2002-1

Author

Lee, Shu Hua

Title

Knowledge Intensity within Industrial Value Chain and Firm Performance

Abstract

This study addresses two set of broad questions. (1) does R&D (knowledge) expenditure have a positive impact on firm performance? And (2) does R&D (knowledge) expenditure have spillover effect on enterprises in the same segment and in different segments? Besides, if the stock market properly uses public information of R&D investments and if the stock price conforms to the rationally pricing for this public information is also examined in this research.The empirical evidence shows that IC design firms have a R&D valuation parameter of $6.78, which is more than that of the whole IC industry ($3.17) and that of IC manufacturers ($2.11). This implies that investors saw the earnings of IC designers as more permanent than the earnings of other segments in the IC value chain. The inter-segments externality effects on the market value to book value ratio ( ) found only in IC design segment. When the current overall R&D investment of the segment in IC design increases by 2.72 ( ) times, the spillover effect would result in a 2.134 dollars of market value for the R&D expenditure made in the current year by firms in other segments.For the Mishkin test of rational pricing issues, all the pricing coefficients are much higher than the prediction coefficients, suggesting that the market may overprice the R&D and non-R&D related-information relative to their ability to predict operation incomes. The ratios of the implied coefficient derived from the pricing equation to the actual coefficient from the prediction equation show that the market may overprice the R&D and non-R&D related-information by as high as 5 to 15 times. This is a strong evidence of irrational pricing on the market for the information examined.To sum up, the R&D contribution of IC design is obviously higher than the other two segments in the same value chain. This leads to a suggestion that the authority in Taiwan should re-consider their subsidy-policy regarding the IC industry. IC design segment is the one in the value chain that needs most attention from the government. This is especially true, if we explicitly account for the positive externality brought by the IC segment to the whole value chain.

2002-2

Author

Tsai, Bi Huei

Title

Differential Earnings Responses and Differential Prices between Depositary Receipts and Underlying Securities, and Earnings Management Incentive of Initial Depositary Receipt Offerings

Abstract

The first research question studies the effect of differential information among investors and price limits on the market reaction to earning announcements. We specifically study the effect of (1) the differential information among local and foreign investors and (2) the price limits imposed in Taiwanese stock markets on the earnings response difference between depositary receipts (DRs) and underlying securities. The empirical results indicate stronger associations between stock returns and reported earnings for DRs than underlying securities. We also find the greater DR market reaction to earning announcements for firms with lower qualified foreign institutional investor (QFII) holdings. This result is consistent with our conjunction that less QFII holdings result in less information gained by the foreign investors on the same underlying firm's performance. In addition, we empirically document that the earnings response period of the underlying security market is longer than that of the DR market. This evidence is used to support the hypothesis that the price limit policy causes the delay of market reactions of the underlying security market. Thus, we conclude that the greater market reactions to earning announcements for DRs can be attributed to the differential information among investors and the price limit policy.The second research question focuses on the price difference between DRs and underlying securities issued by the Taiwanese firms under foreign ownership restrictions. We examine two issues: (1) the price relationships between DRs and their underlying securities for Taiwanese firms, and (2) the determinants of the price differences between DRs and their underlying securities. The empirical results show that large daily price differences are observed between DRs and underlying securities, but are not between DRs traded in different free-entry countries. For the determinants of the price differences between DRs and their underlying securities, we find that the time-series QFII surplus, the QFII ownership limit ratio minus the actual QFII ownership ratio, is inversely associated with the DR premium. As the foreign ownership restrictions become tighter, the QFII surplus decreases and the DR premium increases. Besides, the results indicate the supply-side effect on DR premiums. As the firms increase to issue DRs, the DR premiums become smaller. Furthermore, this study finds the structural change in the relationships between DR premiums and investor sentiment variables in 1997. The DR premiums are sensitive to non-QFII holdings, the total foreign holdings minus the QFII holdings, before 1997. Meanwhile, the DR premiums become more sensitive to firm size, but less sensitive to non-QFII holdings since 1997. It suggests
that overseas investors prefer to invest firms with higher non-QFII holdings because they easily access the information of these firms before 1997. However, foreigners prefer large firms because large firms release more public information with market internationalization since 1997. The change of demand reflects in DR prices, which leads to the variations of DR premiums. This study concludes that the regulation, supply and investor sentiment conditions explain the DR premiums.
The third research question extends the conventional IPO earnings management study to initial depositary receipts offerings. In addition, we go beyond testing the earnings management incentives. Because firms with lower QFII holdings contain less information among investors, we can use QFII ownership to explain the effect of information asymmetry environments on earnings management incentives. Also, we propose that the earnings management is attributed to DR offering size relative to the existing book value of stockholders' equity. Moreover, we further investigate the post-issue adjustment behaviors of earnings management and the effect of earnings management on post-issue DR performance. The empirical results indicate that discretionary accrual (DA) reaches the highest value for one year prior to DR issue. This implies the pre-issue earnings management. Besides, the results reveal that pre-issue DAs appear greater for firms with lower QFII ownership or higher DR offering size. Also, the DA reversals behaviors occur for these firms following DR issues. This suggests that firms with higher information asymmetry and firms that raise more capitals from DR offerings have stronger incentives of earnings management. Furthermore, our empirical results indicate that the firms with higher pre-issue DAs have poorer DR return performance in the subsequent periods following DR issues. That is consistent with the findings of IPOs for underlying securities in Teoh, Welch and Wong (1998).

