Are Fundamentals Priced in the Bond Market?*

To date, the discussion of the Lev and Thiagarajan 1993 fundamentals in the prior literature has been exclusively in the context of the stock market. Our study is the first to examine the value‐relevance of these fundamentals for default risk. By focusing on the market for new bond issues, we examine the value‐relevance of the fundamental score using expected rather than realized returns. Also, by focusing on the bond market we provide a different perspective than that brought by prior studies relying solely on stock prices. We find the fundamentals to be priced in the market for new bond issues as indicators of expected future earnings and to be value‐relevant in enabling the market to discern differences in bond credit quality over and above the published bond ratings.     

Estimating daily volatility in financial markets utilizing intraday data

This study proposes a new approach to the estimation of daily realised volatility in financial markets from intraday data. Initially, an examination of intraday returns on S&P 500 Index Futures reveals that returns can be characterised by heteroscedasticity and time-varying autocorrelation. After reviewing a number of daily realised volatility estimators cited in the literature, it is concluded that these estimators are based upon a number of restrictive assumptions in regard to the data generating process for intraday returns. We use a weak set of assumptions about the data generating process for intraday returns, including transaction returns, given in den Haan and Levin [den Haan, W.J., Levin, A., 1996. Inferences from parametric and non-parametric covariance matrix estimation procedures, Working paper, NBER, 195.], which allows for heteroscedasticity and time-varying autocorrelation in intraday returns. These assumptions allow the VARHAC estimator to be employed in the estimation of daily realised volatility. An empirical analysis of the VARHAC daily volatility estimator employing intraday transaction returns concludes that this estimator performs well in comparison to other estimators cited in the literature.     

Product market competition and conditional conservatism

Based on pooled cross-sectional analysis, we find a robust positive relation between product market competition and conditional accounting conservatism. We also find evidence of an inter-temporal increase in conditional conservatism following industry deregulation and increased antitrust case filings. Distinguishing further between two dimensions of competition, we find conditional conservatism is greater when there is a higher threat of new entrants as well as stiff existing competition. Moreover, we find these results largely hold for industry followers as opposed to industry leaders, suggesting that strategic considerations shape the extent to which product market competition affects conditional conservatism.     

Long-run Relationships Between World Vegetable Oil Prices

In the international edible oil markets, there is believed to be high substitutability between vegetable oils and fats produced under different conditions. In light of this, we consider the question: what is the nature of the long-run relationships between vegetable oil prices? Long-run co-movements among oil prices are analysed, based on a multivariate cointegration model. The empirical finding is that most co-movements are consistent with the predictions of market theory. Prices of oils tend to be grouped according to their different end-uses. Some policy implications of a buffer stock scheme are discussed.     

Do Investors Care about the Auditor's Economic Dependence on the Client?*

In this study, we investigate whether investor perceptions of the financial reporting credibility of Big 5 audits are related to the auditor's economic dependence on the client as measured by nonaudit as well as total (audit and nonaudit) fees paid to the incumbent auditor. We use the client‐specific ex ante cost of equity capital as a proxy for investor perceptions of financial reporting credibility and examine auditor fees both as a proportion of the revenues of the audit firm and as a proportion of the revenues of the audit firm's practice office through which the audit was conducted. Our findings suggest that both nonaudit and total fees are perceived negatively by investors' that is, the higher the fees paid to the auditor, the greater the implied threat to auditor independence, and the lower the financial reporting credibility of a Big 5 audit. Furthermore, our findings appear to be largely unrelated to corporate governance: investors do not perceive the auditor as compensating for weak governance. Separately, recent anecdotal evidence suggests that declining revenues from nonaudit services' as a result of recent regulatory restrictions” are being offset by substantial increases in audit fees. Other things being equal, rising audit fees imply higher profit margins for audit services, indicating that the audit function may no longer be a loss leader. Thus, to the extent that investors perceive total fees negatively, recent regulatory initiatives to limit nonaudit fees may not have adequately addressed the perceived, if not the actual, threat to auditor independence posed by fees.     

Structural unempolyment in Australia

This paper examines whether structural unemployment increased in Australia over the last two decades. A simple regression model has been considered for testing the hypothesis of increase in unemployment of several segment of the labour force over time. Six dimensions of the labour force, namely age, sex, region, duration of unemployment, occupation and industry, have been taken into account. Analysis of the regression results reveals that the structural unemployment problem is substantial with respect to age, sex, duration of unemployment occupation and industry. Regarding region the evidence for structural symptom is not very strong.     

Simultaneity, Rationality and Price Determination in US Live Cattle

The results of recent research on the informational efficiency of the US live cattle futures market are ambiguous. Moreover, simultaneous, rational expectations models of spot and futures markets for non-storables are lacking in the literature. This paper addresses both issues: by developing a simultaneous rational expectations model of the US live cattle market, with functional relationships for short hedgers, long hedgers, net short speculators and consumers, the paper employs a wider information set than in previous research and it thus provides a more powerful test of the efficient market hypothesis (EMH). Tests indicate the possible presence of non-linearities in the long hedging and net short speculation equations.
The results suggest first, that there is support for Working's hypotheses of selective and operational hedging, for short and long hedgers respectively, second that speculators may be noise traders or risk-loving (although the non-linear version of the speculation function partially corrects this anomaly), and third that beef is a normal good while corn is a complementary input. Time-varying volatility is represented as an EGARCH ( p , q ) process. Post-sample, this model does not significantly outperform the futures price in spot price forecasting, implying non-rejection of the EMH.     

Litigation reform,accounting discretion,and the cost of equity

In this paper, we isolate a context – the 1995 Public Securities Litigation Reform Act – where information risk (accruals quality) is likely to change, and investigate whether the increase in accounting discretion associated with litigation reform is viewed by investors as basically opportunistic (i.e., as distorting reported earnings) or as improving the ability of reported earnings to reflect economic value. We measure accounting discretion using both positive (i.e., income-increasing) as well as absolute performance-adjusted abnormal accruals. Our analysis focuses on a constant sample of firms over a 10-year (1992–2001) period, and is structured in two stages. In the first-stage, we utilize an instrumental variable technique that isolates the increase in accounting discretion associated with the 1995 Act. In the second-stage, we relate the predicted increase in accounting discretion associated with litigation reform – obtained from the first-stage regression – to the ex ante equity risk premium for Big N audit clients. Our results suggest that the increase in accounting discretion associated with the 1995 Act was viewed by investors as basically opportunistic. Further, the exogenous nature of the 1995 Act suggests that the observed increase (and pricing) of accounting discretion is related to litigation reform rather than some omitted firm-specific operating characteristic. Overall, our findings suggest that litigation reform affects firm value through managers’ exercise of accounting discretion and cost of equity capital channels.