Asymmetric information in securitization: An empirical assessment

Asymmetric information in securitization deals is analyzed based on a unique dataset comprising a million mortgages, both securitized and not, and using a methodology, previously applied to insurance data, that looks at the correlation between risk transfer and default probability. The main finding is that, for given observable characteristics, securitized mortgages have a lower default probability than non-securitized ones. We show that this finding is consistent with banks caring about their reputation for not selling lemons.     

International day-of-the-week effects: An empirical examination of iShares

Ample evidence suggests that day-of-the-week patterns exist in US and foreign equity returns. We extend the evidence on the day-of-the-week effect in equity returns by examining the return patterns of iShares for 17 countries and Standard and Poor's Depository Receipts (SPDRs) to establish whether previously observed predictabilities in equity returns are reflected in iShares' returns. We utilize a split sample to examine return patterns and develop trading rules using the initial subsample. We then test those trading rules out of sample. Empirical results reveal that iShares exhibit day-of-the-week return patterns that can be exploited by informed traders.     

An empirical assessment of reinsurance risk

We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, a firm's loss could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we gain insight into the reinsurance market structure and perform a scenario analysis to measure contagion risks. Considering entities on a standalone basis, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. At group level our analysis points to the contagion risk of in-house reinsurance structures, given that such in-house reinsurance parties are generally not higher capitalised than other group members.     

An empirical assessment of commercial web-based professor evaluation services

We examined the validity of data found on a popular web-based, user-created commercial professor evaluation service, RateMyProfessors.com (RMP), in business school settings. We compared publicly available RMP data for two business schools with official faculty evaluations unavailable to the public. We find that students rate professors significantly lower on RMP than on official university evaluations. However, we also find that the rankings of official university evaluations and RMP are significantly correlated (p < .001), with correlation values high enough to provide useful data to students.     

Secondary currency: An empirical analysis

Many cases exist of multiple currency usage throughout history. As two leading examples, secondary currencies were widespread during both the Great Depression in the United States and the 2002 recession in Argentina. What are the determinants of multiple currency usage and what is the effect on economic activity? Both issues are empirically addressed using individual-level surveys collected by the authors in Argentina during 2002 and 2003. The evidence supports the theoretically predicted determinants of secondary currency acceptability put forth in monetary theory. In particular, findings show that the acceptability of the secondary currency increases when the supply of national currency is low, the relative transaction cost of the secondary currency is low, and the individual trading technologies are less effective. Moreover the acceptability of the secondary currency has real effects on economic activity. Among those who use the secondary currency the monthly income gain is more than 15% of the average Argentine's monthly income. Excluding trades of used goods, this amounts to a 0.6% increase in GDP.     

An empirical assessment of the Feltham-Ohlson models considering the sign of abnormal earnings

This paper provides an empirical assessment of the Feltham-Ohlson models, distinguishing between firms with positive and negative abnormal earnings. Abnormal earnings persistence and conservatism parameters differ for these two groups; this implies different earnings prediction models and valuation functions for both profit-making and loss-making firms. The analysis refers to the period 1991-1999 and uses a sample of Spanish firms quoted on the Madrid S.E. The results suggest that our contextual approach is more useful than the non-contextual one to predict future abnormal earnings and explain current prices. Although the Ohlson (1995) model is accurate in forecasting future abnormal earnings and stock prices, the results improve when firms with negative abnormal earnings are valued using a temporary model and firms with positive abnormal earnings using a more permanent one. The Feltham and Ohlson (1995) model generates the lowest forecast errors in the prediction of positive abnormal earnings, but it produces the least accurate results in forecasting prices.     