2001-1

Author

Chang, Hui Shan

Title

The effects of imputed tax credit system on equity valuation

Abstract

The implementation of the full imputation tax credit system did impose great impacts on capital market and company policies.　The tax reform and particular regulation force us to review how the new tax system affects the traditional equity valuation model.　This research takes the future tax liabilities of retained earnings into account, and includes it in the equity valuation model.　Based on the particular circumstances that different tax rules applies to the retained earnings before and after the tax reform, the research develops an equity valuation model applicable in the local full imputation tax credit system.　An after-tax equity valuation model is established to explore the separate valuation effect of the retained earnings before and after the tax reform, measure the change of the valuation of the affected accounts under the new system, and develop hypotheses, in order to test the impacts on the equity valuation that the new tax system has brought about. The empirical results in this research can be summarized as follows:1.　The tax liabilities valuation effect of the retained earnings The tax liabilities of retained earnings should have negative impacts on the equity valuation.　Since the retained earnings before 1998 does not apply for the new tax rule, and thus the dividends distributed from retained earnings before 1998 was implicitly doubly taxed, therefore, the investors should have a higher valuation on the retained earnings after that year.　Based on the results of the listed companies, the future tax liabilities of retained earnings have been taken into account in the investors' equity valuation.　The effect was negative for both retained earnings before and after 1998. The valuation effect has been higher for the retained earnings after 1998, which is consistent with our hypothesis.　The empirical results are different for the OTC companies, in which investors show no consideration of the future tax liability of the retained earnings when conducting valuation.　The results of all samples show the similar valuation effect as that of listed companies.2.　The valuation effect of the ratios of retained earnings to book value Both the ratios of the listed companies and all the samples exhibit positive valuation effects, and the valuation on the ratio of retained earnings after 1998 to book value is lower than that of retained earnings before 1998 to book value.3. The valuation effects of the current portion of income tax expense As the empirical results demonstrate, there is a positive relation between firm price and the valuation of the current portion of income tax expense, but the effect is not significant.　It is seemed that investors have perceived the change of the nature of income tax expense. 4. The valuation effects of the deferred tax asset and deferred tax liabilities From 1999 till 2000, there is no significant positive valuation effect on net deferred tax liabilities (deferred tax liabilities minus deferred tax assets), which is inconsistent with our hypothesis.In summary, it is clearly that under the full imputation tax credit system, the equity valuation will not be complete until the imputed tax liabilities of retained earnings applied under different tax rules is taken into consideration. Besides, the implementation of imputation tax credit system results in the change of the nature of corporate income tax, deferred tax assets, and deferred tax liabilities. This change should be kept in mind while investors
measure firm prices. Keywords: Imputation Tax Credit System, Accounting-Based Valuation Model, Dividend Taxes Capitalization, Tax Liabilities of Retained Earnings

2001-2

Author

Chang, Ming Lei

Title

The Performance of State-Owned Enterprises in China:A Principal-Supervisor-Agent Relationships Analysis

Abstract

2000-1

Author

Title

Abstract

2000-2

Author

Huang, Lan Kuei

Title

An Analysis of Technical Efficiency in Post-Merger Period: The Case of Accounting Firms in Taiwan

Abstract

No matter in Taiwan or in other countries, accounting firms have always
enlarged their scale by merger for all the time. Even when large international
accounting firms underwent two mergers in 1989 and 1998, and have formed the "
Big Five", the top management of "Big Five" didn't rule out the possibility
of further merger in the future. In other words, merger has been an important
strategy for accounting firms in development.
The purpose of this study is to analyze the impact of accounting firms'
merger on technical efficiency. Data Envelopment Analysis is applied to
evaluate the technical efficiency of accounting firms. Besides quantitative
variables, audit quality is taken into consideration when selecting the input/
output variables. In stage two, a regression analysis is applied to the DEA
efficiency scores in order to identify the impacts of accounting firm mergers.
The data used in this study are from the annual survey of accounting firms in
Taiwan held by the Department of Statistics of the Ministry of Finance during
1990 to 1999 period.
The major findings are summarized as follows: first, merger has significant
impacts on the technical efficiency variation of accounting firms between pre-
merger year and merger year. Holding the effects of other factors constant,
the impact of size growth on technical efficiency variation is different
between merged accounting firms and non-merged accounting firms. The larger
the size growth of accounting firm after merger, the less the technical
efficiency improves. Holding the effects of other factors constant, the impact
of service concentration variation on technical efficiency variation is
different between merged accounting firms and non-merged accounting firms. The
larger the service concentration variation, the less the technical efficiency
improves.
Second, in one year and above after merger, merger has no significant impact
on the technical efficiency variation of accounting firms between pre-merger
year and post-merger years. One possible explanation of this empirical result
is the technical efficiency of this industry as a whole is mature; therefore
the shock of merger to technical efficiency is easy to recover for accounting
firms. Third, taking the accounting firms industry as a whole, accounting firm
size has significant impact on technical efficiency variation between
different years. This result verifies that the motivation of accounting firms
merger is to enlarge firm size rapidly.

