Ex Ante Incentives for Earnings Management and the Informativeness of Earnings

This study examines the relation between ex ante incentives of insurance managers to engage in earnings management to meet regulatory standards and the informativeness of earnings. This study extends prior research by simultaneously examining the effects of earnings management and uncertainty about earnings as suggested by Collins and DeAngelo (1990) and Imhoff and Lobo (1992). Results from a sample of 375 quarterly earnings announcements of 41 property and liability insurers during the period 1989 to 1992 support the hypothesis that when managers' incentives for earnings management are high, earnings announcements are less informative to investors (even after controlling for uncertainty associated with exposure to large-scale catastrophes). Robustness tests suggest that our results are not attributable to firm size, time period effects, firm effects, accounting estimation error, or financial distress risk. These results are consistent with investors using publicly available information to predict P-L insurance managers' ex ante incentives to manage earnings to meet regulatory standards, and that they use this information in forming their beliefs about earnings quality.     

Allocate Capital and Measure Performances in a Financial Institution

This paper provides a model for allocating capital and measuring performances for financial institutions. The methodology relates the economic valuation of the balance sheet to the market value of the firm. In so doing, each business unit is evaluated on an economic basis, and the capital allocated to these units is related to the risk premiums that the market demands. The paper's results have broad applications for corporate managers, risk managers, and other market participants in managing financial institutions to increase shareholders' value.     

Call Options, Points, and Dominance Restrictions on Debt Contracts

We analyze the impact of a contract's length, callability, amortization, and original discount by arbitrage methods. Among instruments that are callable without penalty, longer instruments command a higher interest rate because the borrower possesses the option of repaying relatively more slowly. However, the rate on longer self-amortizing loans cannot be substantially larger than for shorter ones because the payments decrease with contract length. Bounds on the trade-off between points and rate for callable debt are characterized using the trade-off for noncallable debt and the property that the value of the prepayment option increases with the loan's interest rate.     

Assessing the technology contribution to value added

Technology and knowledge are two key components for economic growth; however, the two concepts are not consensually defined. This paper proposes a model to assess and quantify the technology contribution to the value-adding process. The methodological approach implied building an operational concept for technology that is independent of the concepts of knowledge and capital. As such, technology could be interpreted and quantified as an input parameter in a new production model. This model interprets and assesses, separately, the value contributions of the uses of technology, of knowledge and of capital in a production process, defining the Technology Index for that process. The model is applied to manufacturing sectors of seven European countries, quantifying their respective dependences on technology. A comparison of the Technology Index proposed here is made with the OECD's Technology Intensity factor, arguing that the former reflects the technology dependence better that the latter. Accordingly, a criterion for classifying the economic sectors' dependence on technology is proposed. A main contribution from this study is an objective classification criterion for technology dependence of firms and economic sectors. It also provides an easy benchmark procedure for knowledge and capital dependence between firms and sectors.     

The Creation of Value Through Corporate Reputation

The relationship between social and financial performance (CSP – FP) has been a main objective in the literature on business management, as it would provide an economic justification for the social investment insofar as it contributes to the creation of value. This relationship has been empirically tested by several authors though without using a theoretical model that sustains this relationship. The aim of this article is to propose a theoretical model of the process of the creation of value from the reputation generated by companies, integrating the factors that have been shown to be more relevant in this process from previous research, in such a way that hypotheses are put forward regarding the existence of this relationship and the factors that determine it. Finally, an empirical test is performed using the 100 most prestigious companies operating in Spain during 2004.     

Ordering univariate distributions by entropy and variance

This paper examines the role of variance and entropy in ordering distributions and random prospects. There is no universal relation between entropy and variance orderings of distributions. But we place their relationship in the context of a stronger ordering relation known as dispersion ordering. Further, some conditions are identified under which variance and entropy order similarly when continuous variables are transformed. We also analyze parametric changes which do not disturb the agreement between these rankings. The results are conveniently tabulated in terms of distribution parameters.     

