Anticipation of quarterly earnings announcements: A test of option market efficiency

This study tests Chicago Board Options Exchange efficiency by examining option price behavior in the weeks surrounding a firm's quarterly earnings announcement. The evidence presented here suggests that a first-order autoregressive seasonal process describes quarterly earnings behavior and demonstrates that the information content of an earnings announcement is fully incorporated in option prices by the end of the announcement week.     

Challenges faced by accountancy education during and beyond the years of transition—some Hong Kong evidence

The sovereignty of Hong Kong (HK) was returned to China on 1 July l997 and HK has become a Special Administrative Region of China under the principle of “one country, two systems”. In order to evaluate the impact of the “l997” issue on accountancy education in HK, the Department of Accountancy of The Hong Kong Polytechnic University was chosen as a case study. This paper discusses the accounting reforms taking place in China, the political factor of “1997”, and their corresponding impacts on accountancy education in HK. This discussion is followed by assessing the challenges faced and the responses made by the Department of Accountancy of The Hong Kong Polytechnic University in order adapt to the challenges.     

The Impact of Social and Economic Development on Corporate Social and Environmental Disclosure in Hong Kong and the U.K.

This study compares corporate social and environmental disclosure (CSED) in Hong Kong (HK) and the U.K. through a content analysis of 334 annual reports prepared by 69 listed companies over the period of 1993–1997. We find that U.K. and HK companies differed in the amount, theme and location of CSED, and that there was an upward trend in the amount of CSED in both U.K. and HK firms during the five-year period, although U.K. firms increased more than HK firms. We argue that HK and U.K.'s different stages of social and economic development, by creating differential pressures and demand for CSED and exposing companies to differential political costs and legitimacy threats, contributed towards these differences in CSED.     

The role of expectations in stabilization policy

This paper develops and tests a theory of the process by which private agents in an economy form expectations about government policy. Agents form and update their beliefs about the true state of government policy in a Bayesian fashion. The ‘credibility’ of a policy is defined to be the subjective probability that the government is pursuing a 'reform' policy rule. The ‘credibility’ of a reform of monetary or exchange rate policies is a function of the parameters of both monetary and fiscal policies. The theory is applied to the Chilean and Argentine exchange reforms of the late 1970's.     

Bond pricing when the short-term interest rate follows a threshold process

This paper derives analytical solutions for arbitrage-free bond yields when the short-term interest rate follows an autoregressive process with the intercept switching endogenously. This process from the SETAR family is especially suited to capture the near-unit-root behaviour typically observed in the evolution of short-term interest rates. The derived yield functions, mapping the one-month rate into n-period yields, exhibit a convex/concave shape to the left and right of the threshold value, respectively, a pattern which is also found in US bond yield data. The longer the time to maturity, the more distinct the nonlinearity of the yield function becomes.     

Generalized Disappointment Aversion and Asset Prices

We characterize generalized disappointment aversion (GDA) risk preferences that can overweight lower‐tail outcomes relative to expected utility. We show in an endowment economy that recursive utility with GDA risk preferences generates effective risk aversion that is countercyclical. This feature comes from endogenous variation in the probability of disappointment in the representative agent's intertemporal consumption‐saving problem that underlies the asset pricing model. The variation in effective risk aversion produces a large equity premium and a risk‐free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment‐growth process.     

Short-term Dynamics in the Cyprus Stock Exchange

Abstract

This paper investigates the short-term dynamics of stock returns in an emerging stock market namely, the Cyprus Stock Exchange (CYSE). Stock returns are modelled as conditionally heteroscedastic processes with time-dependent serial correlation. The conditional variance follows an EGARCH process, while for the conditional mean three nonlinear specifications are tested, namely: (a) the LeBaron exponential autoregressive model; (b) the Sentana and Wadhwani positive feedback trading model; and finally (c) a model that nests both (a) and (b). There is an inverse relationship between volatility and autocorrelation consistent with the findings from several other stock markets, including the US. This pattern could be the manifestation of a certain form of noise trading namely positive feedback trading or, momentum trading strategies. There is little evidence that market declines are followed with higher volatility than market advances, the so-called ‘leverage effect’, that has been observed in almost all developed stock markets. In out of sample forecasts, the nonlinear specifications provide better results in terms of forecasting both first and second moments of the distribution of returns.     

What do we know about audit quality?