Dividend reinvestment plans: An empirical analysis

This study examines the effect of initiating discount and no discount dividend reinvestment plans on shareholder wealth. The results show a negative response to DRP announcements, which is significantly smaller than that found in studies of new equity offerings. These results are consistent with the Scholes and Wolfson (1989) hypothesis that managers in need of equity capital use DRPs to mitigate the adverse stock price effects of new equity issue announcements. Furthermore, there is a significant difference in the price response of discount and no discount DRPs for industrial firms. This result is supportive of the signaling potential of discount DRPs. Supportive evidence is also found in the analysis of firm characteristics for industrial firms.     

Privatization and globalization: An empirical analysis

This paper examines the link between globalization-measured by foreign direct investment (FDI) and foreign portfolio investment (FPI) – and privatization of state-owned enterprises, in a multi-country sample that focuses on developing countries. We hypothesize that privatization has an effect on FDI/FPI as the process of fostering private sector participation is often accompanied by liberalization reforms, and by allocations of substantial shares of newly privatized firms to foreign investors. Similarly, we expect FDI/FPI to foster privatization efforts as new capital inflows, technology and managerial skills that accompany FDI/FPI make the environment more prone to competition, providing governments with incentives to privatize inefficient firms that need to be turned around. This relation is assessed in two ways, first in a dynamic panel using a generalized method of moments approach, and second through panel causality tests. We find a bi-directional positive relation between privatization proceeds and globalization, particularly in the case of FDI.     

Sourcing of internal auditing: An empirical study

This paper studies the factors associated with organizations’ internal audit sourcing decisions, building from a previous study by Widener and Selto (henceforth W&S) [Widener, S.K., Selto, F.H., 1999. Management control systems and boundaries of the firm: why do firms outsource internal audit activities? J. Manage. Account. Res. 11, 45–73]. In their study, W&S used Transaction Cost Economics (TCE) to explain the governance of internal auditing. Our study seeks to replicate their results, using newly collected data from 66 companies headquartered in the Netherlands. Our findings are supportive of W&S. Like W&S, we find asset specificity and frequency (both individually and in interaction) to be significantly associated with sourcing decisions. These findings are robust against different model specifications, and they hold across variously defined samples. We conclude that the W&S results are reproducible in different conditions, enhancing the credibility of the TCE-based explanation of organizations’ internal audit sourcing practices.     

Ratings-based credit risk modelling: An empirical analysis

Banks have recently developed new techniques for gauging the credit risk associated with portfolios of illiquid and defaultable instruments. These techniques could revolutionise banks' management of credit risk and could in the longer term serve as a more risk-sensitive basis for calculating regulatory capital on banks' loan books than in Basel 2, the new regulatory capital framework. In this paper we implement a popular credit risk model that exploits the information in credit ratings to determine a portfolio's value-at-risk. Using price data on large eurobond portfolios, we assess, on an out-of-sample basis, how well the model tracks the risks it is supposed to measure.     

Executive compensation and non-financial risk: An empirical examination

Executives face potentially severe (non-financial) personal risks if firm environmental performance is below industry best practice. We examine the relation between CEO compensation and the non-financial risk associated with environmental exposure, and how use of environmental performance as an explicit determinant of compensation affects this relation. We find evidence that CEOs are compensated for exposure to environmental risk, even after controlling for financial risk. We also find that this premium is reduced when the CEO has greater opportunities to improve the firm’s environmental performance.     

Systematic risk and international diversification: An empirical perspective

This paper reports findings from a study that systematically evaluated the nature of the relationship between internationalization and systematic risk. In addition to previous conceptualizations, this study also examined whether the number of foreign countries and segments a firm operates in constitute a part of the information used by market participants to assess a firm's risk exposure. We find that international diversification is significantly and positively associated with systematic risk and that diversification augments systematic risk. Our findings have implications on the stability of foreign expansion and business decisions by managers on the appropriate level of overseas commitment.     

Multivariate affine generalized hyperbolic distributions: An empirical investigation

The aim of this paper is to estimate multivariate affine generalized distributions (MAGH) using market data. We use the Ibovespa, CAC, DAX, FTSE, NIKKEI and S&P500 indexes. We estimate the univariate distributions, bi-variate distributions and six-dimensional distribution. Then we assess their goodness of fit using Kolmogorov distances. As an application we study the efficient frontier.     