2000-3

Author

Lee, Hua

Title

Strategic Considerations in Auditing Litigation and Settlement

Abstract

It is widely recognized that the CPAs have been facing severe legal crises in
the past decade, even after the enactment of the Private Securities Litigation
Reform Act of 1995 or the Securities Litigation Uniform Standards Act of 1998.
However, the low trial rate (8%, Palmrose, 1991) indicates that most legal
disputes are either settled out of court or dropped. Nevertheless, defending
against weak claims is financially burdensome and time-consuming. Once having
gone to court, the court may commit legal errors, because under negligence
liability the definition of the negligence is not clearly specified. In
particular, compared to other kind of lawsuits (such as criminal or civil
suits), in auditing litigation, the possible lack of expertise by the court in
making correct judgment of standards of negligence in accounting and auditing
further heightens the extent of legal error.
The purpose of the dissertation is to analyze the strategic interactions
between an auditor and an investor in a dynamic auditing litigation game,
especially in the presence of legal error under negligence liability, when
settlement bargaining is considered. In the first part of the thesis, we show
that there exists a set of equilibrium strategies: the investor correctly
conjectures the auditor's chosen due care (audit effort), and proposes a
settlement offer that the auditor will accept with certainty. By incorporating
a damage penalty into the model as a compensation for the winning defendant (
auditor), raising either the standard of negligence or the auditor's expected
litigation cost increases due care, while the effects of damage award,
penalty, and legal error remain ambiguous. We also characterize the court's
choices of damage award and penalty subject to the auditor's chosen due care.
In the second part of the thesis, we then apply the model to compare
litigation cost rules, the American rule, the British rule, the Proplaintiff
rule, and the Prodefendant rule. The application of the model to the
litigation cost allocation rule does not support practitioners' advocacy for
a move to the British rule. We show that the effort exerted by the auditors
may be lower under British rule, which results in more high-probability-of-
losing auditors going to trial.

2000-4

Author

Huang, Der Fen

Title

The Risk-Relevant Information Content and Policy Effect of Capital Adequacy Regulations for Banks in Taiwan

Abstract

This paper examines the information content of capital adequacy ratio and its
components for risk of banks in Taiwan. Also, it investigates whether the new
1998 capital requirement mechanism provides incremental information to assess
bank risk compared with the old 1992 mechanism, and evaluates which mechanism
is more closely associated with bank risk. Final, it investigates whether the
risk-based capital adequacy ratio has incremental and relative information
about bank risk compared with the non-risk-based capital ratio (ordinary or
traditional capital ratio). This paper employs an option pricing methodology
to calculate implied asset risk as a proxy for total risk of banks. This
methodology incorporates the non-linearity of equity, deposit insurance, and
regulatory rules. Currently, almost numbers of capital adequacy ratio
components used in this study are not required annual reporting disclosures.
The major findings are: (1) The capital adequacy ratio and its components
convey information regarding bank risk. (2) The components of the new capital
ratio have incremental explanatory power over the old rules and over the non-
risk-based capital ratio. In addition, the new mechanism has greater
information content than the old one regarding implied asset risk, and each
risk-based mechanism has greater information content than non-risk-based one. (
3) Two risk dimensions categorized by regulators, credit risk and market risk,
have different explanatory power. There is a positive impact of credit risk
exposures on bank risk, but market risk exposures do not. (4) The rationality
of risk forecast based on risk-based capital ratio is supported empirically,
but it is not hold on disaggregated data (components). Based on the empirical
results in this paper, we suggest that regulators and accounting standard
setters should require banks to publicly disclose this regulatory information
for enhancing transparency of banking.

1999-1

Author

Kuo, Jenn Shyong

Title

Performance Evaluation of Multiple Production Process: Measuring the Efficiency of Higher Education Institutions in Taiwan