This paper reviews empirical research over the past 25 years, mainly from the United States, in order to assess what we currently know about audit quality with respect to publicly listed companies. The evidence indicates that outright audit failure rates are infrequent, far less than 1% annually, and audit fees are quite small, less than 0.1% of aggregate client sales. This suggests there may be an acceptable level of audit quality at a relatively low cost. There is also evidence of voluntary differential audit quality (above the legal minimum) along a number of dimensions such as firm size, industry specialization, office characteristics, and cross-country differences in legal systems and auditor liability exposure. The evidence is very positive although there is some indication that audit quality may have declined in the 1990s, in which case there could be merit in recent reforms such as the Sarbanes-Oxley Act of 2002 in the US. However, we do not know from research the optimal level of audit quality and therefore whether we currently have ‘too little’ or ‘too much’ auditing? Despite this lacuna we are entering an era of more mandated auditing in response to high-profile corporate governance failures including the Enron–Andersen affair. Finally, while recent reforms have scaled back the scope of non-audit services due to independence concerns, a case can be made that audit quality will always be somewhat suspect if other services are provided that are perceived to potentially compromise the auditor's objectivity and skepticism. For this reason public confidence in audit quality may be increased by proscribing all non-audit services for audit clients. Recommendations are also proposed with respect to legal liability reform and changes in partner compensation arrangements.     

Return predictability in African stock markets

This paper models weekly index returns adjusted for thin trading as a nonlinear autoregressive process with conditional heteroscedasticity to investigate the weak-form pricing efficiency of 11 African stock markets. Specifically, the use of the EGARCH-M model allows us to capture how conditional volatility affects the pricing process without imposing undue restrictions on the parameters of the conditional variance equation. On the basis of such a robust model, we are able to reject the evidence in prior studies that the Nigerian stock market is weak-form efficient. On the other hand, we confirm extant results that the markets in Egypt, Kenya, and Zimbabwe are efficient while that of South Africa is not weak-form efficient. We also generate new results, which point to the efficiency of the stock markets in Mauritius and Morocco, while the markets in Botswana, Ghana, Ivory Coast, and Swaziland are not consistent with weak-form efficiency.     

香港人民币债券市场发展动态及趋势分析

近来香港人民币债券市场的蓬勃发展吸引了各方广泛关注。香港人民币债券市场的发展对于推动人民币国际化、建设香港离岸金融中心有着重要的意义。文章介绍了香港离岸人民币市场发展现状,分析了近期香港人民币债券市场发展动态以及未来的趋势,并从人民币合成债券和点心债券协调发展、后续政策措施对香港人民币存量及人民币债券市场的影响的角度,探讨了香港人民币债券市场的未来发展。     

Unnatural selection of outside directors: Consequences of Japanese corporate governance reforms

We examine how Japanese listed companies increase the number of outside directors to comply with corporate governance reforms. We find that, after the reforms, there has been an increase in the number of cases in which former company auditors (kansayaku) become outside directors in the same company. This trend is more pronounced for hitherto noncompliant firms with insufficient outside directors before the reforms. Moreover, the firms appointing company auditors as outside directors tend to change their corporate structures to maintain existing practices and minimize compliance costs. Our findings imply that Japanese reforms have increased the unnatural selection of outside directors.     

Time and the Price Impact of a Trade

We use Hasbrouck's (1991) vector autoregressive model for prices and trades to empirically test and assess the role played by the waiting time between consecutive transactions in the process of price formation. We find that as the time duration between transactions decreases, the price impact of trades, the speed of price adjustment to trade-related information, and the positive autocorrelation of signed trades all increase. This suggests that times when markets are most active are times when there is an increased presence of informed traders; we interpret such markets as having reduced liquidity.     

A Class of Gaussian Hybrid Processes for Modeling Financial Markets

This paper proposes a one-factor model of financial markets using a class of Gaussian process that can be decomposed into a Brownian motion and an Ornstein–Uhlenbeck process. It is shown that this “hybrid” process is obtained as a continuous-time scaling limit of the differenced first-order autoregressive integrated moving average (ARIMA(1,1,1)) process. Parameter estimations using an ARIMA(1,1,1) framework and its variance ratio test show the accuracy of the proposed model. Construction of the one-factor commodity futures price model is presented as an application. A multidimensional extension of the hybrid process is also presented in the Appendix.     

Volatility and market structure

This study examines volatility within three related intra-day series – transaction returns, quote midpoint returns, and limit order book midpoint returns – for a set of NYSE-listed stocks. We document statistically significant GARCH effects both overall and surrounding earnings announcements in all three series for the majority of stocks in the sample. We then compare the extent of volatility clustering among the series. In addition, the relation between volatility and market structure is examined via a set of cross-sectional regressions, and relations among the series over time are studied in a vector autoregressive framework.     