Termination of distressed residential mortgages: An empirical analysis

A sample of 209 distressed mortgages is used to analyze the terminations of distressed mortgages. An option-based model is compared to a traditional default model. Results show that the traditional model is statistically superior. However, the model's ability to identify a default is similar to that of the simpler option-based model. Alternative measures of borrower's equity are compared. Measuring borrower's equity using total debt more accurately explains default than using either the mortgage balance or the mortgage value.     

Intertopical sequencing of examination questions: An empirical evaluation

This research examines whether the ordering of topics within an accounting examination influences either (a) the time necessary to complete the examination, or (b) examination scores. Further, these effects are examined on both introductory students (n=83) and on more advanced accounting students (n=84).Six hypotheses concerning examination time and examination score were tested via two three-factor ANOVAs. It was found that “better” students are disadvantaged by random sequencing of multiple-choice questions and score significantly lower than on an ordered format. Poorer students appear not to be affected. No differences were found relating to time necessary to complete the exam.     

Culture and accounting in Indonesia: An empirical examination

This study examines the relationships among the cultural characteristics of Indonesian society, reporting practices of Indonesian firms, and accounting standards promulgated by the Association of Indonesian Accountants. It is argued that an empirical relation exists between the change in cultural values, as conceived by Hofstede's theory of the five dimensions of cultural values (power distance, uncertainty avoidance, individualism, masculinity, and time horizon and the change in accounting values as captures by Gray's four dimensions (professionalism, conservatism, secrecy, and uniformity). Using LISREL to evaluate data between 1981 and 1992, three of Hofstede's five cultural values (power distance, uncertainty avoidance, and individualism) have significant relationships with one or more accounting value. This limited confirmation of the culture-accounting relationships suggest that particular historical and economic configurations must be considered in longitudinal analysis. The conflicting influences of extensive government involvement in the economy and nascent market competition are a possible explanation of the Indonesian results.     

Financial distress and idiosyncratic volatility: An empirical investigation

We investigate the link between distress and idiosyncratic volatility. Specifically, we examine the twin puzzles of anomalously low returns for high idiosyncratic volatility stocks and high distress risk stocks, documented by Ang et al. (2006) and Campbell et al. (2008), respectively. We document that these puzzles are empirically connected, and can be explained by a simple, theoretical, single-beta CAPM model.     

On the political economics of tax reforms: survey and empirical assessment

Political constraints and incentives are the true driver of tax reforms. This paper reviews the political economics literature on personal income tax systems and reforms to see how political mechanisms help explain tax reforms. We take some of the implications of these theories to the data using LABREF, a database that identifies labor tax reforms in the European Union for the period 2000–2007, and control for economic and labor market factors. We find that political variables carry more weight than economic variables, and we show empirical regularities that support political economy theories. We also find that governments tended to reform more in better economic times, engaging in pro-cyclical behavior.     

The proposed elimination of full cost accounting in the extractive petroleum industry: An empirical assessment of the market consequences

On July 15, 1977, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of Statement 19 in which a proposal was set forth to establish the uniform usage of successful efforts accounting and to eliminate full cost accounting in the extractive petroleum industry. This study addresses the question of whether the proposed elimination of full cost accounting had an adverse effect on the security returns of full cost versus successful efforts firms. The evidence presented in this study suggests that the proposal to eliminate full cost accounting was associated with a significant negative difference in risk-adjusted rates between full cost firms and successful efforts firms whose financial reports remained unaffected by the proposed change. This observed difference was found to be sustained over an eight month period including confirming events and disclosures associated with the initial proposal. We do not attribute this difference to market inefficiencies but, rather, to the anticipated consequences which this mandated accounting change is likely to have on managerial behavior and to increased costs that will have to be borne by the affected companies.