Are audit fees discounted in initial year audit engagements?

Many studies report that audit fees are discounted in the year of an auditor change and regulators have long been concerned that such fee discounting could impair audit quality. We find significant bias in the way studies have tested for fee discounting. The bias exists because interim procedures are usually performed by both the predecessor and successor auditors but only the successor's fee needs to be disclosed. Accordingly, the disclosed fee during the auditor change year usually relates to a partial year of auditing services. We find that the evidence for fee discounting disappears after correcting for this measurement bias.     

Incomplete Markets and Hyperbolic Discounting

A growing number of empirical researchers are finding evidence of hyperbolic discounting in their investigations on the nature of preferences for distributing consumption over time. This article contributes to the literature by exposing a large class of models in which hyperbolic and exponential discounting are observationally equivalent. The results of the modeling approach simultaneously resolve serious concerns raised by other models in the literature that have been used to explain the empirical findings and answer other questions raised by the phenomenon that are unexplained by earlier contributions. By analyzing an intertemporal general equilibrium model with incomplete insurance markets, this article demonstrates that for sufficiently short time horizons, values implied by a hyperbolic discount function fall within incomplete market valuation bounds.     

A positive analysis of corporate capital budgeting practices

Although the academic literature has long argued that discounted cash flow methods are superior to other capital budgeting rules, these methods have only fairly recently come into widespread use. This article points out that there are both costs and benefits to using discounting rules such as net present value. Therefore, they may often not work better in practice than nondiscounting methods. Empirically, the use of discounting methods is positively correlated with market interest rates and the dissemination of information about these tools and negatively correlated with the degree of uncertainty in the economy, which is consistent with our hypotheses.     

Risk analysis and asset valution: A Monte Carlo Simulation using stochastic rents

Introduction of the Present Value Distribution Model (PVD) offers an alternative method for the valuation of projects yielding intertemporal stochastic rents. A combination of concepts from many areas of the literature yields the given model. The base procedure relies on Monte Carlo Simulation with the application of recently established theories on stochastic rents, path dependent cash flow trajectories, and period dependent discount rates.Among the benefits of the (PVD) are exogenous risk discounting and consistent distribution determination. Risk discounting is applied to the resultant of the distribution model rather than within the model. Furthermore, the present value distributions are independent of analyst's perceptions yielding an objective single period gamble.     

Hyperbolic Discounting and Consumer Patience: The Case of Korea

ABSTRACT

In this article, we test whether the consumption pattern in Korea exhibits a time-inconsistent discounting behavior compared to the conventional exponential discounting. We derive the quasi-hyperbolic Euler equation and estimate it using the generalized method of moments (GMM). The estimation results show that Korean consumers exhibit a time-inconsistent quasi-hyperbolic discounting behavior in general, but the pattern of inconsistency in consumption behavior, in particular the degree of impatience, depends on the estimation period, in particular whether it includes financial crisis periods in 1997–98 and 2008–11.     

VALUING REAL OPTIONS: CAN RISK‐ADJUSTED DISCOUNTING BE MADE TO WORK?

This paper examines three alternative approaches to valuing real options: (1) the standard option pricing technique using "risk-neutral" probabilities; (2) the use of risk-adjusted discount rates; and (3) discounting certainty-equivalent values with a riskless discount rate. As suggested by the title, a question of particular interest is whether an approach based on risk-adjusted discount rates can be "made to work" for valuing options. The answer is yes. Indeed, the authors show that any of the three approaches will provide a correct valuation if properly employed.
Nevertheless, there are important differences in the information requirements associated with each of the three methods. Another important issue is the relative degree of difficulty in calculating the correct option value. When these two considerations are taken into account, the risk-neutral option pricing procedure generally proves to be the preferred method. It tends to be computationally more convenient—often much more convenient—and to require less information than either the risk-adjusted discounting or certainty-equivalent procedures.     

