTION SCHEDULE AUTOMATIC REDUCTION AMOUNT DATE1 July 2XX2 USD100,000 1 January 2XX3 USD100,0001 July 2XX3 USD100,000 1 January 2XX4 USD100,000 1 July 2XX4 USD100,000 James T. Chen JT Chen ____Name and signature of the Applicant。

递延所得税异动、审计风险与审计应对

递延所得税异动、审计风险与审计应对作者：潘克勤潘潇阳来源：《会计之友》2024年第15期【摘要】文章主要考察递延所得税异动的成因和审计应对策略。

实证研究发现：亏损/扭亏是递延所得税异动的催生因素，操控性应计在两者之间起部分中介作用；递延所得税异动幅度越大，审计意见较上年恶化及递延所得税被作为关键审计事项披露的概率越大，且审计定价及其增长幅度越高；审计披露方式对递延所得税异动与审计定价的关系存在调节效应，年报被出具非标审计意见或者递延所得税被作为关键审计事项披露，则针对高额递延所得税异动索取的高额审计定价及其增长将得到一定幅度下调。

文章丰富了审计领域的递延所得税研究，表明递延所得税异动既是审计风险的测度指标，也是监管层和投资者觉察企业风险的信号。

【关键词】递延所得税异动；审计意见；关键审计事项；审计定价【中图分类号】 F239.4 【文献标识码】 A 【文章编号】 1004-5937（2024）15-0111-07一、引言资产或负债的账面价值和计税基础之间的差异以及一些特殊事项均会导致递延所得税。

除了特殊业务导致的递延所得税外，递延所得税异动还是所得税会计之前会计政策的结果，盈余管理动机则可能决定了递延所得税异动。

因此，与其说会计师事务所在应对递延所得税异动审计风险，不如说是在应对递延所得税前置会计政策所带来的审计风险。

本文基于企业亏损/扭亏背景，推演盈余管理动机和会计政策倾向，进而推测递延所得税异动，并在此基础上理论分析会计师事务所应对递延所得税异动的策略。

本文揭示了递延所得税异动部分产生于应计制盈余管理，完善了利用递延所得税进行利润操控的理论解释；探讨了会计师事务所针对递延所得税异动采取的审计披露和审计定价联动策略，丰富了递延所得税在审计领域的研究，同时指出递延所得税异动对监管层和投资者具有风险预警作用。

