IAS 39 reclassification choice and analyst earnings forecast properties

In October 2008, the International Accounting Standards Board amended IAS 39 to allow banks to retroactively reclassify financial assets that previously were measured at fair value to amortized cost. By reclassifying financial assets, a bank can potentially avoid recognizing the unrealized fair value losses and thereby increase its income and regulatory capital during a market downturn. We examine the implications of the reclassification decision by banks for the properties of financial analyst earnings forecasts during 2008–2009, when economic conditions were highly volatile. We find that the reclassification choice during the financial crisis reduced analyst forecast accuracy and increased forecast dispersion. We also find that the observed decline in analyst forecasting ability is limited to the year of adoption when the economic environment was highly volatile.     

A review of: “ENGINEERING ECONOMY, 4th. Ed.” By E. Paul DeGarmo The Macmillan Company 1967 532 pp. $10.95.

A risk measure, expected opportunity loss (EOL), is introduced to quantify the potential loss of making an incorrect choice in risk-based decision making. Different from Savage's (1951 Savage, L. J. 1951. The theory of statistical decision. Journal of the American Statistical Association, 46(253): 55–67. [Taylor &; Francis Online], [Web of Science ®] , [Google Scholar]) minimax regret principle, EOL can account for the unbounded continuous random outcomes of alternatives and decision makers’ acceptable risk. This article studies the effects of the forms of loss function, correlation among outcomes, and the acceptable risk on the ranking results by considering the loss function in the power form. The results show that the loss functions and the outcomes correlations can significantly influence the rankings of alternatives in risk-based decision making.     

Principal‐agent and Peer Relationships in Tournaments

Effort provision in tournaments may depend on both social preferences towards the competitor and social preferences towards the principal who designed the tournament. In a laboratory experiment, we analyze agents' behavior in different tournament settings that vary the distribution of the prize between agents. The principal chooses between a low and a high guaranteed payment. Standard economic theory predicts the same effort provision in all situations. Instead, our results show that both the generosity of the principal and the strict separation between winner and loser increase the effort level in tournaments. Moreover, agents focus their preferences either on the principal or on the agent. Copyright © 2014 John Wiley & Sons, Ltd.     

Economic policy uncertainty and financial statement comparability

We examine the implications of economic policy uncertainty (EPU) for financial statement comparability. We posit that the increased difficulty of estimating future cash flows and the increased opportunity for earnings management with increased EPU reduce the quality of earnings and its comparability. Consistent with this reasoning, we find a negative relation between earnings comparability and lagged EPU. Further, the association between EPU and comparability is more negative for firms that have poorer accruals quality and higher earnings volatility. We do not find that accounting policy choice is systematically related to the association between EPU and comparability. These results suggest that cross-sectional differences in accounting estimates rather than accounting policies influence the relation between EPU and comparability.     

Land‐use change trajectories up to 2050: insights from a global agro‐economic model comparison

Changes in agricultural land use have important implications for environmental services. Previous studies of agricultural land‐use futures have been published indicating large uncertainty due to different model assumptions and methodologies. In this article we present a first comprehensive comparison of global agro‐economic models that have harmonized drivers of population, GDP, and biophysical yields. The comparison allows us to ask two research questions: (1) How much cropland will be used under different socioeconomic and climate change scenarios? (2) How can differences in model results be explained? The comparison includes four partial and six general equilibrium models that differ in how they model land supply and amount of potentially available land. We analyze results of two different socioeconomic scenarios and three climate scenarios (one with constant climate). Most models (7 out of 10) project an increase of cropland of 10–25% by 2050 compared to 2005 (under constant climate), but one model projects a decrease. Pasture land expands in some models, which increase the treat on natural vegetation further. Across all models most of the cropland expansion takes place in South America and sub‐Saharan Africa. In general, the strongest differences in model results are related to differences in the costs of land expansion, the endogenous productivity responses, and the assumptions about potential cropland.     

Demographic Dissimilarity and Workplace Inclusion

This study examined the relationship between individual demographic dissimilarity from co-workers and three indicators of inclusion by an organization: decision-making influence, access to sensitive information, and job security. Data from 345 individuals in eight work units showed that individual dissimilarity in race and gender were negatively associated with inclusion, and the effect of race dissimilarity was more pronounced for whites than for non-whites. In contrast, individual dissimilarity in tenure and education level were positively associated with inclusion, and these effects were more pronounced for those with greater tenure and greater education, respectively. Overall, the results suggest that whether being different hinders or helps organizational inclusion may depend on whether that difference is visible and whether it reflects job expertise. Further, they suggest that, when being different is a hindrance, it may be hardest on those who have traditionally been the majority in organizations.     

Auditor reputation and earnings management: International evidence from the banking industry

We examine the relation between auditor reputation and earnings management in banks using a sample of banks from 29 countries. In particular, we examine the implications of two aspects of auditor reputation, auditor type and auditor industry specialization, for earnings management in banks. We find that both auditor type and auditor industry specialization moderate benchmark-beating (loss-avoidance and just-meeting-or-beating prior year’s earnings) behavior in banks. In addition, we find that once auditor type and auditor industry specialization are included in the same tests, only auditor industry specialization has a significant impact on constraining benchmark-beating behavior. In separate tests related to income-increasing abnormal loan loss provisions, we find that both auditor type and auditor expertise constrain income-increasing earnings management. Again, in joint tests, only auditor industry expertise has a significant impact on constraining income-increasing earnings management.     

A further look at transaction costs,short sale restrictions,and futures market efficiency: The case of Korean stock index futures

Persistent underpricing in the Korean stock index futures market is documented and alternative explanations are examined. No-arbitrage pricing bands are computed using alternative sets of transaction costs and short sale restrictions faced by different investor groups. We find that a substantial portion of the mispricing can be explained by these factors, though a high incidence of mispricing remains after accounting for costs faced by the marginal trader group—the KSE exchange members. We also observe frequent underpricing of futures during periods of downward market trends. This is attributed in part because of unique restrictions on short sales and accounting conventions in the Korean market. In addition, tests of alternative futures pricing models are conducted that provide mixed results. Though we do not reject the standard cost-of-carry model, an equilibrium pricing model provides reasonable explanatory power. Further, use of the cost-of-carry model does not appear to be driving the findings of persistent underpricing. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 153–174, 1999     

The evaluation of time-dependent attributes

This study investigated time-dependent attributes; that is, those not known during use but where the passage of time reveals information about the attribute. In a lab experiment, subjects were asked to try out a new home banking system. Two independent variables were manipulated: (a) the accuracy (or inaccuracy) of a bank transaction, and (b) whether the information about accuracy was revealed immediately or after a delay. An unknown time-dependent attribute (i.e., accuracy of fee charges) was evaluated more favorably when a highly correlated attribute, transaction accuracy, was also evaluated positively. When the attributes were not highly correlated, there was an interactive effect of information about transaction accuracy and the time when this information was revealed on evaluations of time-dependent attributes. Generally, information that was received with delay influenced the evaluation of time-dependent attributes, but information received immediately did not. © 1996 John Wiley & Sons, Inc.