Confidence and trading aggressiveness of naïve investors: effects of information quantity and consistency

Advances in technology, as well as regulatory and legislative actions, have led to an increase in the quantity of information available to the public. This paper experimentally examines the effects of information quantity and consistency (or directional agreement) on the judgments and trading behavior of naïve investors, holding constant the quality (or predictive value) of information. In my experiment, investors receive accounting signals and make predictions and trading decisions for 24 separate firms. I find that increasing the quantity and consistency of information leads naïve investors to show greater judgment confidence and trading aggressiveness. Increased quantity reduces investors’ expected wealth in laboratory markets, while the effect of consistency on expected wealth depends on the relationship between the low- and high-quality signals investors receive. Results highlight possible unintended consequences of increased disclosure and suggest directions for future experimental and archival research.     

Boom–Bust Cycles and the Forecasting Performance of Linear and Non-Linear Models of House Prices

The tremendous rise in house prices over the last decade has been both a national and a global phenomenon. The growth of secondary mortgage holdings and the increased impact of house prices on consumption and other components of economic activity imply ever-greater importance for accurate forecasts of home price changes. Given the boom–bust nature of housing markets, nonlinear techniques seem intuitively very well suited to forecasting prices, and better, for volatile markets, than linear models which impose symmetry of adjustment in both rising and falling price periods. Accordingly, Crawford and Fratantoni (Real Estate Economics 31:223–243, 2003) apply a Markov-switching model to U.S. home prices, and compare the performance with autoregressive-moving average (ARMA) and generalized autoregressive conditional heteroscedastic (GARCH) models. While the switching model shows great promise with excellent in-sample fit, its out-of-sample forecasts are generally inferior to more standard forecasting techniques. Since these results were published, some researchers have discovered that the Markov-switching model is particularly ill-suited for forecasting. We thus consider other non-linear models besides the Markov switching, and after evaluating alternatives, employ the generalized autoregressive (GAR) model. We find the GAR does a better job at out-of-sample forecasting than ARMA and GARCH models in many cases, especially in those markets traditionally associated with high home-price volatility.     

A discussion of “Inter-industry network structure and the cross-predictability of earnings and stock returns”

Aobdia et al. (Rev Account Stud, 2014) view the economy as a network of customers and suppliers. Using the 1997 input–output trade flow data from the Bureau of Economic Analysis to model the inter-industry network, they examine whether an industry’s position in the network, in particular, its “network centrality,” affects the transmission of information and economic shocks. They find that, compared to the accounting performance and stock returns of noncentral industries, those of central industries are explained by aggregate risks to a greater extent and are more highly associated with the contemporaneous and future performance of their linked industries. These findings suggest that network centrality matters—it plays an important role in how economic shocks are transmitted within the economy. The question of why network centrality matters, however, remains unanswered. A fruitful avenue for future research is to explore the origin of shocks to shed light on the fundamental question of whether sectoral shocks can aggregate into macro shocks.     

Concavity of utility,concavity of welfare,and redistribution of income

The marginal social value of income redistribution is understood to depend on both the concavity of individuals’ utility functions and the concavity of the social welfare function. In the pertinent literatures, notably on optimal income taxation and on normative inequality measurement, it seems to be accepted that the role of these two sources of concavity is symmetric with regard to the social concern about inequality in the distribution of income. Direct examination of the question, however, reveals that this is not the case. Concavity of utility has a simple, direct effect on the marginal social value of redistribution, as might be expected, whereas concavity of the social welfare function has a more subtle influence, one that in some cases may not be very significant. The implications of this difference are examined for some standard forms of utility and welfare functions, including particular versions that appear in the optimal income taxation literature.     

