Research Applications of the Multifamily Housing Institute's Apartment Database

Data on the financial performance of multifamily rental housing has not been available nearly as long as such information for single-family housing. It is believed that this lack of information has increased the cost of debt and equity capital to apartment housing and thus has increased the rents paid by apartment residents. Data on apartments, which is now becoming available through an industry-sponsored initiative, has the potential of narrowing this information gap. This article has several objectives: to describe this new database, AptData^TM, to housing researchers to assess the strengths and weaknesses of AptData^TM for housing market and policy research, to compare estimates from AptData^TM with those from other sources, and to offer several potential research applications of this new data resource.     

The Relationship between Earnings,Funds Flows and Cash Flows: Evidence for the UK

Recent UK information content studies have provided evidence of a significant relationship between earnings and share prices, as in the US, but have also identified an apparent lack of information content for operating cash flow, which is in marked contrast to findings from US research. This paper provides direct evidence on the relationship between earnings, funds flows and cash flows in the UK during the period 1965–84, using tests of association and predictive tests based on a research methodology applied by Bowen, Burgstahler and Daley (1986) to US data. The results provide UK evidence on the contemporaneous and predictive relationships between measures of earnings, funds flows and cash flows which are generally consistent with the US findings of Bowen et al. and which do not support the view that earnings in the UK are superior to cash flows as predictors of future cash flows.     

Tipping Behavior of Diners in Three Upscale Chinese Restaurants in Hong Kong

This study intends to fill a gap in the literature and explores customers' tipping behaviors in the Chinese foodservice industry. The main focus of this study is to test a model that examines the influences of “food quality”, “service quality”, “conformity”, “universalism”, “reputation”, “likelihood of return” and “overall meal satisfaction” on tip size. A survey was conducted with 611 restaurant patrons in three selected Chinese restaurants in Hong Kong. The findings of this study reveal that five of these seven factors were found to be good predictors of overall satisfaction except “universalism”. However, the overall impact of these seven factors on tip amount was small. Implications of the findings were discussed and directions for future studies were included.     

The Value of Management Letters to Unlisted Companies

This paper reports the results of research on the value of management letters to unlisted companies. The aims of the research were: (1) to identify the issues raised in management letters; (2) to assess the value of management letters to unlisted companies; and (3) to assess the value of management letters to auditors. Within these aims we investigated whether the size of the audit firm (Big 5, Top 20, or other) or the length of audit tenure had any effect on the contents of management letters or their value to unlisted companies. We conclude that the issues most frequently raised in management letters related to internal control and accounting systems but that other issues, such as taxation and general business advice, are often included. There was little difference in the contents of management letters issued by Big 5 audit firms and other firms. Unlisted companies generally considered that the advice given in management letters was valuable. Again, there was little difference between clients of Big 5 audit firms and other firms. Similarly, the length of audit tenure had no statistically significant effect. Finally, auditors considered that the most important benefit of the management letter to themselves was its potential for enhancing clients’ perceptions of the auditor. The potential for reducing costs was relatively unimportant. These results were similar both for Top 20 and non-Top 20 audit firms.     

Does Volatility Improve UK Earnings Forecasts?

Abstract:  We investigate the relation between UK accounting earnings volatility and the level of future earnings using a unique sample comprising some 10,480 firm-year observations for 1,481 non-financial firms over the 1985–2003 period. The findings confirm the in-sample result of an inverse volatility-earnings relation only for the 1998–2003 sub-period and for the most profitable firms. The out-of-sample forecast accuracy for the top earnings quintile improves when volatility is added as a regressor to a model including only lagged earnings. The findings are consistent with the over-investment hypothesis and the view that the earnings of the most volatile firms tend to mean revert more rapidly.     

EXTRAORDINARY ITEMS AND INCOME SMOOTHING: A POSITIVE ACCOUNTING APPROACH

This is an empirical study of single-period income smoothing which uses an incentives-based model to explain classificatory choices. An index is constructed to measure the smoothing effect of these choices. Weighted least squares regression results indicate that classificatory choices consistent with smoothing are more likely to be observed in firms with high earnings variability, high dividend payout, substantial managerial holdings of share options and diffuse share ownership. The existence of material scope for smoothing strengthens these findings. The model as a whole is statistically significant and, although the proportion of variability in smoothing explained is modest, it compares very favourably with other accounting choice studies. The relationship between smoothing and alternative earnings management strategies, including big bath accounting, is explored.     

Changes in Non‐current Assets and in Property,Plant and Equipment and Future Stock Returns: The UK Evidence

We examine the effect of changes in non‐current operating assets (NCOA) and of changes in property, plant and equipment (PPE) on future abnormal stock returns using a sample of 21,549 UK non‐financial firm observations over the 1990–2012 event period. The results from a matching portfolio procedure and 4‐factor regressions indicate that abnormal returns from investing in a portfolio of low‐minus‐high quintile NCOA and PPE change firms are between 5.5% and 6.1%. This negative association is confirmed by cross‐sectional regressions. The economic significance of mispricing seems weaker than in the US and weaker than the mispricing of working capital accruals adjusted for depreciation in the UK. Changes in PPE drive the predictability of share returns with respect to changes in NCOA. There is no significant evidence that return predictability is stronger in less liquid firms. We find two strands of evidence that lend some support to behavioural explanations of predictability through overreaction to investment. On one hand, fundamental information about investment explains one‐third of the predictability of returns while, on the other, predictability is generally not significantly stronger in firms with high operating leverage as a proxy for risk.     

The effect of the interest coverage covenants on classification shifting of revenues

ABSTRACT

While prior studies focus on real/accrual-based earnings management and expense misclassification to investigate earnings manipulation in avoiding covenant violations, this paper extends such research in a new direction. In particular, it examines whether firms employ classification shifting of revenues when they are subject to interest coverage EBITDA-based covenants close to their threshold values or limits. This earnings management tool allows firms to increase reported EBITDA by misclassifying non-operating revenues as operating revenues to remain within covenant limits that include EBITDA. Using a sample of 559 UK listed firm-years for the period 2005–2014, it establishes that the use of classification shifting of revenues is high when interest coverage covenants are close to their limits. Further analysis suggests that firms also employ revenue shifting when all their loan covenants are EBITDA-related.