We examine the value relevance of deferred tax components disclosed under SFAS No. 109. We classify deferred tax components into seven categories: depreciation and amortization; losses and credits carried forward; restructuring charges; environmental charges; employee benefits; valuation allowance required hy SFAS No. 109; and all other components. We find that separating deferred taxes into components provides value relevant information. In particular, the valuation coefficient on deferred tax liabilities from depreciation and amortization is close to zero, reflecting investors' expectations that firms will continue to invest in depreciable assets reducing the probability of future reversal. Also, deferred taxes from restructuring charges have valuation coefficients larger than other deferred tax components, reflecting the higher likelihood of reversal in the short run. Finally, we find that the net realizable value of deferred taxes from losses and credits carried forward is negatively associated with stock prices. This result suggests that investors do not expect part of these carryforwards to he utilized, although we cannot rule out the possibility that model misspecification is driving this result. CondenseLes impots report6s resultent de l'ecart entre l'impot exigible et la charge constatee au titre des impots de l'exercice. II n'y a done d'impots reportes que lorsque les normes d'information financiere different des exigences en matifere d'information fiscale. II arrive souvent que les utilisateurs des etats financiers ne s'entendent pas sur la methode la plus appropriee pour evaluer une societe dont le hilan contient des impots reportes actifs et passifs. Certains sont d'avis que les impots reportes nets representent des obligations financieres et, par cons6quent, que leur valeur doit etre actualis6e de la meme maniere que les autres obligations financieres a long terme. D'autres invoquent le fait qu'il est frequent que les impots reportes passifs (resultant, par exemple, d'ecarts temporels lies a l'amortissement) ne soient jamais regies, de sorte que la valeur comptable de l'avoir des actionnaires de l'entreprise devrait etre augmentee des impots reportes passifs nets (et diminuee des impots report6s actifs nets). La majorite des utilisateurs des etats financiers paraissent cependant r6agir a la complexite du probleme en ignorant carrement les impots report6s. Les auteurs se donnent pour objectif de proposer un cadre de rdfdrence simple permettant de comprendre le role des impots report6s nets, et des 616ments qui les composent, dans I'fitablissement de la valeur de I'entreprise. Us d6tnontrent aussi que Tinformation relative aux impots report6s foumie aux termes du SFAS n° 109 est pertinente £i r^tablissement de cette valeur. Us examinent plus pr^cisement si revaluation des 616-ments d'impot report6 d6pend de la probabilit6 de r6sorption. A partir de I'information foumie sur les 616ments d'impot report6, conform6ment aux exigences du SFAS n° 109, ils 6valuent la probabilit6 de r6sorption de chaque 616m...

We study a model of financial reporting where investors infer the precision of reported earnings. Reporting a larger earnings surprise reduces the inferred earnings precision, dampening the impact on firm value of reporting higher earnings, and providing a natural demand for smoother earnings. We show that for sufficiently “bad” news, the manager under‐reports earnings by the maximum, preferring to take a “big bath” in the current period in order to report higher future earnings. If the news is “good,” the manager smoothes earnings, with the amount of smoothing depending on the level of cashflows observed. He either over‐reports or partially under‐reports for slightly good news, and gradually increases his under‐reporting as the news gets better, until he is under‐reporting the maximum amount for sufficiently good news. This result holds both when investors are “naïve” and ignore management’s ability to manipulate earnings, or “sophisticated” and correctly infer management’s disclosure strategy.

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

Accounting for employee stock options is affected by whether outstanding options are viewed as equity or liabilities. The common perception is that the FASB's recommended treatment (per SFAS No. 123), which is based on the options-as-equity view, results in representative financial statements. We argue that this treatment distorts performance measures for three reasons. First, the deferred taxes associated with nonqualified options should also be included as equity, but are not. Second, since unexpected share price changes affect optionholders and equityholders differently, combining their interests provides an average earnings effect that is not representative for either group. We show that efforts to isolate the interests of common stockholders via diluted earning per share calculations (per SFAS No. 128) are inherently incapable of identifying wealth transfers between stockholders and optionholders. Finally, projections of future cash flow statements prepared under SFAS No. 95 overstate cash flows to current equityholders by the pretax value of projected option grants. We show that these distortions can be avoided simply by accounting for options as liabilities at grant and thereafter recognizing changes in option values (similar to the accounting for stock appreciation rights). Our analysis of stock option accounting leads to two, more general implications: (1) all securities other than common shares should be treated as liabilities, thereby simplifying the equity versus liability distinction, and (2) these liabilities should be recorded at fair values, thereby obviating the need to consider earnings dilution.

Some companies now outsource their internal audit function to public accountants. Internal auditors and accounting firms disagree about the merits of outsourcing. Each type of auditor claims to provide more cost‐effective services and appears to claim superior expertise. This paper uses agency theory to examine outsourcing and reconciles the outsourcing debate without resorting to differential auditor expertise. Under the assumptions that public accountants' “deep pockets” provide incentives to outsource and their higher opportunity cost provides a disincentive, we characterize the optimal employment contract with each auditor. We find that public accountants provide higher levels of testing, but possibly for a higher expected fee. This result supports both the internal auditor's claim as the lower cost provider, and the public accountant's claim of higher quality. We also find that incentives to outsource generally increase in various measures of risk, including the risk that a control weakness exists and the size of the loss that can result from an undetected control weakness.

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