Abstract

In terms of the nature of production process, all university and college are
organizations that consists of production process with multiple inputs,
multiple outputs and heterogeneous sub-production processes.　The output of a
particular sub-process can be the input of another sub-process, therefore
becomes an intermediate product.
The university or college mainly consists of three major sectors: 1) the
academic sector, 2) the administrative sector, and 3) the library.　The
academic sector is the major sector that produces the final product.　The
function of administrative sector is to provide support for the teaching and
research activities of the teachers and students.　The mission of library is
to collect, organize and deliver the information needed by the academic
sector.　There is a significant heterogeneity in the nature of production
process among these three sectors.
However, the previous research on university or college efficiency evaluation
using Data Envelopment Analysis (DEA) has been conducted mostly basing on the
hypothesis that there exists a set of similar peer Decision Making Units (DMU).
In addition, there has been no literature discussing the role of intermediate
product in the overall production process within the university and college.　
In this dissertation, the technical analysis of efficiency evaluation will
emphasize the role of intermediate product in the overall production process
of the university and college.　This setting helps enhance the accuracy in
evaluating the production efficiency of the university and college.
The research objectives of this dissertation are listed as follows:
1.Propose a new efficiency evaluation model that reflects the real organization
structures of the university and college.　The modified DEA model encompasses
multiple inputs, multiple outputs, and multiple heterogeneous sub-production
processes with emphasis on the role of intermediate product within the
organization structure.　The calculated efficiency index from this proposed
modified DEA model was then compared to that attained from the conventional
DEA model.
2.Explore the correlation between the overall efficiency and individual sector
efficiencies as well as the correlation among various individual sector
efficiencies.
3.Utilize regression analysis to explore the factors influencing the
individual sector efficiencies and overall efficiency.
The conclusions are summarized below:
1.The results of overall efficiency evaluation can vary, depending on the
models used (Fare 1991, modified Fare model and Charnes, Cooper and Rodnes
Model 1978), the degree of input　variables aggregation and the measurement of
intermediate products (the optimal quantity and actual quantity).
2.There exist significant linear correlation between the overall efficiency of
the university or college and the efficiency of individual academic sector,
library sector and administrative sector.　The academic sector efficiency has
the highest Spearman correlation coefficient with the overall efficiency, with
the library being second and the administrative sector a distant third.　
Comparing the correlation coefficients among the overall efficiency and each
individual sector efficiency from different evaluation models reveals that CCR
model underestimates the importance of the academic sector and overestimates
the importance of administrative and library sector.
3.There are no linear correlation among the individual efficiency of academic,
administrative, and library sectors.
4.The results from regression analysis of individual sector efficiency are
summarized as follows:
1) The regression analysis on academic sector was analyzed according to two
sets of variables. The analysis of the first set of variables reveals that the
academic sector efficiency correlates positively with the science orientation (
SIC) and student--teacher ratio (STR).　The analysis of the second set of
variables indicates that the academic sector efficiency correlates positively
with the diversity (DIV) and average class size (CLA).
2) The regression analysis on administrative sector was discussed according to
two sets of variables.　The analysis of the first set of variables reveals
that the administrative sector efficiency correlates positively with the
science orientation (SIC) and average class size (CLA).　The analysis of the
second set of variables indicates that the administrative sector efficiency
correlates positively with the size of school (SIZE) but inversely with the
diversity (DIV).
3) The regression analysis on library sector was discussed according to two
sets of variables.　The analysis of the first set of variables reveals that
the library sector efficiency correlates positively with the science
orientation (SIC) and student--teacher ratio (STR).　The analysis of the
second set of variables indicates that the library sector efficiency
correlates positively with the student-teacher ratio (STR).　The correlation
with diversity (DIV) is inconclusive.
5.The results from regression analysis of overall efficiency are summarized as
follows:
1) After adjusting with environmental variables, the academic sector
efficiency (RAC) and the library sector efficiency (RLB) have a positive and
significant influence on the overall efficiency.　However, the administrative
sector efficiency (RAD) does not have a stable correlation with the overall
efficiency.　In addition, most of the administrative sector efficiency (RAD)
coefficients are not significant.　The academic sector efficiency has the
highest correlation coefficient, with library the second and the administrative
sector the last.　Furthermore, the effect of academic sector on the overall
efficiency is higher in the Fare (1991) model and the modified Fare model than
in the CCR model.
2) In terms of environmental variables, the coefficient of property ownership
variable (OWN) is negative, which suggests that the private school is more
efficient than the public school, and those of school history (RHIST) are
positive therefore the more established school show higher efficiency.
For strategy variables, the coefficients of the science orientation (SCI) and
school history (RHIST) are positive, whereas the coefficients of the part-time
to full-time faculty ratio (RPFR) are negative.　In all the school sampling,
only the CCR model indicates that diversity (RDIV) has a significant negative
correlation with the overall efficiency, which suggests that lowering the
diversity helps elevate the overall school efficiency.
6.To further explore the correlation between the overall efficiency and the
diversity (RDIV), the samples were separated into two sets according to the
science orientation (SIC).　In the samples where the science and engineering
are the majority (SIC greater than 0.5), the coefficient of diversity (RDIV)
is positive, which indicates the higher the diversity, the higher the overall
school efficiency.　In schools where liberal arts and social science are the
majority (SIC lower than 0.5), the coefficient of diversity (RDIV) is
negative, which indicates the higher the diversity, the lower the overall
school efficiency.
Based on the findings in this dissertation, we recommend that the environmental
and strategy variables used in the regression analysis and their correlation
with efficiency can be good reference tools for the education and school
authorities when distributing education resources and adopting education and
management policies.　The environmental variables include the school history
and school property ownership.　According to the nature, the strategy
variables can be categorized as: developmental characteristics (diversification
of departments and science orientation), school member structure (part-time to
full--time teacher ratio and student-to-teacher ratio), and the size of
school (total number of students, average class size and student-to-teacher
ratio).

