ECONOMICS OF ACCOUNTING Volume II - Performance Evaluation

Springer Series in Accounting Scholarship

Series Editor:

Joel S. Demski Fisher School of Accounting University of Florida

Books in the series:

Christensen, Peter O., Feltham, Gerald A. Economics of Accounting - Volume I

Information in Markets Christensen, Peter O., Feltham, Gerald A.

Economics of Accounting - Volume II Performance Evaluation

ECONOMICS OF ACCOUNTING Volume n - Performance Evaluation

Peter O. Christensen University ofAarhus and

University of Southern Denmark-Odense

Gerald A. Feltham The University of British Columbia, Canada

Springer

Library of Congress Cataloging-in-Publication Data

A CLP. Catalogue record for this book is available from the Library of Congress.

Economics of Accounting -Volume II, Performance Evaluation Peter O. Christensen and Gerald A. Feltham

ISBN 0-387-26597-X e-ISBN 0-387- 26599-6 Printed on acid-free paper. ISBN 978-0387-26597-1

© 2005 Springer Science+Business Media, Inc. All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, Inc., 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now knon or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights.

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To Kasper, Esben, and Anders Tracy, Shari, and Sandra

CONTENTS

Foreword to Volume I by Joel S. Demski xv Preface to Volume I xvii Preface to Volume II xxi

16. Introduction to Performance Evaluation 1 16.1 An Illustration of a Principal-agent Relationship 3 16.2 Basic Single-period/Single-agent Settings 7

16.2.1 Optimal Contracts 7 16.2.2 Ex Post Reports 10 16.2.3 Linear Contracts 12 16.2.4 Multiple Tasks 14 16.2.5 Stock Prices and Accounting Numbers 16

16.3 Private Agent Information and Renegotiation in Single-period Settings 18

16.3.1 Some General Comments 18 16.3.2 Post-contract, Pre-decision Information 19 16.3.3 Pre-contract Information 20 16.3.4 Intra-period Renegotiation 22

16.4 Multi-period/single-agent Settings 24 16.4.1 Full Commitment with Independent Periods 24 16.4.2 Timing and Correlation of Reports in a Multi-period

LENMOAQX 25

16.4.3 Full Commitment with Interdependent Periods 26 16 A A Inter-period Renegotiation 29

16.5 Multiple Agents in Single-period Settings 30 16.5.1 Multiple Productive Agents 30 16.5.2 A Productive Agent and a Monitor 33

16.6 Concluding Remarks 35 References 35

PARTE PERFORMANCE EVALUATION IN

SINGLE-PERIOD/SINGLE-AGENT SETTINGS

17. Optimal Contracts 39 17.1 Basic Principal-agent Model 40

17.1.1 Basic Model Elements 40 17.1.2 Principal's Decision Problem 42 17.1.3 Optimal Contract with a Finite Action and

Outcome Space 44

viii Contents

\12 First-best Contracts 45 17.3 Risk and Effort Aversion 48

17.3.1 Finite Action Space 49 17.3.2 Convex Action Space 59 17.3.3 Convex Outcome Space - The Mirrlees Problem 68 17.3.4 Randomized Contracts 71

17.4 Agent Risk Neutrality and Limited Liability 73 17.5 Concluding Remarks 78 Appendix 17A: Contract Monotonicity and

Local Incentive Constraints 79 Appendix 17B: Examples that Satisfy Jewitt's Conditions for the

Sufficiency of a First-order Incentive Constraint 86 Appendix 17C: Characteristics of Optimal Incentive Contracts for

KARA Utility Functions 88 References 92

18. Ex Post Performance Measures 95 18.1 Risk Neutral Principal "Owns" the Outcome 96

18.1.1 ^-Informativeness 98 18.1.2 Second-order Stochastic Dominance with Respect

to the Likelihood Ratio 105 18.1.3 A Hurdle Model Example I l l 18.1.4 Linear Aggregation of Signals 115

18.2 Risk Averse Agent "Owns" the Outcome 120 18.3 Risk Averse Principal "Owns" the Outcome 124

18.3.1 Economy-wide and Firm-specific Risks 125 18.3.2 Hurdle Model with Economy-wide and

Firm-specific Risks 131 18.4 Costly Conditional Acquisition of Information 135 18.5 Concluding Remarks 147 Appendix 18A: Sufficient Statistics versus

