Incentive Effects of Rate-of-Return Regulation in Hong Kong: Reply

Journal of Regulatory Economics -     

Accounting Information in the Market for Debt

This paper surveys trust deeds supporting listed public debt issues by Australian industrial and commercial companies. It provides evidence on the restrictive covenants and the accounting rules negotiated therein. The survey indicates cross-sectional variation in the covenants/rules which is related to the nature of the debt. The paper also compares the negotiated rules with mandated accounting standards. As in the U.S. the effect of the negotiated accounting rules is, generally, to reduce management's ability to relax constrictive covenants.     

Incentive effects of rate-of-return regulation: The case of Hong Kong electric utilities

A comparison of Hong Kong and United States rate-of-return regulation indicates differences in the definition of the rate base and in the proportion of it permitted a fair rate of return. These differences imply that Hong Kong electric utilities utilize proportionately more fixed (less current) assets, and that these assets are financed proportionately more by equity (less by debt), than their United States counterparts. Our results support both these predictions, providing further evidence that since rate-ofreturn regulation is implemented by reference to reported results, comparatively minor differences in regulatory frameworks can have quite dramatic consequences for utilities' asset structure and financing mix.     

SOME OBSERVATIONS ON THE FOUNDATIONS OF THE CURRENT VALUE DEBATE

Proponents of alternative accounting information production systems have, in supporting their alternative, usually demonstrated the superiority of their system conditional upon assumptions about the producers and consumers of accounting information, and in light of the lack of evidence on the issue, assumptions about the relative costs and benefits of their system. This paper addresses the premises that are implicit in the usual arguments for one or the other form of current value accounting and reaches the general conclusion that the arguments for change are not as compelling as they may, at first glance, appear to be.     

The Diffusion of Tax Effect Accounting in Australia

This paper examines the impact of regulation and earnings management incentives on the evolution of tax effect accounting in Australia. Following the release of the first accounting standard on the issue the method spread roughly equally throughout the mining and industrial sectors. Amendments to the standard, which loosened the recognition criteria for tax loss carry forwards, led to a significant increase in the proportion of companies (particularly industrials) adopting income tax allocation. Subsequent amendments restricting such carry forwards were associated with a significant decline in the proportion of companies allocating tax (particularly miners). We also observe differential financial statement effects between mining and industrial companies and, within both sectors, differential financial statement effects across time. Consistent with the arguments of Leppinus (1977) and Gibson (1984) the adoption of tax effect accounting is, on average, earnings enhancing in the post-DS4 period. However, in the pre-DS4 period, adoption was just as likely to reduce income for industrial companies as it was to increase it. In contrast, adoption was almost uniformly earnings reducing for mining companies. Thus something other than an earnings management hypothesis is needed to explain the voluntary adoption decision of the early (pre-DS4) adopters. We conjecture on the alternatives.     

Accounting Information and Joint Arrangements

The accounting profession has recently issued a standard (AAS19) on production sharing agreements and has signalled impending regulation of accounting for other types of joint arrangements. Here we discuss the nature of joint arrangements and the role that accounting information plays in causing such arrangements to exist, determining their legal form, safeguarding the interests of the contracting parties, and protecting other interested parties likely to be disaffected by the arrangement.     

THE IMPLICATIONS OF DISTRESS PREDICTION MODELS FOR CORPORATE LENDING

Three literatures on financial distress prediction are reviewed and evaluated in terms of their usefulness in credit analysis. These are (1) bankruptcy prediction models initiated by Altman, (2) behavioural studies of the ability of loan officers and others to make accurate predictions of bankruptcy and (3) attempts to simulate loan officers' judgements. It is concluded that techniques based on judgement simulation are likely to be the most effective decision aids.