Regulators worldwide increasingly use data envelopment analysis (DEA) for the incentive regulation of electric distribution firms. Although the production/cost frontiers estimated by DEA models provide valuable information for electricity rate setting, the benefit of DEA benchmarking in regulatory practice would be limited due to specification errors of DEA models. In this paper, we summarize and discuss existing issues of using DEA models for efficiency benchmarking from four aspects: 1. Specification of inputs and outputs, 2. Selection of costs for benchmarking, 3. Imposition of structure on benchmarking models, and 4. Treatment of contextual variables. We also give suggestions for improving the use of DEA models.

Purpose: This paper explores if the firm’s strategic orientation can be associated with differences in cost behavior activity.Design/methodology/approach: Using Compustat data from 1979 to 2012, the archival study examines if there are differences between differentiation and cost leadership strategies on the firm’s cost stickiness.Findings: The main finding provides evidence that firms pursuing a differentiation strategy exhibit greater cost stickiness, on average, as compared to firms pursuing a cost leadership strategy. This relationship is moderated by the optimistic or pessimistic expectations of managers for future sales.Originality/value: This paper contributes to the literature on cost management by explaining how strategic positioning affects firms’ cost behavior using the framework of asymmetric cost behavior. The study encompasses both product and period costs and documents the impact on earnings.

The bullwhip effect is the phenomenon of distorted information that causes the amplification of variability of demand in supply chains. We examine the relationship between the bullwhip effect and cost behavior using a large sample of U.S. public firms from 1980 to 2019. Our empirical results show that the costs of firms with a higher intensity of bullwhip effect are significantly more responsive to changes in sales, suggesting that firms facing higher amplification of demand will adopt a less rigid short-term cost structure with lower fixed and higher variable costs. Furthermore, the bullwhip effect is associated with a higher elasticity of number of employees, operating leases, and rental expenses with respect to sales. The findings of mediation analyses suggest that firms are likely to lease capacity resources to increase the flexibility and manage the operating risk associated with the bullwhip effect. The results are robust to alternative model specifications. This study contributes to both the cost accounting and supply chain management literature, and documents large sample evidence on whether and how the bullwhip effect affects a firm’s choice of cost structure.

The economic literature documents that the investment rate in intangible assets, including intellectual property (IP), has far outpaced that of tangible assets for several decades. In this context, our research delves into the impact of self-created intangible assets on the auditor’s risk assessment. We present compelling evidence that, on average, research and development (R&D) knowledge capital is associated with higher audit fees. Using patent-based metrics as the proxies for innovation outcomes, we reveal that the number of patents (quantity), patent citations (quality-adjusted quantity), and patent technology classes (scope) all positively correlate with audit fees. Additional analyses show that innovation efficiency is negatively associated with audit fees. Furthermore, firms with a higher intensity of knowledge capital are more likely to receive going concern opinions than those with significant innovation outcomes. These findings provide valuable insights into the complex relationship between intangible assets and audit risk assessment.

Corporate management and their auditors are required to evaluate whether there is a risk that the company’s ability to continue as a going concern is impaired. For fixed asset-intensive firms, however, regulatory inspections consistently identify problems with auditors’ testing of property, plant, and equipment (PPE), raising doubts about whether auditors understand the risks associated with these assets. This paper examines whether auditors incorporate the risks associated with PPE into their going concern evaluation and the accuracy of that evaluation. Using probit regression on financial and auditing data of U.S. public firms contained in S&P Global Compustat North America, Audit Analytics, and the Center for Research in Security Prices (CRSP) from 2000 to 2019, this paper examines the effects of PPE intensity, impairment, and age on the likelihood that an auditor issues a going concern modification. We test the accuracy of the auditor’s going concern evaluation by comparing it to the client’s subsequent viability or bankruptcy. Our results find that PPE intensity and PPE impairments are positively associated with the likelihood of an auditor issuing a going concern modification, indicating that auditors view PPE as contributing to substantial doubt about the entity’s ability to continue as a going concern. We do not find a significant association between PPE age and going concern modification. Additionally, the going concern evaluation is more accurate for firms with higher PPE intensity. These findings imply that auditors appropriately consider PPE assets in their going concern evaluations.