1999-2

Author

Chen, Chien Chung

Title

Communication and Monitoring Between Agents: An Analysis of the Moral Hazard Problem in Teamwork

Abstract

This dissertation attempts to analyze the optimal use of the costly side
mechanisms between agents, specifically using communication and monitoring to
alleviate the moral hazard problem in which the principal tries to induce both
agents to exert more effort in a teamwork. In order to resolve this incentive
problem, besides the side mechanisms, the principal can also provide compen-
sation contract bonuses when the two-outcome team performance measure re-sult
is "success". With respect to the different costs of communication and of
monitoring, I studied how the principal designed the bonuses to minimize the
rent, when the setting was with risk neutral and limited liability agents.
Two kinds of the team performance measures are defined when studying the
probability of occurrence of the "success" outcome. Specifically, I looked
at when both agents shirk work together as opposed to when only one shirks
work and the other doesn't. If the probability is higher when the two shirk
work to-gether, I defined as the group-contribution style measure. If the
probability is higher when one shirks work and the other doesn't, I defined
as the individ-ual-contribution style measure.
This dissertation reaches two main conclusions:
First, when the measure is the group-contribution style and the communica-tion
cost is cheap, agents will tend to communicate, thus escaping from the or-
ganizational convention, which potentially persuades them to work, and
instead, allowing them to plan how to shirk work together. In this situation,
communica-tion between agents is a collusion threat for the principal. To
overcome this threat, the principal must increase the agents' bonuses to
induce them not to shirk work, and hence he is forced to transfer some of his
wealth to the agents.
Second, the analysis demonstrates that although side monitoring between agents
can alleviate the moral hazard problem, this mechanism may be effec-tively
induced only when the measure is the individual-contribution style. Fur-
thermore, employing side monitoring is optimal only when the monitoring cost
is cheap. Comparing the equilibrium when agents behave independently, with the
equilibrium when side monitoring exists, the principal will pay a lower rent
with the latter; the agent being monitored will get a lower bonus and thus
have a lower expected utility; the agent doing the monitoring may get a higher
bonus and thus have a higher expected utility, especially when the monitoring
cost is high; however, due to the costly monitoring, there will always exist
social dead-weight loss.
The main contribution of this dissertation is to explore the role that side
communication and monitoring play in an organization. Much past literature has
ignored side mechanisms as a rational phenomenon in an organization. However,
there is an explanation to the decision making process that agents use as to
whether they will choose to communicate and to monitor, and as to the optimal
bonus design that the principal uses to prevent or induce those decisions. I
also demonstrate that, for the principal, side communication will bring a
collusion threat, but monitoring will bring some form of cooperation between
agents, though it will only be beneficial to the principal.

1998-1

Author

Yen, Sin Hui

Title

The framing effects of accounting information: decision types, psychological mechanism, and debiasing methods

Abstract

A review of accounting and auditing literature suggests that the differential
framing effects in prior research may be attributed to the fact that different
decision types (i.e., choices between two alternatives vs. preference on a
specific target) were utilized in various studies.　In addition to
distinguishing the framing effects from one decision type to another, this
dissertation investigates various theories of the psychological processes
underlying these framing effects.　This dissertation further proposes and
tests the debiasing methods corresponding to the framing effects of different
decision types.
Four experiments, using undergraduate students and senior managers in various
industries, were conducted to examine the framing effect of the "choice"
decision type.　Two scenarios involving business capital budgeting and
personal money decisions were developed as experimental material.　Consistent
with Tversky and Kahneman's (1981) finding, framing effects existed across
different subjects and scenarios.　However, subjects exhibited a bidirectional
framing effect for business capital budgeting decisions while they exhibited a
unidirectional framing effect for personal money decisions.　Further, among
the three theories (i.e., prospect theory, fuzzy-trace theory, and
probabilistic mental model), the probabilistic mental model (PMM) explained
the observed behavior best.　The validity of PMM was further examined by
providing subjects with "complete" information.　The results indicated that no
framing effects emerged when complete information was offered.
Three additional experiments with undergraduates and senior managers as
subjects were conducted to investigate framing effects of the "preference"
decision type.　The experimental material involved business capital budgeting
only.　The results indicated that unidirectional framing effects existed.　
Among the three theories (i.e., prospect theory, associative model, and the
outcome salience effect), the associative model explained the observed
behavior best.　Providing subjects with either complete information or
standard representation was found to mitigate framing effects.　This further
confirmed the descriptive validity of the associative model.
Finally, in the above seven experiments, experience and response mode（choice
vs. rating/judgment） were found to have no significant impact on framing
effects.