Extensions and intensions of management control—The inclusion of health

Interest in management control of intangibles has grown remarkably during the last decades and now includes managing employee health. Research in this field is so far in the early stages: few empirical studies have been undertaken and fewer studies take into consideration the implications of such systems. In this paper we wish to contribute to the field with a qualitative study of instances of management control of health in ten Swedish organizations.Many good intentions lie behind the idea of making health and ill-health a subject for management control and the expected results are very positive—lower sick-leave rates, reduction of costs and human suffering. Such intentions stand for an intension, i.e. the ideas, properties or state of affairs that are connoted by a word or symbol, in this case what can be connoted by the concept of management control of health, its conceptual position. An intension, however, is not given insofar as a word or concept may be associated to more than one. Thus we set out to interpret management control of health in terms of two conceptual positions, modernism and postmodernism, in order to bring forth two very different intensions of management control of health: one where the practice is seen as an investment with a purpose to visualize ill-health and increase efficiency by putting in place measures to increase employee health; the other where the practice is seen as a means to make the individual accountable in order to be able to intensify control and colonize leisure.     

Beating market expectations and the pricing of firms’ probability of default

This study explores the impact of beating analysts' forecasts on investors' perceptions about firms' default probability. The information contained in analysts’ forecasts, both earnings and revenues, provides additional information to investors in pricing CDSs. While previous research has focused on the impact of beating analysts’ earnings forecasts, this study shows that firms that beat analysts' revenue forecasts also experience, on average, a decrease in the CDS premium around the earnings announcement date. This study also documents that the effect is stronger when firms beat/miss both earnings and revenue forecasts. When firms beat (miss) earnings and miss (beat) revenues, the effect of earnings is the dominant signal. These effects are stronger for firms with high levels of default risk.     

Analysis and Suggestions of Rapid Development of China＇s Investment Immigration

我国正掀起改革开放以来的第三拨移民高潮,这拨移民高潮又称新世纪移民潮,其主力由新富阶层和知识精英组成,通过留学、技术移民或投资移民等方式移居海外。其中,投资移民与金融、地产投资等关系密切,逐步形成了一个跨行业的新产业链。本文对投资移民及金融参与的问题进行调查,分析投资移民资金转移路径与实质,实步探讨金融介入的情况,对规范投资移民行为及其整个产业链运作提出建议,以供决策参考。     

The impact of SEC investigations and accounting and auditing enforcement releases on firms’ cost of equity capital

I study the impact of an SEC investigation (as captured by accounting and auditing enforcement releases) on a firm’s cost of equity capital. AAERs are often used in accounting literature as a proxy for fraudulent financial reporting. Fraudulent financial reporting should lead to an increase in cost of equity capital as a firm’s future cash flows become less certain. Overall, this study provides evidence of changes in cost of equity capital for firms targeted by an SEC AAER on the date the investigation is first made public.     

Discussion of “Board interlocks and the diffusion of disclosure policy”

Cai et al. (Rev Account Stud, forthcoming, 2014) find that firms with interlocked directors are more likely to stop quarterly forecasts and that the past stopping experience of interlocked directors affects the forecast-cessation process. Their findings are consistent with the notion that interlocked directors serve as conduits for information sharing, which may result in the change of corporate disclosure policies. My discussion focuses on potential issues with the findings and implications for future study.     

An examination of state and local government pension underfunding – Implications and guidance for governance and regulation

State and local government pension underfunding has become a major focus of public policy debate due in large part to recent Governmental Accounting Standards Board (GASB) actions that have brought national attention to the issue. The extent of these plans underfunding has been debated, along with the necessity for state government intervention and the level of regulatory actions that should be enacted by state legislatures. State and local public pension plans do not fall under the enumerated powers of the federal government in the Constitution and are therefore left to each individual state to regulate. The amount of plan underfunding and enacted public policy by state varies greatly. Additionally, in contrast to numerous state balanced-budget laws, legal directives for fully funding public pensions are virtually non-existent. This paper analyzes the state and local public pension crisis, examines current and long-term risk, studies public employee fiscal conditions, considers the societal impacts of these plans, considers the strengths and weakness of pension plan types, recommends public policy and regulation, and offers strategies for managers, board members, and public officials to adopt.     