Sufficient Incentive Statistics 148 References 150

19. Linear Contracts 153 19.1 Linear Simplifications 154 19.2 Optimal Linear Contracts 158

19.2.1 Binary Signal Model 159 19.2.2 Repeated Binary Signal Model 161 19.2.3 Multiple Binary Signals 164 19.2.4 Brownian Motion Model 166

19.3 Concluding Remarks 179 References 180

Contents ix

20. Multiple Tasks and Multiple Performance Measures 181 20.1 Basic Multi-task Model 182

20.1.1 General Formulation of the Principal's Problem 182 20.1.2 Exponential Utility with Normally Distributed

Compensation 184 20.2 Allocation of Effort Among Tasks with Separable Effort Costs 186

20.2.1 A "Best" Linear Contract 186 20.2.2 The Value of Additional Performance Measures 190 20.2.3 Relative Incentive Weights 192 20.2.4 Special Cases 193 20.2.5 Induced Moral Hazard 201

20.3 Allocation of Effort Among Tasks with Non-separable Effort Costs 210

20.4 Log-linear Incentive Functions 216 20.5 Concluding Remarks 218 References 219

21. Stock Prices and Accounting Numbers as Performance Measures 221

21.1 Ex Post Equilibrium Stock Price 222 21.2 Stock Price as an Aggregate Performance Measure 224 21.3 Stock Price as Proxy for Non-contractible Investor

Information 228 21.3.1 Exogenous Non-contractible Investor Information . . . 230 21.3.2 A Fraction of Privately Informed Investors 231 21.3.3 Comparative Statics 238

21.4 Options Versus Stock Ownership in Incentive Contracts . . . . 246 21.4.1 Optimal Incentive Contract 246 21.4.2 Incentive Contracts Based on Options and Stock

Ownership 251 21.5 Concluding Remarks 255 References 256

PARTF PRIVATE AGENT INFORMATION AND RENEGOTIATION

IN SINGLE-PERIOD/SINGLE-AGENT SETTINGS

22. Post-contract, Pre-decision Information 259 22.1 The Basic Model and the Revelation Principle 259 22.2 The Hurdle Model 266 22.3 Perfect Private Information 267 22.4 Imperfect Private Information 270

X Contents

22.4.1 Some Benchmarks 270 22.4.2 Examples of Private Imperfect Information with

and without Communication 274 22.5 Is an Informed Agent Valuable to the Principal? 277 22.6 Delegated Information Acquisition 282 22.7 Sequential Private Information and the Optimal Timing of

Reporting 286 22.8 Impact of Disclosure on the Information Revealed

by the Market Price 292 22.9 Concluding Remarks 303 References 304

23. Pre-Contract Information - Uninformed Principal Moves First 305 23.1 Basic Model 305 23.2 Perfect Private Information 308 23.3 Imperfect Private Information 313 23.4 Mechanism Design 323

23.4.1 Basic Mechanism Design Problem 324 23.4.2 A Possibility of No Private Information 332 23.4.3 To Be or Not to Be Informed Prior to Contracting . . . 335 23.4.4 Impact of a Public Report on Resource Allocation . . . 337 23.4.5 Early Reporting 342

23.5 Concluding Remarks 348 Appendix 23 A: Proof of Proposition 23.6 349 References 351

24. Intra-period Contract Renegotiation 353 24.1 Renegotiation-proof Contracts 355 24.2 Agent-reported Outcomes 363 24.3 Renegotiation Based on Non-contractible Information 366

24.3.1 Renegotiation after Unverified Observation of the Agent's Action 367

24.3.2 Renegotiation after Observing a Non-contractible, Imperfect Signal about the Agent's Action 368

24.3.3 Information about Outcome before Renegotiation . . . 371 24.4 Private Principal Information about the Agent's Performance 371 24.5 Resolving Double Moral Hazard with a Buyout Agreement . 376 24.6 Concluding Remarks 378 References 379

Contents xi

PARTG CONTRACTING IN MULTI-PERIOD/SINGLE-AGENT SETTINGS

25. Multi-period Contracts with Full Commitment and Independent Periods 383

25.1 Basic Model 385 25.2 Aggregate Consumption Preferences 391

25.2.1 An "Effort Cost" Model with Exponential Utility 391 25.2.2 An "Effort Disutility" Model 394

25.3 Time-additive Preferences 398 25.3.1 No Agent Banking 398 25.3.2 Agent Access to Personal Banking 403

25.4 Multi-period Z '̂A^Model 407 25.4.1 The Agent's Preferences and Compensation 408 25.4.2 The Agent's Choices 410 25.4.3 The Principal's Contract Choice 419