A time-inconsistent Dynkin game: from intra-personal to inter-personal equilibria

This paper studies a nonzero-sum Dynkin game in discrete time under non-exponential discounting. For both players, there are two intertwined levels of game-theoretic reasoning. First, each player looks for an intra-personal equilibrium among her current and future selves, so as to resolve time inconsistency triggered by non-exponential discounting. Next, given the other player’s chosen stopping policy, each player selects a best response among her intra-personal equilibria. A resulting inter-personal equilibrium is then a Nash equilibrium between the two players, each of whom employs her best intra-personal equilibrium with respect to the other player’s stopping policy. Under appropriate conditions, we show that an inter-personal equilibrium exists, based on concrete iterative procedures along with Zorn’s lemma. To illustrate our theoretical results, we investigate a two-player real options valuation problem where two firms negotiate a deal of cooperation to initiate a project jointly. By deriving inter-personal equilibria explicitly, we find that coercive power in negotiation depends crucially on the impatience levels of the two firms.

     

A Conceptual Basis for a Recoverable Amount Test

Indecision, disagreement and confusion surround the literature on and accounting standards relating to a recoverable amount (RA)test and discussion about the appropriateness of discounting expected net future cashflows in the determination of RA. While a RA test is widely used in accounting standards, the concept and test in the professional literature and accounting standards is vague and ambiguous. Consequently the test is difficult to interpret and analyse rigorously. There is a need for an explicit conceptual basis to support accounting standards and practice relating to a RA test.     

The discounting controversy of deferred income taxes

This article examines the controversy related to discounting deferred income taxes. A brief background is provided and then the controversy surrounding discounting is analyzed. It is concluded that discounting is too burdensome to consider implementing, and the FASB needs to look at the discounting issue more extensively.     

金融机构票据融资发展问题探析及建议

近几年,我国票据市场的票据签发量和贴现量均大幅增加,整体呈现快速发展趋势。但票据量及价格的大幅、频繁波动,也影响了票据融资功能的正常发挥。本文通过实证分析发现,贴现余额增量与实际信贷余额增量以及货币供应量M1余额增量均呈反向变化趋势,表明贴现量变化对货币供应量的调控产生了一定的负面影响。其主要原因在于,信贷考核指标中包含了票据贴现数量,票据贴现成为贷款数量调节器。为此,文章就如何完善金融机构票据管理,进而促进票据市场健康发展提出了相关建议。     

Hedge fund return predictability; To combine forecasts or combine information?

While the majority of the predictability literature has been devoted to the predictability of traditional asset classes, the literature on the predictability of hedge fund returns is quite scanty. We focus on assessing the out-of-sample predictability of hedge fund strategies by employing an extensive list of predictors. Aiming at reducing uncertainty risk associated with a single predictor model, we first engage into combining the individual forecasts. We consider various combining methods ranging from simple averaging schemes to more sophisticated ones, such as discounting forecast errors, cluster combining and principal components combining. Our second approach combines information of the predictors and applies kitchen sink, bootstrap aggregating (bagging), lasso, ridge and elastic net specifications. Our statistical and economic evaluation findings point to the superiority of simple combination methods. We also provide evidence on the use of hedge fund return forecasts for hedge fund risk measurement and portfolio allocation. Dynamically constructing portfolios based on the combination forecasts of hedge funds returns leads to considerably improved portfolio performance.     

Future generations and nuclear power—A pluralistic economic appraisal

Nuclear power is a growth industry despite the unresolved problem of waste management. This paper considers the case of Turkey which has a fast growing economy, and where the government has given permission to a Russian company to build a large plant in Mersin, Southern Turkey. Nuclear projects have unique features such as expensive set-up costs, long and expensive decommissioning processes (much longer than construction periods) and the issue of safe disposal of large quantities of highly radioactive wastes, some of which will remain active for many thousands of years, that may create environmental problems especially for future generations. The main focus in this paper is on the role of discounting in economic appraisal of nuclear projects in Turkey and elsewhere. Here we use three discounting methods in economic appraisal of the Turkish plant; standard discounting, the UK government’s method of declining discount rate and the intergenerational discounting method. The first two tend to yield somewhat favourable results under the assumption of no interruption in supply due to technical reasons or a major accident. The intergenerational discounting method, on the other hand, which treats all generational cohorts involved equitably, does not yield results as favourable as the other criteria.     