Americanism and financial accounting theory – Part 3: Adam Smith,the rise and fall of socialism,and Irving Fisher's theory of accounting

A previous paper (Part 1) rejected the conventional wisdom that America was ‘born capitalist’ and the historians’ consensus that it had become capitalist by the early-19th century; another (Part 2) rejected Chandler's thesis that the ‘modern business enterprise’ brought a ‘new form of capitalism’ to America from the 1840s. The accounting evidence suggests that America began to make the transition to capitalism around 1900 in a period of intense conflict between ‘capital and labour’ generated by ‘big business’ from the 1880s, a process not completed until the 1920s. This paper (Part 3) examines the consequences for America's political ideology and financial accounting theory. America's exceptional transition, it argues, explains the history of its political ideology, and this history explains Irving Fisher's theory of accounting. Section A argues that America lagged behind Britain because it started from a society of simple commodity producers and semi-capitalists, which created an exceptional ideological problem for its ruling elite. Big business generated hostility from workers, farmers and small employers – expressed in labour movements, ‘populism’, socialism, and ‘progressivism’ – and created an ideological problem by contradicting the ‘independent producer’ ideology of workers and farmers, and the ‘individual liberalism’ of small manufacturers and merchants, both underwritten by Adam Smith's Wealth of Nations. The paper argues that Smith's theory of price articulates as semi-capitalist accounting, which explains his popularity in America until the appearance of big business in the 1880s. Socialism and progressivism became political forces in America from 1900 to around 1920. Progressivism produced ‘corporate liberalism’, the ideological counter to socialism that corporations could be made ‘socially responsible’ by government regulation and ‘publicity’ to ensure they earned only ‘fair’ returns, but this left two problems. First, socialists argued that no profit was ‘fair’, and second, fear of the ‘labour danger’ made American financial reports secretive and conservative. Section B argues that Irving Fisher responded to these problems with a theory of accounting, which he developed as a refutation of Marx and the American brand of socialism advocated by Eugene Debs, the threateningly successful presidential candidate of the Socialist Party of America. An important but neglected reason for socialism's abrupt collapse around 1920, it argues, was that the socialists lost the intellectual argument with the middle classes, and that Fisher's theory played an important role in this defeat. Fisher was a vigorous self-publicist, strongly influenced the teaching of economics and accounting in the universities and, the paper argues, changed the language of American accounting. Fisher claimed that accounting practice supported his theory of ‘capital’ and ‘income’, but the paper shows he did not understand double-entry bookkeeping or the accountants’ ‘cost theory of value’, and therefore divorced accounting from the reality of business transactions. As his theory underlies the FASB's framework, the paper concludes that Fisher's legacy to the world is a pathological theory of financial accounting.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Austria and Germany

Abstract

Austria and Germany share similar accounting traditions. International harmonization in both countries has mainly focused on group accounting. In contrast, single financial statements give rise to legal and tax consequences and, thus, are still tied to the traditional principles of orderly accounting. Recent regulatory changes confirmed this dual role of accounting in both countries, while moving local accounting rules closer to IFRS, although to different extents. We illustrate how recent regulations in the two countries made reference to IFRS, how IFRS was considered during the law-making process and outline major differences that remain between domestic and international accounting standards.     

The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk

This paper provides an empirical assessment of the factors affecting the spread between the Euro Overnight Index Average (EONIA) and the main policy rate of the European Central Bank (ECB). Up until the period when Lehman Brothers collapsed in mid-September 2008, the spread was small and positive. After this point, the liquidity surplus that developed from the fixed rate full allotment tendering arrangement in refinancing operations drove the widening of EONIA spread (trading below the ECB policy rate), although other factors also played a significant role. This paper explains the drivers of spread across alternative non-crisis/crisis regimes. In addition, the paper examines how the EONIA spread reacts to shocks imposed on a range of liquidity and credit risk factors in alternative crisis/non-crisis regimes. The results have implications for factors that should be monitored closely across both regimes, and also the implications that this may have for steering an unsecured overnight rate in crisis times.     