二、文献回顾（一）递延所得税的产生路径及会计处理差异递延所得税的形成有两大路径。

一是各项资产或负债的账面价值与计税基础不一致导致的递延所得税，该类递延所得税同时影响当期所得税费用。

PinedaleAnticlineFactSheet

Index1. Location/Description2. Gas Resources3. Fish and Wildlife Resources- Mule Deer- Pronghorn- Sage Grouse- Fisheries- Project History- Adaptive Environmental Management /Pinedale Anticline Working Group- Proposal for PAPA ExpansionReturn to the main energy page.Location/DescriptionThe Pinedale Anticline Project Area (PAPA) is located south of Pinedale, Wyo., and consists of 197,345 acres of federal, state and private lands. Of this total, approximately- 157,719 surface acres (79.9%) are BLM- 9,766 surfaces areas (5.0%) are state of Wyoming- 29,860 surface acres (15.1%) are private(Click here for the Pinedale Anticline project Web site with links to the project documents.)Back to Top Gas ResourcesThe PAPA is one of the newest and most productive gas fields in the continental United States. Gas reserves, estimated at up to 40 trillion cubic feet (TCF), reside in an over-pressurized, low permeability or "tight sands" formation that requires hydraulic fracturing to facilitate production. Estimates are that 20-25 TCF of gas may be recoverable.Back to Top Fish and Wildlife ResourcesFish and wildlife resources in the PAPA and surrounding area are world class, and the upper Green River area is a longtime destination for sportsmen. Approximately 100,000 big-game animals migrate through and seasonally use the upper Green River area, making it an American Serengeti. Mule deer, pronghorn, moose, sage grouse and other game species use all or portions of the PAPA throughout the year. The New Fork River and Green River, both world-class trout fisheries, are within the PAPA and support thousands of anglers per year.- Mule DeerMule deer that winter on the Mesa Big Game Winter Range are part of the Sublette mule deer herd, which consists of 15 hunt units and a post-season objective of 32,000 animals. The Sublette Mule Deer Study (Sawyer and Lindzey 2001) indicates that these mule deer seasonally migrate 60-100 miles from winter range near Pinedale, Wyo., to summer in portions of the Salt River, Wyoming, Wind River, Gros Ventre and Snake River ranges. Abundance estimates for the Mesa winter range have declined by more than 40 percent sincedevelopment began in 2000. (Click here to download published article.)- PronghornPronghorn also winter on the Mesa Big Game Winter Range and are part of the Sublette pronghorn herd, the second largest in Wyoming. The herd consists of 11 hunt units and has a post-season population objective of 48,000 animals. Some of these animals travel more than 200 miles from their summer range in Grand Teton National Park to their winter range south of the PAPA, depending on snow accumulations. The longest big-game migration still functioning in the United States (outside of Alaska), it includes numerous obstacles and bottlenecks, of which Trapper’s Point on the north end of the PAPA is most famous.- Sage GrouseSage grouse are abundant within the PAPA with a total of 14 leks, or breeding grounds, inside the project boundary. Historical accounts of sage grouse in the winter counted thousands of birds in flocks in the PAPA, particularly in the Lovatt Draw portion of the project. Since development began, the leks nearest to intense development have been severely affected or eliminated. Experts have predicted sage grouse extirpation from the PAPA if development proceeds as planned and additional habitat conservation measures are not undertaken.- FisheriesThe New Fork River and Green River are within the PAPA and provide thousands of anglers exceptional fishing throughout the year. The New Fork River is considered one of the best brown trout fisheries in the West, and the Wyoming Game and Fish Department has enacted special regulations on both rivers to preserve special qualities and opportunities. Public access points are few, and anglers must navigate industrial truck traffic, noise and dust —all of which diminish angling experiences.Back to Top Project HistoryIn July 2000, the BLM signed the record of decision (ROD) for the Pinedale Anticline Oil and Gas Exploration and Development Project (PAPA). (Click here for PAPA documents.) The ROD allowed development under the"environmentally preferred" alternative (also called the "Resource Protection Alternative"). This authorized development of 700 producing well pads over a 10-15 year period.The PAPA was divided into nine management zones, each with specific objectives and thresholds for development. The ROD recognized the uncertainty of what development might mean to natural resources and established an "adaptive environmental management" (AEM) process to deal with these variables. Through AEM, the Pinedale Anticline Working Group (PAWG) was established to guide AEM and advise the BLM (more about the PAWG below).In November 2004, BLM signed a decision that allowed Questar Energy to pursue "year-round" drilling, including limited development in big-game winter range during the winter, in exchange for mitigation that included reductions in total truck trips per year, total well pads, airborne emissions and drilling duration (from 18 years to 9 years).In 2005, at Questar’s request, the BLM modified this operating plan and allowed more development during the winter and, for the first time, winter completions of wells. Also in 2005, the BLM authorized a pilot project that