Collusion and heterogeneity of firms

We examine the impact of heterogeneous discounting on collusion in dynamic Bertrand competition. We show exactly when collusion can be sustained and how collusion would be organized efficiently with heterogeneous discounting. First, we show that collusion is possible if and only if the average discount factor exceeds a certain threshold, with or without capacity constraints. Next, we identify a dynamic pattern of market share that characterizes efficient collusion and obtain the unique long‐run prediction despite the presence of multiple equilibria. In the long run, the most patient firm and the most impatient firm tend to dominate the market.     

An empirical analysis of audit fee price competition after the Korean 1999 Omnibus Cartel Repeal Act

This study examines the audit service market in Korea after the 1999 Omnibus Cartel Repeal Act to determine if increased competition has led to audit fee discounting. Until 19 December 2001, when the Korean government enacted The Financial Supervisory Regulations, researchers could not address questions related to price competition in the Korean audit market due to data limitations. The new regulations allow researchers to examine audit effort for the first time because both audit hours and audit fees are now recommended disclosures. We use audit fee data of Korean companies for the 6-year period 1999–2004, and find evidence that total audit fees paid have been increasing but audit fees per hour have been decreasing. We also find that Big 5 auditing firms’ fees per hour are significantly lower than non-Big 5 auditing firms and are decreasing across time. These price pressures should be of concern to regulators and investors because prior research has demonstrated that price competition leads to discounting, which can result in unrealistically low audit fees and poor audit quality. Finally, as in previous research, we also find discounting of initial audit engagements in the Korean market.     

Discounting,intergenerational equity and the almost-anywhere dominance criterion

This article considers the problem of choosing amongst long-term investment programmes which have cost-benefit implications stretching over many generations. Page has argued that, in this area, the discounting criterion should be restricted to the limited role of eliminating intergenerationally inefficient programmes whilst the final choice from the programmes in the efficient set should be made using some form of equity criterion. The elimination of intergenerationally inefficient programmes in this field will usually on its own suffice to establish the final choice of programme. It then follows that alternative equity criteria, such as almost-anywhere dominance, can have a role only if they replace discounting as the decision criterion. Whether the discounting criterion is preferred as the choice criterion depends very much on whether the desired compensatory adjustments can be effected.     

Equity,efficiency, and discounting : The reasons for discounting intergenerational effects

Confusion between the ethical norm of intergenerational equity and the practical technique of discounting only obscures the basic issues of efficiency and equity. The author distinguishes between the discounting approach and the equity argument, and explains their essentially complementary roles in long-term investment decisions. He argues that the discounting method is an important tool in the achievement of intergenerational equity since it can determine the amount of compensation to be paid to future generations, a sum which by definition will compensate them for the damage our action has caused.     

Long-term factorization in Heath–Jarrow–Morton models

The long-term factorization decomposes the stochastic discount factor (SDF) into discounting at the rate of return on the long bond and a martingale that defines a long-term forward measure. We establish sufficient conditions for existence of the long-term factorization in HJM models. A condition on the forward rate volatility ensures existence of the long bond volatility. This yields existence of the long bond and convergence of \(T\)-forward measures to the long forward measure. It contrasts with the familiar risk-neutral factorization that decomposes the SDF into discounting at the short rate and a martingale defining the risk-neutral measure.     

SOME FORMAL CONNECTIONS BETWEEN ECONOMIC VALUES AND YIELDS AND ACCOUNTING NUMBERS

This paper reports a number of results concerning the relationship between accounting numbers and economic values and yields. Some of the results have appeared previously in the literature and some are new. They have been collected together in a common analytical framework in order to demonstrate their formal, mathematical character. It is shown that present value can be obtained by discounting almost any profit numbers; that accounting rates of return define a discount function directly analagous to the term structure and the internal rate of return; and that the internal rate of return can be expressed as a linear weighted sum of accounting rates of return.     

Hyperbolic Discounting and the Phillips Curve

Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.     

2013年中国票据市场发展报告

2013年中国票据市场的主要运行特点是：票据承兑和贴现余额冲高回落;上下半年利率走势大相径庭,年中流动性紧张为分水岭;票据交易活跃,买入需求旺盛;电票业务较快增长,其中转贴现交易增长最快。在此基础上,文章对今后一段时期票据市场规模和利率的可能走势进行预判,分析了近期一些重大经济金融改革创新对票据市场发展的长短期影响。