Does concurrent management of mutual and hedge funds create conflicts of interest?

This paper shows that conflicts of interest may exist in cases where a hedge fund manager starts a mutual fund but not in the opposite case. We compare performance, asset flows, and risk incentives to establish several key differences between these two scenarios: First, prior to concurrent management, hedge fund managers experience worse performance while mutual fund managers achieve better performance relative to their full-time peers. Second, hedge fund managers who choose concurrent management are disproportionately the ones with less experience. Their hedge funds tend to suffer a decline in performance after the event. By contrast, mutual fund managers who choose concurrent management tend to outperform their full-time peers. Based on our findings, we make important recommendations for policy makers and companies. The relevance of our recommendations extends beyond the small share of companies presently engaged in concurrent management.     

An empirical analysis of differences in Black and White asset and liability combinations☆

This study analyzes data from the 1992 Survey of Consumer Finances and finds significant differences in asset and liability combinations between Black and White households. In addition, White households are identified as having significantly greater net worth and financial assets relative to Black households. We are unable to show that the net worth of Black households is constrained by barriers in financial markets. Our study investigates how this difference in net worth could engender different financing decisions. We find that Black households are significantly more risk averse in their choice of assets. Further, we find that Black households typically pay higher rates for several types of credit instruments, even though they self identify as conducting significantly more extensive searches in the financial markets. JEL classification: D10; D31; J15     

Discussion of “Investor recognition and stock returns”

Lehavy and Sloan (2008, Review of Accounting Studies) note that prior studies find that earnings and cash flows explain only a small portion of the cross-sectional variation in stock return. This motivates them to investigate empirically the ability of a behavioral model of capital market equilibrium proposed by Merton (1987, Journal of Finance, 42, 483–510) to explain the remaining variation in stock returns. Their primary findings show that security value is, as predicted, increasing in investor recognition of the security and that investor recognition is incremental to and more important than cash flows in explaining the cross-sectional variation of stock returns. While the research question is intriguing and well motivated, a number of methodological limitations may limit the reliability of the findings/interpretations. In this paper, I first evaluate the motivation and potential contribution of the Lehavy and Sloan (2008) study. I then outline methodological limitations underlying the study and offer ways of overcoming them. In the final section, I state my conclusions.     

Risk-shifting and the regulation of bank CEOs’ compensation

This paper analyzes the effects of two regulatory mechanisms, namely a regulation of the structure of bank CEOs incentive pay and sanctions for the CEOs of failed banks, on bank risk shifting. We extend a standard model of CEO compensation by incorporating leverage and an investment decision. To the extent that bank depositors and creditors are even partially protected by public guarantees, we show that it is in the interests of bank shareholders to choose more risky investments than would be socially optimal, and therefore to design a CEO contract with excessive risk taking incentives. Thus, we argue that current corporate governance arrangements in the banking sector are not efficient. In this setting, we show that putting in place one of the aforementioned mechanisms could yield the socially optimal outcome at no cost. We also identify some limitations and potential perverse effects of these mechanisms.     

Was audit quality of Laventhol and Horwath poor?

Laventhol and Horwath (L&H), the then seventh largest accounting firm in the US, declared bankruptcy in November 1990. The firm claimed that its bankruptcy was due to the perception of it being a deep pocket rather than inherent deficiencies in its performance. In this study, we examine whether the audit quality of L&H was lower than other auditors. Results do not show that L&H is associated with lower quality audits either in terms of lower likelihood of issuing modified audit opinion, higher levels of discretionary accruals for its clients, or lower predictability of discretionary accruals for future non-discretionary net income for its clients than for clients of other auditors. Results of additional tests also do not suggest that auditors that take up clients of L&H report differently from L&H. This evidence does not support the proposition that L&H’s audit quality was less than audit quality of other audit firms during the period leading up to the bankruptcy.