allowed three additional companies (Anshutz, Shell and Ultra) well drilling during the restricted winter months, resulting in nine total locations that were drilled in winter 2005-2006. During this same time, BLM granted more activity for "deep well" development, adding to the total disturbance and activity during restricted periods.In late 2005, the BLM and the operators began discussion about further year-round development, negotiations which have resulted in the proposal to modify the 2000 ROD for the PAPA with a supplemental EIS and expand development exponentially.Back to Top Adaptive Environmental Management /Pinedale Anticline Working Group The AEM process was established to address the uncertainty of impacts on natural resources like fish and wildlife and balancing energy development with other uses of the lands. AEM was specified as essential to the project’s success in meeting these goals and outcomes. Through AEM, the BLM could be apprised of impacts from development and make mid-course corrections to address resources being affected. The process also facilitated an annual assessment whereby the BLM, companies and stakeholders could review the previous year’s actions and plan for the coming year. AEM was to be administered by the PAWG. (Click here for the PAWG Web site.)Shortly after the ROD was signed in 2000, the PAWG formed and began developing monitoring and mitigation plans for the resources of concern. Immediately, the PAWG was challenged by Yates Petroleum as violating the Federal Advisory Committee Act (FACA), and subsequently the group was halted and dissolved. In the meantime, the BLM approved permits, and the companies began drilling with neither the PAWG in place nor the commitments to the ROD for monitoring and mitigation being implemented. Some monitoring, mostly for certain wildlife species, was funded by industry, but the data collected was never evaluated.In 2004, after being chartered under FACA and appointments made by the Secretary of Interior, the PAWG met again, nearly four years after development began. Task groups for resources were formed, comprising more than 100 participants. The PAWG requested an accounting of the ROD requirements and actions and learned that most AEM requirements were not being met. The PAWG struggled from 2004-2006, during which time many participants abandoned the group, disillusioned by the process. In 2006, the PAWG reformed with a new direction, whereby only post-decision actions were to be addressed. This change effectively eliminated the one of the primary functions of the AEM process — the PAWG’s working with the BLM and industry to plan operations to reduce or eliminate impacts identified through monitoring or research. This and the BLM’s inaction on previous recommendations left the AEM process in limbo, and no official PAWG meeting took place in 2006. The wildlife task group, a critical part of the PAWG, dissolved in 2005, with its recommendations for mule deer ignored by the BLM.The BLM has attempted to revitalize the PAWG, but the process has faltered. Appointments of participants have been allowed to expire, and as of June 2008 the group did not have enough members for a quorum. The PAWG and tasks groups have publicly stated their frustration with the BLM and the process, leaving its future in doubt. Back to Top Proposal for PAPA ExpansionIn 2005, the companies began working with the BLM to revise the 2000 ROD for the PAPA. In December 2006, the BLM released the draft supplemental environmental impact statement (SEIS) (link to SEIS Web site), which outlined the expansion proposed by industry and planned by the BLM. Public comments overwhelmingly opposed the proposal and alternatives. Consequently, in December 2007 the BLM released a revised SEIS (link to SEIS Web site) that outlined two additional alternatives and a preferred alternative. The preferred alternative includes the following components:- An additional 4,399 wells from 600 total well pad locations would be allowed, with the amount of surface disturbance increased by 12,000 acres.- Many wildlife protections would be waived, and year-round drilling would occur in crucial big-game habitats and near sensitive sage grouse habitats.- Mitigation would include additional pipelines, some lease deferrals and other voluntary commitments.- Thirty-six million dollars, spread over approximately 17 years, would be committed, and annual payments would be based on the pace of development.- The BLM would develop an interagency monitoring group, which would include representatives from industry but not the public, for wildlife resources.- Mule deer populations would be allowed to decline another 15 percent — and sage grouse populations would be allowed to decline 30 percent — before action would be required.- The future and function of the PAWG would be unclear. Many of the previous commitments for wildlife resources would be superseded.- Many actions contradict recent research, and the pilot and demonstration project results are not incorporated into the proposal.- Development plans do not include any deeper formation wells that might be drilled in the same area, and baseline inventories and monitoring/mitigation plans are not required until after the decision is made.- Drilling and production would take approximately 75 years, with total reclamation and restoration of the area continuing for more than a century.Back to Top。