1998-2

Author

Yang, Meng Ping

Title

The Effect of Audit on the Information Value of Semiannual Financial Reports

Abstract

The audit requirement regulation of semiannual financial reports is a unique
institutional difference between Taiwan and many major countries.　The
regulation is expected to improve the reliability of semiannual reports by
means of audit.　On the other hand, audit work delays the announcement of
semiannual reports and diminishes their relevance.　To inspect the local issue
from the prospect of stock investors, this paper examines the effect of audit
on the information value of semiannual financial reports by the measure of
earnings response coefficient.
After the enacting of Securities Exchange Act in 1968, the semiannual reports
of all public companies in Taiwan are required to be audited. This means that
no non-audited semiannual reports are available to be a comparative group.　
Instead of using other countries' non-audited semiannual reports and Taiwan'
s non-audited quarterly reports, we adopt the Taiwan's qualified semiannual
reports which result from the recognition of investment income, under the
equity method, based on the non-audited semiannual reports of those invested
companies.　The delicate research design will prevent the factors such as the
intrinsic discrepancy among countries and different quarterly reports from
confounding the explanations of empirical results.
Utilizing the companies listed on Taiwan Stock Exchange from 1992 to 1997 as
samples, this paper investigates the effect of audit on the information value
of semiannual financial reports under two settings: management is neutral and
management tends to manipulate earnings upwards.　The major findings are
summarized as follows: first, under two above settings respectively, the
earnings response coefficients of audited semiannual reports are larger than
those of non-audited semiannual reports.　It empirically supports that audit
will increase the information value of semiannual financial reports. Second,
because the audit group differs from the non-audit one in the long-term
investment, the effect of audit on the earnings response coefficients of
audited semiannual reports will reflect in the investment income rather than
the whole earnings.　Third, the earnings response coefficients of investment
income are higher than those of other earnings parts, which indicates there
are distinct economic substances such as growth opportunity among earnings
parts of public companies in Taiwan.　Forth, It is evident empirically that
the information of auditors' work in the long-term investment under the
equity method doesn't reveal until the announcement of semiannual reports.

1998-3

Author

Guo, Ruey Ji

Title

Analytical Studies on Auditing Decision under Continuous States

Abstract

The dissertation intends to create a few of analytical models to deal with the
problems of auditing decision under continuous states and finds some
conclusions unobservable in the models based on discrete states. In the
dissertation, the auditor is classified as "absolutely honest", "generally
honest", or "absolutely dishonest" type, where the "generally honest"
type is defined to be between the "absolutely honest" type and the "
absolutely dishonest" type. Basically, the latter two types can be considered
non-independent ones while the first type is equivalent to the independent one.
In chapter 2, the author first analyzes the principal's audit policy using an
independent auditor and sets up a basic analytical model for auditing decision
under continuous states. The results indicate that, with an increase in the
product of audit quality and penalty, the principal's audit policy will change
from "no auditor" (NA) mechanism to "rent extraction" (RE) mechanism, "
effort adjustment" (EA) mechanism, and then "random audit" (RA) mechanism.
However, as the audit cost ascends up to a certain level, the optimal audit
policy will consist of only two audit mechanisms, i.e., NA and RA mechanisms.
Adequately modifying the model in chapter 2, the author further studies in
chapter 3 the principal's audit policy using a non-independent auditor and
deals with the collusion problem between the auditor and the manager by
assigning some dishonest type to the auditor. With regard to the audit policy
using the "absolutely dishonest" type of auditor, there are three results
noteworthy, i.e., (a) under the specific setting in this study, the optimal
audit policy using the "absolutely dishonest" type of auditor won't bring any
effect of rent extraction; (b) the manager may choose the first-best level of
effort even if the audit quality is less than one; (c) when the audit cost
ascends up to some level, the principal will never take an action of complete
audit, instead will possibly use the random audit mechanism.
As for the audit policy using the "generally honest" type of auditor, the
results show that using this type of auditor can bring an effect of rent
extraction whereas the effect will contract with an increase in the dishonest
parameter d and wholly disappear as d=1 (i.e., using the "absolutely dishonest
" type of auditor). Essentially, when d approaches to zero, the analysis of
audit policy will become equivalent to the one in chapter 2 (using the
absolutely honest type of auditor); on the other hand, when d approaches to
one, the analysis of audit policy will become equivalent to the one in the
former half part of chapter 3 (using the absolutely dishonest type of auditor).
Based on the studies in chapters 2 & 3, the chapter 4 dwells on the interaction
between the Invoice Incentive System (IIS) and the audit policy of the tax
collector. The results indicate that the audit cost remains playing a
distinguishing role in the audit policy of the tax collector. Specifically,
assuming the auditor is independent, there exists some range in rp<=1, where r
denotes the audit quality and p denotes the penalty ratio, for the tax
collector to execute the complete audit mechanism as the audit cost descends
to some level. On the contrary, the tax collector will never consider using
the independent auditor if the audit cost ascends up to some level and the
product of audit quality and penalty ratio falls below one.
For the range of rp>1, as long as the audit cost is relatively low, the tax
collector will choose the action of random audit (RA mechanism) as the state
isn't good enough, but won't use any independent auditor as the state becomes
better (NA mechanism). In addition, assuming the possible influences of the
IIS on the revenues declared by the firm and the audit cost, the author
obtains some conclusions concerned. First of all, under the situation that the
tax collector adopts the random audit mechanism, the invoice-reward will
result in an increase of the possibility of auditing, yet won't bring any
effect on the audit probability.
Next, the results indicate that both the level of revenues declared and the
truth-level on revenues declared will be subject to different level of the
impact resulting from an invoice-reward. In the increased RA area resulting
from the invoice-reward, both the level of revenues declared and the truth-
level on revenues declared ascend. Also, in the range of rp, probably subject
to random audit, the invoice-reward brings an increase in the revenues
declared by the firm for the state not subject to any audit. As for in the
range of rp, not subject to any audit, the invoice-reward does induce the firm
to raise her revenues to be declared even if it has no effect on her truth-
level on revenues declared.
Finally, with respect to the auditing decision using an "non-independent"
auditor, the complete audit mechanism won't be used any more in the range of
rp<=1. However, in the range of rp>1, the tax collector will remain using the
random audit mechanism up to the point of state at which the expected marginal
benefit equals the expected marginal cost.
The main contribution of the dissertation is to demonstrate the dynamics of
auditing decisions under continuous states. It should be able to provide the
principal of some agency hierarchy with an insight on how to determine an
optimal audit policy depending on the variety of exogenous variables such as
audit cost, audit quality, penalty, etc.