If You Provide It,Will They Read It? Response Time Effects in a Choice Experiment

Substantial effort is expended in the design of surveys, including the amount and type of information they contain. However, we often do not know how involved respondents are in reading and processing the informational content of a survey and making choices, and whether different levels of involvement result in systematic differences in estimated models. To address this issue, we recorded response times for each respondent of an internet‐based choice experiment for stream restoration. Response times per survey section and for the entire survey were used as proxies for the amount of involvement in reading information provided or answering choice questions. Response times per survey section fell rapidly, possibly signaling learning, use of heuristics, or attempts to quickly dispel with the survey. Response times were found to be independent of demographics and attitudes. Log‐likelihood ratio tests failed to reject the null hypotheses of equal coefficients and scale parameters across response time‐partitioned data. However, there exists an association between response times and the increasing learning curve or difficult choice trade‐offs, suggesting a heuristic response. Additional research on response time effects and survey design is needed, especially with the rise in electronic surveying media. D'énormes efforts sont investis dans la conception de sondages, notamment pour déterminer la quantité et le type d'information présentée. Toutefois, nous ne savons pas combien de temps les répondants consacrent à la lecture et au traitement de cette information et au choix des réponses, ni si les divers degrés de participation entraînent ou non des différences systématiques dans les modèles estimés. Pour s'attaquer à cette question, nous avons chronométré les personnes qui ont répondu à un sondage en ligne sur la restauration des cours d'eau. Nous avons utilisé le temps de réponse pour chaque section et pour le sondage au complet comme mesure approximative de l'effort des participants pour lire l'information et répondre aux questions. Pour chaque section, le temps de réponse diminuait rapidement, soit en raison des connaissances heuristiques des répondants, soit en raison de leur désir d'effectuer le sondage le plus rapidement possible. Le temps de réponse s'est révélé indépendant des caractéristiques démographiques et des attitudes des répondants. Des tests du rapport de vraisemblance n'ont pas rejeté les hypothèses nulles de coefficients égaux et de paramètres d'échelle de l'ensemble des données cloisonnées. Toutefois, il existe un lien entre le temps de réponse et la courbe d'apprentissage croissante ou la difficulté des choix, ce qui laisse supposer une réponse heuristique. Il faudrait effectuer davantage de recherche sur les effets du temps consacré pour répondre à un sondage et pour le concevoir, en raison du nombre croissant de sondages en ligne.     

Convergence within the EU: Evidence from Interest Rates

The economic and political changes which are taking place in Europe affect interest rates. This paper develops a two-factor model for the term structure of interest rates specially designed to apply to EMU countries. In addition to the participant country's short-term interest rate, we include as a second factor a 'European' short-term interest rate. We assume that the 'European' rate follows a mean reverting process. The domestic interest rate also follows a mean reverting process, but its convergence is to a stochastic mean which is identified with the 'European' rate. Closed-form solutions for prices of zero coupon discount bonds and options on these bonds are provided. A special feature of the model is that both the domestic and the European interest rate risks are priced. We also discuss an empirical estimation focusing on the Spanish bond market. The 'European' rate is proxied by the ecu's interest rate. Through a comparison of the performance of our convergence model with a Vasicek model for the Spanish bond market, we show that our model provides a better fit both in-sample and out-of sample and that the difference in performance between the models is greater the longer the maturity of the bonds.
(J.E.L.: E43, C510).     

Land use optimization in watershed scale

Managing a watershed for satisfying the inhabitant's demand is a difficult task if one has to maintain a reasonable balance between usually conflicting environmental flows and demands. The solution to these complex issues requires the use of mathematical techniques to take into account conflicting objectives. Many optimization models exist for general management systems but there is a knowledge gap in linking practical problems with the optimum use of all land resources under conflicting demands in a watershed. In the present study, an optimization problem has been formulated for the Brimvand watershed, Iran, comprising ca. 9572 ha to find out the most suitable land allocation to different land uses, viz. orchard, irrigated farming, dry farming and rangeland targeting soil erosion minimization and benefit maximization.