Testing for Income Smoothing Using the Backing Out Method: A Review of Specification Issues

This study investigates potentially spurious correlation in prior studies of income smoothing which use a research method that we call backing out. If E is reported income, Y a discretionary earnings component hypothesized to smooth income, and T the smoothing target, the backing out method consists of regressing Y on E – Y – T. A negative regression coefficient is interpreted as evidence that Y is being managed to smooth earnings. We argue that the negative regression coefficient may simply reflect the positive correlation between E and T, which may or may not be the result of manipulating Y. If E is not manipulated by Y, the negative regression coefficient reflects measurement errors in E – Y as an estimate of unmanaged earnings.We replicate the backing out method of prior studies and use each of the accrual and cash flow components of earnings in the Statement of Cash Flows for Y. We find that the regression coefficient, hypothesized to be negative because of smoothing with Y, is always negative and its magnitude depends on the variances of Y and E – T (smoothing error) independent of the nature of Y (discretionary or nondiscretionary). We conclude that the negative coefficient on E – Y – T is equally consistent with three possibilities: (1) managers smooth earnings with Y, (2) managers smooth earnings with something other than Y, and (3) managers do not smooth earnings at all.     

Rationality and Analysts' Forecast Bias

This paper proposes and tests a quadratic-loss utility function for modeling corporate earnings forecasting, where financial analysts trade off bias to improve management access and forecast accuracy. Optimal forecasts with minimum expected error are optimistically biased and exhibit predictable cross-sectional variation related to analyst and company characteristics. Empirical evidence from individual analyst forecasts is consistent with the model's predictions. These results suggest that positive and predictable bias may be a rational property of optimal earnings forecasts. Prior studies using classical notions of unbiasedness may have prematurely dismissed analysts' forecasts as being irrational or inaccurate.     

The late take-off phenomenon in the diffusion of telecommunication services: network effect and the critical mass

Telecommunication services are distinctive in that their adoptions are influenced by network effect resulting in the late take-off phenomenon and the critical mass problem. In this paper we examined the late take-off phenomenon in the diffusion process of telecommunication services. We first compared the parameters of the diffusion process of consumer durables with those of fax services in the US and Korea. By analyzing the parameters of a new diffusion model based on the threshold model proposed by Markus, we found that the late take-off phenomenon resulted from the low heterogeneity of the threshold distribution for the potential adopters. A simulation approach was proposed for the theoretical implication of the critical mass problem in the start-up telecommunications services.     

Dual-class versus single-class firms: information asymmetry

I examine information asymmetry in dual-class firms in general and when they need (do not need) additional external capital. In general the results show that dual-class firms have higher information asymmetry than single-class firms. When dual-class firms need additional external financing, the gap in information asymmetry between dual-class firms and single class firms is narrower. I find that as the need of additional external capital increases, the difference in information asymmetry between dual-class and single-class firms decreases (consistent with increased disclosures). It decreases, up to a point that there is no difference in information asymmetry with single-class firms that also needs additional external capital. When using adverse selection component of bid-ask spread, the paper finds that as the need of external financing gets high, dual-class firms show lower information asymmetry 1 year before they need additional external capital.     

Book Reviews

Hendra Esmara (ed.), Teori Ekonomi Dan Kebijaksanaan Pembangunan: Kumpulan Esei Untuk Menghargai Sumitro Djojohadikusumo, Jakarta: P.T. Gramedia, 1987, pp. 645 + xxx, npg.

Khong Cho Oon, The Politics of Oil in Indonesia: Foreign Company-Host Government Relations, LSE Monographs in International Studies, Cambridge: Cambridge University Press, 1986, pp. 253 + x, $89,00.

Hal Hill, Foreign Investment and Industrialization in Indonesia, Singapore: Oxford University Press, 1988, pp. 179 + xxi, $34.50.     

Comparative net cost impact of the utilization of panitumumab versus cetuximab for the treatment of patients with metastatic colorectal cancer in Canada

Objective:

Clinical practice guidelines support the use of the epidermal growth factor receptor (EGFR) inhibitors panitumumab and cetuximab for the treatment of metastatic colorectal cancer (mCRC) after failure of other chemotherapy regimens, based on significant clinical benefits in patients with wild-type KRAS. The purpose of the analysis was to compare provincial hospital costs when using panitumumab vs cetuximab with or without irinotecan in this patient population using a Net Impact Analysis (NIA) approach.

Methods:

The NIA determined the total per patient cost of the reimbursed regimens of panitumumab vs cetuximab in British Columbia, Alberta, Manitoba, Ontario, and Québec. Utilization of healthcare resources related to EGFR inhibitor infusions, follow-up monitoring, and treatment of adverse events (AEs) were also included. Healthcare resource use including drugs, medical supplies, laboratory testing, oncology infusion time, and healthcare professionals’ time was obtained through expert consultation and the use was then multiplied by the province-specific cost of each resource. Numerous sensitivity analyses were conducted.

Results:

Based on the dosing regimens in place in each province, the total annual per patient cost of panitumumab ranged from $22,203–$32,600, while the total annual per patient cost of cetuximab treatment varied from $30,321–$40,908. Treatment with panitumumab resulted in lower costs in all cost categories including drug acquisition, infusion preparation/administration, patient monitoring, and AE management. Per patient savings with panitumumab ranged from a low of $3815 in British Columbia to a high of $10,603 in Ontario. In sensitivity analyses, panitumumab remained cost saving in all scenarios where the savings ranged from $150–$16,006 per patient.

Conclusions:

Treating chemorefractory mCRC patients with panitumumab rather than cetuximab reduced healthcare resource costs. Provincial healthcare savings achieved with the use of panitumumab could potentially be re-allocated to other cancer treatments, although further study would be needed to validate this assumption.     

Consumption,Income, and Wealth: Evidence from Age,Cohort, and Period Elasticities

This paper examines the relationship between non‐durable consumption, income, and wealth (housing and financial) allowing explicitly for generational heterogeneity. A framework is proposed to disentangle cohort, age, and period effects and the empirical analysis is based on the U.S. Consumer Expenditure Survey data. We find that there are significant generational differences and the results highlight the range of elasticities implicit in results presented, thus far, by age groups. Moreover, we find supporting evidence of humped shaped age profiles for the elasticity of consumption with respect to income and the importance of financial wealth for those aged 60+. The framework also allows us to generate cohort profiles which draw attention to the negative role of housing wealth for generation X, and period profiles which reinforce the role of financial wealth for the baby‐boom generation.     

Introduction to "Exchange Rates in Europe and Australasia: Fundamental Determinants, Adjustments and Policy Implications"

The papers in this issue are concerned with the behaviour of exchange rates — their fundamental determinants, adjustment processes and policy implications. The authors combine theory with empirical evidence, test hypotheses as well as show the relevance of their analysis for policy. This Introduction addresses several questions. What are the contributions of the articles to the economics of exchange rates? Are they significant in increasing our understanding of the current issues and in addressing questions of policy? How can one explain the movements in the European and the Asian currencies? What can we expect to happen to the euro with the enlargement of the euro area? Do the papers provide frameworks to guide empirical research? In this Introduction, we highlight aspects of each paper that addresses these issues.     

Differential levels of disclosure and the earnings-return association: evidence from foreign registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers.We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients (ERCs).