纯氯化铵安全数据表说明书

Material Safety Data SheetAmmonium Chloride PureACC# 95878Section 1 - Chemical Product and Company IdentificationMSDS Name: Ammonium Chloride PureCatalog Numbers: AC123340000, AC123340010, AC123340250, AC123340250Synonyms: Ammonium Chloratum, Ammonium Chloridum, Ammonium Muriate, Sal Ammonia, Salmiac.Company Identification:Acros Organics N.V.One Reagent LaneFair Lawn, NJ 07410For information in North America, call: 800-ACROS-01For emergencies in the US, call CHEMTREC: 800-424-9300Section 2 - Composition, Information on IngredientsCAS#Chemical Name Percent EINECS/ELINCS 12125-02-9Ammonium chloride>99.0235-186-4Hazard Symbols: XNRisk Phrases: 22 36Section 3 - Hazards IdentificationEMERGENCY OVERVIEWAppearance: colorless or white. Caution! May cause respiratory and digestive tract irritation. May be harmful if swallowed. Causes eye irritation. May cause skin irritation.Target Organs: None.Potential Health EffectsEye: Causes eye irritation.Skin: May cause skin irritation.Ingestion: May cause irritation of the digestive tract. May cause systemic toxicity with acidosis. May be harmful if swallowed.Inhalation: If heated, dust or fume may cause respiratory tract irritation.Chronic: Prolonged or repeated skin contact may cause dermatitis.Section 4 - First Aid MeasuresEyes: Flush eyes with plenty of water for at least 15 minutes, occasionally lifting the upper and lower eyelids. Get medical aid immediately.Skin: Flush skin with plenty of soap and water for at least 15 minutes while removing contaminated clothing and shoes. Get medical aid if irritation develops or persists. Wash clothing before reuse.Ingestion: Induce vomiting. If victim is conscious and alert, give 2-4 cupfuls of milk or water. Never give anything by mouth to an unconscious person. Get medical aid.Inhalation: Remove from exposure to fresh air immediately. If not breathing, give artificial respiration. If breathing is difficult, give oxygen. Get medical aid.Notes to Physician: Treat symptomatically and supportively.Section 5 - Fire Fighting MeasuresGeneral Information: As in any fire, wear a self-contained breathing apparatus inpressure-demand, MSHA/NIOSH (approved or equivalent), and full protective gear. During a fire, irritating and highly toxic gases may be generated by thermal decomposition or combustion. Use water spray to keep fire-exposed containers cool. Substance is noncombustible. Containers may explode in the heat of a fire. May polymerize explosively when involved in a fire.Extinguishing Media: For small fires, use dry chemical, carbon dioxide, water spray oralcohol-resistant foam. Substance is noncombustible; use agent most appropriate to extinguish surrounding fire. For large fires, use water spray, fog or alcohol-resistant foam. Cool containers with flooding quantities of water until well after fire is out.Section 6 - Accidental Release MeasuresGeneral Information: Use proper personal protective equipment as indicated in Section 8. Spills/Leaks: Vacuum or sweep up material and place into a suitable disposal container. Clean up spills immediately, observing precautions in the Protective Equipment section. Avoid generating dusty conditions. Provide ventilation.Section 7 - Handling and StorageHandling: Wash thoroughly after handling. Use with adequate ventilation. Minimize dust generation and accumulation. Do not get in eyes, on skin, or on clothing. Keep container tightly closed. Avoid ingestion and inhalation.Storage: Store in a cool, dry, well-ventilated area away from incompatible substances. Store below 40°C.Section 8 - Exposure Controls, Personal ProtectionEngineering Controls: Use adequate general or local exhaust ventilation to keep airborneconcentrations below the permissible exposure limits.Exposure LimitsChemical Name ACGIH NIOSH OSHA - Final PELsAmmonium chloride 10 mg/m3 TWA; 20mg/m3 STEL10 mg/m3 TWA none listedOSHA Vacated PELs: Ammonium chloride: 10 mg/m3 TWA; 20 mg/m3 STELPersonal Protective EquipmentEyes: Wear appropriate protective eyeglasses or chemical safety goggles as described by OSHA's eye and face protection regulations in 29 CFR 1910.133 or European Standard EN166.Skin: Wear impervious gloves.Clothing: Wear appropriate protective clothing to prevent skin exposure.Respirators: Follow the OSHA respirator regulations found in 29CFR 1910.134 or European Standard EN 149. Always use a NIOSH or European Standard EN 149 approved respirator when necessary.Section 9 - Physical and Chemical PropertiesPhysical State: SolidAppearance: colorless or whiteOdor: odorlesspH: 5.0 (10% sol at 25C)Vapor Pressure:************Vapor Density: Not available.Evaporation Rate:Negligible.Viscosity: Not available.Boiling Point: 520 deg C(sublimes)Freezing/Melting Point:328 deg CAutoignition Temperature: Not available.Flash Point: Not available.Decomposition Temperature:Not available.NFPA Rating: (estimated) Health: 1; Flammability: 0; Reactivity: 0Explosion Limits, Lower:Not available.Upper: Not available.Solubility: 39.6% at 176F.Specific Gravity/Density:1.53 (Water=1)Molecular Formula:NH4ClMolecular Weight:53.4877Section 10 - Stability and ReactivityChemical Stability: Stable at room