25.5 r Agents versus One 421 25.5.1 Exponential EC Utility Functions 421 25.5.2 ED Utility Functions 422

25.6 Concluding Remarks 426 Appendix 25A: Two-period Hurdle Model Examples 427 Appendix 25B: Proofs 432 References 436

26. Timing and Correlation of Reports in a Multi-period Z^A^Model 439

26.1 Impact of Correlated Reports in a Multi-period LEN Model . 440 26.1.1 Impact of Report Timing on the Agent's Utility with

Exogenous Incentive Rates 440 26.1.2 Impact of Report Timing on the Principal's Optimal

Expected Net Payoff 445 26.1.3 A Single Action with Multiple Consumption Dates . . 447 26.1.4 Multiple Actions and Consumption Dates 453

26.2 Two Agents versus One 458 26.3 Concluding Remarks 463 References 463

27. Full Commitment Contracts with Interdependent Periods . . . . 465 27.1 Basic Issues in Sequential Choice 467

27.1.1 A Two-period Model with Interdependent Periods . . . 467 27.1.2 Stochastic Interdependence 470

27.2 Stochastically Independent Sufficient Performance Statistics 472 27.2.1 Orthogonalization: Achieving Stochastic Independence 473

xii Contents

27.2.2 Normalization: Obtaining Zero-mean Statistics 478 27.3 Information Contingent Actions 481

27.3.1 Optimal Contracts 482 27.3.2 A ig£7V Contract of Indirect Covariance Incentives . . . 490

27.4 Learning About Effort Productivity 498 27.4.1 A QEN-PModQ\ 499 27.4.2 A Hurdle Model of Productivity Information 506

27.5 Concluding Remarks 512 References 512

28. Inter-period Contract Renegotiation 513 28.1 Replicating a Long-term Contract by a Sequence of

Short-term Contracts 515 28.1.1 Basic Elements of the FHM Model 517 28.1.2 Main Results 523

28.2 Interdependent Periods with Joint Commitment to Employment 526

28.2.1 Performance Measure and Payoff Characteristics . . . . 526 28.2.2 Optimal Renegotiation-proof Contracts 528 28.2.3 Endogenous QEN-P Models of

Inter-period Renegotiation 536 28.2.4 Comparative Statics Given Identical Periods 541

28.3 Interdependent Periods with No Agent Commitment to Stay . 552 28.4 One versus Two Agents with Interdependent Periods 559 28.5 Concluding Remarks 563 Appendix 28A: FHM Production Technology Assumptions 565 Appendix 28B: Proofs of Propositions 567 References 569

PARTH CONTRACTING WITH MULTIPLE AGENTS IN

SINGLE-PERIOD SETTINGS

29. Contracting with Multiple Productive Agents 573 29.1 Partnerships Among Agents 575

29.1.1 Basic Partnership Model 575 29.1.2 Second-best Contract Based on Aggregate Outcome . 577 29.1.3 Second-best Contract Based on Disaggregate,

Independent Outcomes 581 29.1.4 Second-best Contract with a General Partner 583

29.2 Basic Principal/Multi-agent Model 587 29.2.1 The Principal's Problem 587

Contents xiii

29.2.2 Independent Performance Measures 589 29.2.3 Contracting with Agents with Correlated Outcomes . . 590 29.2.4 Two-agent Model with Perfectly Correlated Hurdles . 591

29.3 Hierarchical Agencies with Decentralized Contracting 597 29.3.1 Efficient Contract Delegation 598 29.3.2 Inefficient Contract Delegation 600 29.3.3 Centralized versus Decentralized Contracting with an

Aggregate Performance Measure 605 29.3.4 Disaggregate Local Information 606

29.4 Multiple Agents with Pre-contract Information 609 29.4.1 Independent Contracts 610 29.4.2 Contracting on the other Agent's Outcome 612

29.5 Concluding Remarks 617 References 618

30. Contracting with a Productive Agent and a Monitor 619 30.1 Contracting with an Informed Worker and a Costly Monitor . 620