1997-1

Author

Sung, Yang Shan

Title

A Study on Strategic Implementation and Information Requirement of Banking

Abstract

Recently, the environment of the banking industry has dramatically changed as
liberalization, internationalization continue reshaping the whole industry.
Therefore it becomes more and more important for individual banks to rethink
how to effectively lever their core competence to create their unique
competitive advantages. In addition, there have been a great number of
researches on business strategies of banking, but only a few academic studies
have discussed information requirements for the banking industry. However,
information requirement analysis not only plays a crucial role in the
successful implementation of banking strategies, but also is the first step in
developing banking strategies. Therefore the purpose of this thesis is to
explore the following matters through the investigation research:
1. To understand the important strategies of banking.
2. To analyze the important strategy differences between the head office and
branches, between branches of different location, and between banks of
distinct sorts.
3. To understand strategic information requirements of banking executives.
4. With regard to the banking executives, analyze the relativity between
frequency of information using and importance of information requirements.

1997-2

Author

Jiang, Jia Shiunn

Title

The effects of imputed tax credit system on equity valuation

Abstract

The Optimal Choices of Accounting System and Compensation Contract in the Presence of Earnings Management and Insider Trading

1997-3

Author

Chu, Hsuan Lien

Title

Empirical Studies on the Efficiency Effects of Implementing Management Control Systems for Hospitals in Taiwan

Abstract

The main purpose of the dissertation is to examine the efficiency effects
of implementing management control systems for hospitals in Taiwan. This
study consists of two independent chapters. Chapter 1 examines the effects of
implementing responsibility centers, total quality management, and physician
fee programs on cross-hospital technical efficiency by applying the Data
Envelopment Analysis (DEA). Using data collected from 90 questionnaires sent
to hospital executives, we find hospitals that have implemented the above-
mentioned management control systems are more efficient than those that do
not, based on asymptotic DEA-based tests. The heteroscedastic multi-tobit
model is also used to better control for the effects of other relevant
variables. Without considering for the time-lagged effect, in the multi-tobit
analysis we find that only physician fee program has a significant effect on
hospital efficiency. As initiating management control systems can be a time-
consuming task, we also consider the time-lagged effect by restricting our
observations to hospitals that have implemented the management control
systems for at least two years. The results indicate that average efficiency
in the hospitals that have implemented responsibility centers or physician
fee programs for at least two years is significantly higher than those that
do not. In contrast, total quality management still has an insignificant
effect on hospital efficiency. In addition, we also consider the differential
effects of implementing responsibility centers with or without integrating
the system with incentive programs associated with departmental profits for
physicians. We find hospitals that have implemented responsibility centers
integrated with incentive programs for physicians perform better than
hospitals that are without responsibility centers. We also find that average
efficiency in the hospitals that have implemented responsibility centers
integrated with incentive programs for physicians is significant higher than
those that implemented responsibility centers without associated formal
performance evaluation schemes.
In chapter 2, we use field data from a large public teaching hospital in
Taiwan to test for efficiency gains resulting from the introduction of a
physician compensation program (PCP), which is based on responsibility
centers system. Our objective is to identify whether an increase in
operational efficiency is evident for 58 departments in the 5 months
following the introduction of the program (the post-PCP period) relative to
the corresponding 5 months in the previous year (the pre-PCP period) for the
sample hospital. The DEA is also invoked to measure the operational
efficiency of each department in the hospital over the two periods. We first
use asymptotic DEA-based tests to examine whether differences in efficiency
scores between the two periods are significant. The chapter finds that
average efficiency in the post-PCP period is significantly higher than that
in the pre-PCP period. Then, a multi-factor tobit model is used to examine
factors that might explain the observed efficiency. We find that average
efficiency in the post-PCP period is still higher, after controlling for
other related factors. The findings suggest that to achieve an increase in
hospital efficiency, responsibility centers should be integrated with
physician compensation programs. In addition, we find that the average of
physicians' seniority and percentage of physicians' service time in the
department are positively associated with efficiency. Finally, departments
with higher profits and smaller size are also associated with higher
efficiency.