temperature in closed containers under normal storage and handling conditions.Conditions to Avoid: Incompatible materials, excess heat.Incompatibilities with Other Materials: Acids, alkalis, and their associated carbonates. Substance reacts with lead and silver salts to form a fulminating compound. Substance reacts with ammonium compounds, bromine pentafluoride, bromine trifluoride, hydrogen cyanide, iodine heptafluoride, nitrates, and potassium chlorate.Hazardous Decomposition Products: Irritating and toxic fumes and gases, ammonia and hydrochloric acid fumes.Hazardous Polymerization: May occur.Section 11 - Toxicological InformationRTECS#:CAS# 12125-02-9: BP4550000LD50/LC50:CAS# 12125-02-9:Draize test, rabbit, eye: 500 mg/24H Mild;Draize test, rabbit, eye: 100 mg Severe;Oral, mouse: LD50 = 1300 mg/kg;Oral, rat: LD50 = 1650 mg/kg;Carcinogenicity:CAS# 12125-02-9: Not listed by ACGIH, IARC, NIOSH, NTP, or OSHA.Epidemiology: No information available.Teratogenicity: No information available.Reproductive Effects: No information available.Neurotoxicity: No information available.Mutagenicity: Cytogenetic analysis: hamster fibroblast, 400 mg/L.Other Studies: None.Section 12 - Ecological InformationEcotoxicity: Fish: LC50 = 109.0 mg/L; 48 Hr.; Static conditions Sunfish (fresh water) TLm=6 ppm/96HEnvironmental: No information reported.Physical: No information available.Other: None.Section 13 - Disposal ConsiderationsChemical waste generators must determine whether a discarded chemical is classified as a hazardous waste. US EPA guidelines for the classification determination are listed in 40 CFR Parts 261.3. Additionally, waste generators must consult state and local hazardous waste regulations to ensure complete and accurate classification.RCRA P-Series: None listed.RCRA U-Series: None listed.Section 14 - Transport InformationUS DOT IATA RID/ADR IMO Canada TDGShipping Name:Noinformationavailable.No informationavailable.Hazard Class:UN Number:Packing Group:Section 15 - Regulatory InformationUS FEDERALTSCACAS# 12125-02-9 is listed on the TSCA inventory.Health & Safety Reporting ListNone of the chemicals are on the Health & Safety Reporting List.Chemical Test RulesNone of the chemicals in this product are under a Chemical Test Rule.Section 12bNone of the chemicals are listed under TSCA Section 12b.TSCA Significant New Use RuleNone of the chemicals in this material have a SNUR under TSCA.SARASection 302 (RQ)CAS# 12125-02-9: final RQ = 5000 pounds (2270 kg)Section 302 (TPQ)None of the chemicals in this product have a TPQ.SARA CodesCAS # 12125-02-9: acute, chronic.Section 313No chemicals are reportable under Section 313.Clean Air Act:This material does not contain any hazardous air pollutants. This material does not contain any Class 1 Ozone depletors. This material does not contain any Class 2 Ozone depletors.Clean Water Act:CAS# 12125-02-9 is listed as a Hazardous Substance under the CWA. None of the chemicals in this product are listed as Priority Pollutants under the CWA. None of the chemicals in this product are listed as Toxic Pollutants under the CWA.OSHA:None of the chemicals in this product are considered highly hazardous by OSHA.STATECAS# 12125-02-9 can be found on the following state right to know lists: California, New Jersey, Florida, Pennsylvania, Minnesota, Massachusetts.California No Significant Risk Level: None of the chemicals in this product are listed. European/International RegulationsEuropean Labeling in Accordance with EC DirectivesHazard Symbols:XNRisk Phrases:R 22 Harmful if swallowed.R 36 Irritating to eyes.Safety Phrases:S 22 Do not breathe dust.WGK (Water Danger/Protection)CAS# 12125-02-9: 1CanadaCAS# 12125-02-9 is listed on Canada's DSL List. CAS# 12125-02-9 is listed on Canada's DSL List.This product has a WHMIS classification of D2B.CAS# 12125-02-9 is listed on Canada's Ingredient Disclosure List.Exposure LimitsCAS# 12125-02-9: OEL-ARAB Republic of Egypt:TWA 10 mg/m3 (fume) OEL-AUSTRALIA:TWA 10 mg/m3;STEL 20 mg/m3 (fume) OEL-BELGIUM:TWA 10 mg/m3;STEL 20 mg/m3 (fume) OEL-DENMARK:TWA 10 mg/m3 (fume) OEL-FRANCE:TWA10 mg/m3 (fume) OEL-THE NETHERLANDS:TWA 10 mg/m3 (fume) OEL-RUSSIA:STEL 10 mg/m3 (fume) OEL-SWITZERLAND:TWA 6 mg/m3 (fume) OEL-UNITED KINGDOM:TWA 10 mg/m3;STEL 20 mg/m3 (fume) OEL IN BULGARIA, COLOMBIA, JORDAN, KOREA check ACGIH TLV OEL IN NEW ZEALAND, SINGAPORE, VIETNAM check ACGI TLVSection 16 - Additional InformationMSDS Creation Date: 6/15/1999Revision #1 Date: 8/02/2000The information above is believed to be accurate and represents the best information currently available to us. However, we make no warranty of merchantability or any other warranty, express or implied, with respect to such information, and we assume no liability resulting from its use. Users should make their own investigations to determine the suitability of the information for their particular purposes. In no event shall Fisher be liable for any claims, losses, or damages of any third party or for lost profits or any special, indirect, incidental, consequential or exemplary damages, howsoever arising, even if Fisher has been advised of the possibility of such damages.。