What makes a bank risky? Insights from the optimal capital structure of banks

Assessing the risk of bank failures is the paramount concern of bank regulation. This paper argues that in order to assess the default risk of a bank, it is important to consider its financing decisions as an endogenous dynamic process. We provide a continuous-time model, where banks choose the deposit volume in order to trade off the benefits of earning deposit premiums against the costs that occur at future capital structure adjustments. The bank’s asset value may suffer from shocks and follows a jump-diffusion process.     

The Economic Significance of the Cross-Sectional Autoregressive Model: Further Analysis

We reexamine whether investors can gain abnormal returns using the cross-sectional autoregressive model of stock returns. We find that the pattern of abnormal returns obtained is inconsistent over the time period 1934–94. We adjust for the higher commission costs in the pre-May 1 1975 period, a point overlooked in Jegadeesh (1990), by assuming a conservative one-way transaction cost of 0.75%. For the post-May 1 1975 period, we use a one-way transaction cost of 0.25%. The results show that investors who invest only on the long side would earn insignificant 'after-transaction cost' abnormal returns in the post-World War II period, 1946–94. The 'after-transaction cost' abnormal return from the short strategy is about 0.5% for the period 1946–94. This article shows that an investor would not earn abnormal returns using this model considering that it is more costly in practice to sell securities short and that most investors would not earn interest on short sale proceeds.     

Modeling the Euro overnight rate

This paper describes the evolution of the daily Euro overnight interest rate (EONIA) by using several models containing the jump component, such as a single-regime ARCH-Poisson–Gaussian process, with either a piecewise function or an autoregressive conditional specification (ARJI) for the jump intensity, and a two-regime-switching process with jumps and time-varying transition probabilities. To model the jump intensity, we include the following effects which are significant for the occurrence of jumps: (1) the end of maintenance period effect because of reserve requirements, (2) the end of month effect, also known as the calendar day effect, caused mainly by accounting adjustments and finally, (3) the meeting effect caused by the meetings of the Governing Council of the European Central Bank (ECB). These effects lead to better performance and several of them are also included for the behavior of the transition probabilities. Since the target of the ECB is to maintain the EONIA rate close to the policy rate, we model the conditional mean of the overnight rate series as a reversion process to this policy rate, distinguishing two alternative speeds of reversion, specifically, a different speed if EONIA is higher or lower than the policy rate. We also study the jumps of the EONIA rate around the ECB's meetings by using the ex-post probabilities of the ARJI model. Finally, we develop a volatility forecasting analysis to measure the performance of the different candidate models.     

Commentary: Has Australia (or Any Other Jurisdiction) ‘Adopted’ IFRS?1

This paper replies to a statement made in this journal that ‘Australia definitely adopts IFRSs’. We analyse and compare the several methods that jurisdictions can use to implement International Financial Reporting Standards (IFRS). These include adopting the International Accounting Standards Board's (IASB) process of setting standards, as well as various forms of standard‐by‐standard implementation. We conclude that the Australian method of implementation is different in major ways from those used in such countries as Israel and South Africa, which involve adopting the IASB's process. By contrast, Australia follows a multi‐step process of enrolling each new standard into a category still entitled ‘Australian Accounting Standards’. To refer to the Australian method as ‘adoption’ of IFRS might therefore mislead, even though Australian companies eventually comply with IFRS.     

Financial reforms and time-varying microstructures in emerging equity markets

This paper seeks to investigate the impact of financial reforms on time-varying microstructures in emerging equity markets. We develop annual indicators of informational efficiency, market volatility and transaction costs, using daily data for a panel of 28 emerging markets over the 1996–2007 period. We then analyze the impact of insider trading regulations, trading system automation and accounting standardization on microstructures through a set of panel regressions controlling for financial development and simultaneous reforms. Our results suggest that emerging market microstructures are affected by economic and political context, are strongly related to one another and depend on specific institutional reforms.     

Tax Reforms, Debt Shifting and Tax Revenues: Multinational Corporations in Canada

An analysis of Canadiancorporate income tax revenues during the 1984–94 periodshows a relative shifting of tax revenue shares between Canadianand foreign-controlled corporations, and a substantial changein the debt levels of foreign-controlled corporations, as wellas Canadian-based multinationals. We claim that these changesmay have been associated with the tax reforms undertaken by theUnited States and Canada in the mid-1980s resulting in the relativechange in the tax rates between the two countries. We also hypothesizethat if this difference persists and in Canadian-controlled corporationscontinue to aggressively expand abroad, the Canadian corporatetax base could experience further pressure.