30.1.1 The Basic Worker Model 620 30.1.2 Contracting with a Worker and a Fully Informable

Monitor 623 30.1.3 Contracting with a Worker and a Partially Informable

Monitor 626 30.2 Contracting with a Productive Agent and a Collusive Monitor 628

30.2.1 The Basic Model 629 30.2.2 A Costless, Truthful, Imperfect Monitor 632 30.2.3 Collusion and the Reward Mechanism 640 30.2.4 The Use of an External Monitor to Deter Lying by an

Internal Monitor 646 30.3 Concluding Remarks 651 References 652

Author Index 653 Subject Index 655

Foreword to Volume I Joel S. Demski

It has long been recognized that accounting is a source of information. At the same time, accounting thought has developed with a casual if not vicarious view of this fundamental fact, simply because the economics of uncertainty was not well developed until the past four decades. Naturally, these developments in our understanding of uncertainty call for a renewed look at accounting thought, one that formally as opposed to casually carries along the information perspec­tive.

Once this path is entered, one is struck by several facts: Information is central to functioning of organizations and markets, the use to which informa­tion is put becomes thoroughly endogenous in a well crafted economic analysis, and uncertainty and risk sharing are fundamental to our understanding of accounting issues.

This is the path offered by the remarkable Christensen and Feltham volumes. Their path takes us through equity and product markets (Volume I) and labor markets (Volume II), and offers the reader a wide-ranging, thorough view of what it means to take seriously the idea that accounting is a source of information. That said, this is not academic technology for technology's sake. Rather it cuts at the very core of the way we teach and research accounting. Once we admit to multiple sources and multiple uses of information, we are forced to test whether our understanding of accounting is affected seriously by ignoring those other sources and uses of information, both in terms of combin­ing information from various sources for some particular use and in terms of reactive response to other sources when one, the accounting source, is altered. It is here that the importance of thinking broadly in terms of the various sources and uses comes into play, and the message is unmistakable: accounting simply cannot be understood, taught, or well researched without placing it in its natural environment of multiple users and multiple sources of information.

The challenge Peter and Jerry provide is not simply to master this material. It is to digest it and act upon it, to offer accounting thought that is matched, so to speak, to the importance of accounting institutions.

We are deeply indebted to Peter and Jerry. That debt will go unattended until we significantly broaden and deepen our collective understanding of accounting.

Preface to Volume I

In 1977, Tom Dyckman, then Director of Research for the American Account­ing Association (AAA) encouraged Joel Demski and Jerry Feltham to submit a proposal for a monograph in the AAA Research Monograph series, "on the state of the art in information economics as it impacts on accounting." Joel and Jerry prepared a proposal entitled:

"Economic Returns to Accounting Information in a Multiperson Setting"

The proposal was accepted by the AAA in 1978, and Joel and Jerry worked on the monograph for the next few years, producing several of the proposed chap­ters. However, the task went more slowly and proved more daunting than expected. They were at separate universities and both found that, as they wrote and taught, they kept finding "holes" in the literature that they felt "needed to be filled" before completing the monograph. This, plus the rapid expansion of the field, meant they were continually chasing an elusive goal.

In the early nineties, Joel and Jerry faced up to the fact that they would never complete the monograph. However, rather than agree to total abandon­ment, Jerry "reserved the right" to return to the project. While, at that time, he did not expect to do so, he did have 500 pages of lecture notes that had been developed in teaching two analytical Ph.D. seminars in accounting: "Economic Analysis of Accounting Information in Markets," and "Economic Analysis of Accounting Information in Organizations."

Over the years, Jerry had received several requests for his teaching notes. These notes had the advantage of pulling together the major work in the field and of being done in one notation. However, they were very terse and mathe­matical, having been designed for use in class where Jerry could personally present the intuition behind the various models and their results. To produce a book based on the notes would require integration of the "words" and "graphs" used in the lectures into the notes (and there were still holes to fill).

Peter Christensen had been a student in one of Jerry's classes in 1986. In 1997, Peter asked Jerry if he was going to write a book based on his lecture notes. When Jerry stated it was too big a task to tackle alone, Peter indicated his willingness to become a coauthor. This was an important factor in Jerry's decision to return to the book, since he had worked effectively with Peter in publishing several papers over the preceding 10 years. Also of significance was our assessment that young researchers and Ph.D. students would benefit from a book that provides efficient access to the basic work in the field. The book

xviii Economics of Accounting

need not try to provide all the latest results and it need not "fill the holes". The objective is to lay an integrated foundation that provides young researchers with the tools necessary to insightfully read the latest work in the field, and to develop their own theoretical analyses.