1996-1

Author

Lee, Shu Hua

Title

Knowledge Intensity within Industrial Value Chain and Firm Performance

Abstract

This dissertation attempts to analyze the relation among legal
liability, human capital investment, and audit quality. Milgrom
and Roberts (1992) mention that "the most important specialized
input in partnerships is typically the knowledge and abilities
of the workers, that is, their human capital." However, when
analyzing the interaction between legal liability and audit
quality, most analytical research uses audit effort to depict
audit quality. The role played by human capital has largely been
ignored. In practice, human capital has been considered to be
crucial to the success of accounting firms. Like other assets,
investment in human capital can lead to an increased flow of
future benefits. One way to invest in human capital is to obtain
education. The 150-hour rule is thus a requirement on the
minimum level of auditors' human capital investment.In the first
part of the dissertation, we discuss the impacts of the legal
liability reform from unlimited liability to limited liability.
It is generally believed that the reduction of auditors'
liability burden will have adverse impacts on audit quality.
Previous studies (e.g. Dye 1995, Moor and Scott, 1989) usually
support this argument. However, most of the models used by them
are one-period and ignore the contribution of human capital to
audit quality. In this chapter, we use a multi-period
overlapping generation model and consider the effect of human
capital investment on audit quality. We derive the short-run,
intermediate-run and long-run effects of the legal liability
reform. It is demonstrated that the shift from unlimited
liability to limited liability does not necessarily result in
the decline of audit quality in the long run.In the second part,
we examine the effect of the 150-hour rule on auditors' entry
and exit decisions, audit fees, auditors' profit, and audit
quality. Education is viewed as the only way for auditors to
make human capital investment and the 150-hour rule is a
requirement on the minimum level of auditors' human capital
investment. Auditors are divided into two groups: incumbent
auditors and potential auditors. Incumbent auditors have gotten
the CPA certification before the implementation of the 150-hour
rule while potential auditors have not. By comparing the
equilibria with and without the 150-hour rule, we derive some
predictions about the consequences of the 150-hour rule. One of
the major purposes of the 150-hour requirement is to increase
auditors' quality. However, it is shown that the average audit
quality does not necessarily increase under the new rule.

1996-2

Author

Liang, Chiung Ju

Title

A study on optimal compensation contracts for new product development

Abstract

Recently, more and more emphasis has been placed on the
issues of product life cycle and quality control system in
managerial accounting. It is found that little improvement in
cost and quality can be achieved in the traditional process of
cost and quality control, since they are implemented after
product mass production. In reality, the quality and capability
of products has been almost determined while completion of
product development and design. Only little and limited cost and
quality improvement can be achieved after design completion.
Therefore, to improve cost and quality effectively, the process
of cost and quality control should be rescheduled at the
beginning of product life cycle: product development and design,
and improve cost and quality over the entire product cycle.
In this dissertation, the life cycle during new products
development is separated into two stages: stageof development
and design, and stage of pricing and production. To have a more
comprehensive study and research on the life cycle during new
product development, this two-stage model is employed to study
the optimal strategy, stage by stage, of a company technically
leading in a specific product.　　In the first stage, a set of
the optimal compensation contract is formulated to decrease the
moral hazard of research and development specialists (agents),
which results from their own self-interest behavior to give up
principals' benefit. In the second stage, the optimal pricing
and production strategies of new and old products are
determined.　　 In addition, the effort of the research and
development specialists during new product development and
design is classified to some effort types according to its
influence to quality of new products, unit cost of mass
production in the future, and customers' comments to the
capabilities of new and old products after new products is on
market. Namely, the diverse efforts of research and development
specialists during new products' development and design results
in diverse impacts on new product development, and these impacts
will be shown on different stages of the entire life cycle of
new product development. Therefore, the workingpattern of
research and development during new product development and
design will be extended from single-task structure to multitask
structure (presented by Holmstromand Milgrom, 1991), the optimal
compensation contracts to research and development specialists
in multitask structure will be explored in depth, and the
influence to principals' benefits and agents' behaviors will be
further analyzed.　　 The primary contribution and application
of this dissertation is summarized below:　　1. Using the two-
stage model, we study how a companytechnically leading in a
specific product designs optimal contracts at the beginning of
product life cycle, to stimulate research and development
specialists' efforts to new product prototype; how to determine
an optimal multi-product pricing and production strategy during
the stage of pricing and production for a more comprehensive
study to life cycle of new product development.　　2. We study
how to find a strategy of new-product entry to the market, as a
more substantial reference to decision of new-product entry to
the market.　　3. The working pattern of research and
development specialists is extended from the single-task
structure to multitask structure, to obtain a better description
to the working pattern of research and development specialists
during new product development and design; and the influence of
the optimal compensation contracts resulted from multitask
structure to principals' benefits and agents' behaviors will
also be better clarified and analyzed.