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Submission
Slide 2
Mujtaba (Agere), Petranovich (Conexant), Fischer (Broadcom), Stephens (Intel) et. al.
November 2005
Additional Authors: Name
Marc de Courville Rolf De Vegt Franz Dielacher Yoshiharu Doi Takagi Eiji Leonid Epstein Mustafa Eroz Stefan Fechtel Paul Feinberg Guido Frederiks Takashi Fukagawa James Gardner Jeremy Gosteau Sudheer Grandhi Paul Gray Daqing Gu Emre Gunduzhan Jin-Meng Ho Dale Hocevar Muhammad Ikram Yasuhiko Inoue Kaz Ishida Takashi Ishidoshiro Lakshmi Iyer
November 2005
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Joint Proposal Closing Report
Date: Authors: Name Company Address
Syed Aon Mujtaba James Petranovich Matthew Fischer Adrian P. Stephens Jon Rosdahl Agere Systems Conexant Broadcom Intel Samsung
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Submission
Slide 1
Mujtaba (Agere), Petranovich (Conexant), Fischer (Broadcom), Stephens (Intel) et. al.
November 2005
Additional Authors: Name
Bill Abbott Santosh Abraham Tomoko Adachi Dmitry Akhmetov Tsuguhide Aoki Yusuke Asai Geert Awater David Bagby Gal Basson Anuj Batra John Benko Bjorn Bjerke Jerry Chang Jerry Chang John Chang Jeng-Hong Chen Stephen Chen Yi-Ming Chen Pei-ju Chiang Emily Chou Keith Chugg Brian Classon Sean Coffey Gabriella Convertino
2005-11-17
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