Parallel to Jerry's two Ph.D. courses, the book is divided into two volumes.

Economics of Accounting: Volume I - Information in Markets Economics of Accounting: Volume II - Performance Evaluation

Chapter 1 gives an overview of the content of Volume I, while Chapter 16 gives an overview of the content of Volume II. Each volume is divided into several parts.

Volume I - Information in Markets Part A. Basic Decision-Facilitating Role of Information Part B. Public Information in Equity Markets Part C. Private Investor Information in Equity Markets Part D. Disclosure of Private Owner Information in Equity and

Product Markets

Volume II - Performance Evaluation Part E. Performance Evaluation in Single-Period/Single-Agent

Settings Part F. Disclosure of Private Management Information in Single-

Period/Single-Agent Settings Part G. Contracting in Multi-Period/Single-Agent Settings Part H. Contracting with Multiple Agents

The three chapters in Part A are foundational to both volumes. However, with occasional exceptions, one can read the material in Volume II without having read Parts B, C, and D of Volume I. Jerry begins both of his Ph.D. courses by ensuring all students understand the fundamental concepts covered in Part A, since these courses are offered in alternate years and the students differ with respect to which course they take first.

Students often seem to find it easier to grasp the material in Volume II, so there is some advantage to doing it first. However, conceptually, we prefer to cover the information in markets material first, and then consider management incentives. The advantage of this sequence is that management incentive models assume the manager contracts with a principal acting on behalf of the owners. The owners are investors, and Volume I explicitly considers investor preferences with respect to the firm's operations. Furthermore, while most principal-agent models implicitly assume incentive risks are firm-specific, there are models that recognize that incentive risks are influenced by both market-

Prefaces xix

wide and firm-specific factors. To fully understand the impact of the market-wide factors on management incentives, one needs to understand how the mana­ger can personally invest in the market so as to efficiently share market-wide risks with other investors. The first volume provides the necessary background for this type of analysis.

Acknowledgments Our greatest debt is to Joel Demski. Joel and Jerry were colleagues at Stanford from 1967 to 1971, and collaborated on some of the early information econom­ics research in accounting. Their initial work focused on the role of accounting information in facilitating management decisions, and culminated in the book, Cost Determination: A Conceptual Approach. In that book they recognized that accounting had both a decision-facilitating and a decision-influencing role, but the book focused on the former. While completing that book, Joel and Jerry were exposed to work in economics which explicitly considered information asymmetries with respect to management's information and actions. They recognized that this type of economic analysis had much to contribute to our knowledge about the decision-influencing role of accounting. In 1978 they published a paper in The Accounting Review, "Economic Incentives in Budget­ary Control Systems," which would later receive the AAA 1994 Seminal Contri­bution to Accounting Literature Award. One of Joel's many Ph.D. students, John Christensen, was instrumental to Peter's interest in accounting research. In recent years, Peter, as with Jerry, has had the opportunity to learn much from working with Joel on joint research.

We also want to acknowledge our debt to other coauthors who have significantly contributed to our knowledge through the joint research process. These include Joy Begley, Hans Frimor, Jack Hughes, Jim Ohlson, Jinhan Pae, Martin Wu, and Jim Xie. Their names are mentioned frequently throughout the two volumes, as we describe some of the models and results from the associated papers.

As noted above, Jerry' s Ph.D. lecture notes provide the foundation for much of the material in our two volumes. Jerry acknowledges that he has learned much from preparing the notes for his students and interacting with them as they sought to learn how to apply economic analysis to accounting. The accounting Ph.D. students who have been in Jerry's classes as he developed the notes include Amin Amershi, Derek Chan, Peter Clarkson, Lucie Courteau, Hans Frimor, Pat Hughes, Jennifer Kao, Claude Laurin, Xiaohong Liu, Ella Mae Matsumura, Jinhan Pae, Suil Pae, Florin Sabac, Jane Saly, Mandira Sankar, Mike Stein, Pat Tan, Martin Wu, and Jim Xie. Some have been Jerry's research assistants, some have been his coauthors (see above), and Jerry has supervised the dissertations of many of these students. In addition to the accounting Ph.D. students, Jerry's Ph.D. seminars have been attended by graduate students in economics, finance, and management science, as well as a number of visiting

XX Economics of Accounting

scholars. All have contributed to the development of the material used in this book.

We are particularly appreciative of colleagues who have read some draft chapters and given us feedback that directly helped us to improve the book. These include Hans Frimor, Jim Ohlson, Alex Thevaranjan, and Martin Wu. Recently, Anne Adithipyangkul, Yanmin Gao, and Yinghua Li (three current Ph.D. students) have served as Jerry's research assistants and have carefully read through the recent drafts of all of the chapters. We are thankful for their diligence and enthusiasm. We are grateful to Peter's secretary, Lene Holbaek, for her substantial editorial assistance.

Jerry's research has been supported by funds from the American Account­ing Association, his Arthur Andersen Professorship, and the Social Sciences and Humanities Research Council of Canada. Peter's research has been supported by funds from the Danish Association of Certified Public Accountants, and the Social Sciences Research Council of Denmark.

The writing of a book is a time consuming process. Moreover, every stage takes more time than planned. One must be optimistic to take on the challenge, and then one must constantly refocus as various self imposed deadlines are past. We are particularly thankful for the loving patience and good humor of our wives. Else and June, who had to put up with our constant compulsion to work on the book. Also, Peter has three sons at home, Kasper, Esben, and Anders. They had to share Peter's time with the book, but they also enjoyed a sabbatical year in Vancouver.

Peter O. Christensen

Gerald A. Feltham

Preface to Volume II

As we stated in the preceding "Preface to Volume I," Volume II focuses on accounting's decision-influencing role in the form of providing performance measures that are useful for incentive contracting. Part A of Volume I contains three chapters that provide foundational material on the decision-facilitating role of information: single-person decision making under uncertainty, decision-facilitating information, and risk sharing, congruent preferences, and informa­tion in partnerships. If the reader is not familiar with the basics, you are encour­aged to read those three chapters before reading this second volume.

While it is helpful to have read Parts C, D. and E of Volume I before read­ing Volume II, it is not necessary for the vast majority of topics. The exceptions are the few sections in Volume II in which we consider either private investor information or the impact of economy-wide versus firm-specific risks, assuming only the latter are diversifiable.

Chapter 16 gives an overview of the content of Volume II, which is now divided into the following four parts.

Part E. Performance Evaluation in Single-period/Single-agent Settings

Part F. Private Agent Information and Renegotiation in Single-period/ Single-agent Settings

Part G. Contracting in Multi-period/Single-agent Settings Part H. Contracting with Multiple Agents in Single-period Settings

Acknowledgments This second volume is a direct outgrowth of the work Joel Demski and Jerry started in their 1978 Accounting Review paper, "Economic Incentives in Budget­ary Control Systems." This paper later received the AAA 1994 Seminal Contri­bution to Accounting Literature Award. Joel is referenced many times through­out this volume because he has produced a number of significant papers dealing with agency theory. Other co-authors of papers referenced in this volume are Hans Frimor, Christian Hofmann, Florin §abac, Martin Wu, and Jim Xie. We are also very thankful to Hans Frimor, Christian Hofmann, and Florin §abac for their detailed comments on recent drafts of several chapters. Earlier drafts were read by Alex Thevaranjan, and Martin Wu, as well as by three Ph.D. students who are currently finishing their dissertations: Anne Adithipyangkul, Yanmin Gao, and Yinghua Li. We are thankful to all who have contributed to the two

xxii Economics of Accounting

volumes, and we are grateful to Peter' s secretary, Lene Holbaek, for her substan­tial editorial assistance.

Jerry' s research on the second volume has been supported by funds from his Arthur Andersen Professorship, his Deloitte and Touche Professorship, and the Social Sciences and Humanities Research Council of Canada. Peter's research has been supported by funds from the Danish Association of Certified Public Accountants, and the Social Sciences Research Council of Denmark.

Our wives. Else and June, have endured the long, and often consuming, process as we worked to complete a second volume of over 600 pages. We again thank them for their loving care and good humor. Also, Peter has three sons, Kasper, Esben, and Anders, who have had to share Peter's time with the book.

Peter O. Christensen

Gerald A. Feltham