Comments on Orphanides and Williams’ “Robust monetary policy”

Comments on the paper by Orphanides and Williams from the November 2006 Carnegie-Rochester conference.     

Sustainability reporting: The role of “Search”, “Experience” and “Credence” information

Corporate sustainability reporting quality has been frequently criticised as being unbalanced, presenting an overly positive view or failing to address material issues. The purpose of this article is to provide a fresh explanation for poor quality sustainability reporting and to propose how quality issues may be addressed. The theoretical framework combines the legitimacy and accountability perspectives using Akerlof's (1970) Market for Lemons theory. Akerlof's approach is extended by differentiating between three types of information in sustainability reports namely search, experience and credence. The article concludes that the type of information must be considered when determining measures to improve report quality.     

Disentangling Managers’ and Analysts’ Non‐GAAP Reporting

Researchers frequently proxy for managers’ non‐GAAP disclosures using performance metrics available through analyst forecast data providers (FDPs), such as I/B/E/S. The extent to which FDP‐provided earnings are a valid proxy for managers’ non‐GAAP reporting, however, has been debated extensively. We explore this important question by creating the first large‐sample data set of managers’ non‐GAAP earnings disclosures, which we directly compare to I/B/E/S data. Although we find a substantial overlap between the two data sets, we also find that they differ in systematic ways because I/B/E/S (1) excludes managers’ lower quality non‐GAAP numbers and (2) sometimes provides higher quality non‐GAAP measures that managers do not explicitly disclose. Our results indicate that using I/B/E/S to identify managers’ non‐GAAP disclosures significantly underestimates the aggressiveness of their reporting choices. We encourage researchers interested in managers’ non‐GAAP reporting to use our newly available data set of manager‐disclosed non‐GAAP metrics because it more accurately captures managers’ reporting choices.     

Chief Financial Officers’ Short‐ and Long‐term Incentive‐based Compensation and Earnings Management

This study examines the association between chief financial officers’ (CFOs) short‐ and long‐term compensation and discretionary current and non‐current accruals. The CFO's cash bonus is used as a measure of short‐term incentives and shares plus options is used as a measure of long‐term incentives. The results show a significant and positive association between CFOs’ short‐term compensation and the absolute value of discretionary current accruals. The results also show a significant and positive association between CFOs’ long‐term compensation and the absolute value of discretionary non‐current accruals. STUDY provides evidence that the earnings management behaviour of CFOs is associated with type of CFO compensation.     

A note on “Inflation and Welfare”

This note provides an analytical confirmation and a refinement of [Lucas Jr., R.E., 2000. Inflation and welfare. Econometrica 68 (62), 247–274 (March)] numerical findings regarding the characterization of optimality in the shopping-time model presented in that paper. The original numerical analysis concludes that a coefficient of risk aversion (σ) greater than 0.01 is sufficient for optimality. Here we use Arrow’s sufficiency theorem to confirm this result and, more importantly, to show without more calculations how changes in parameters can affect it.     

“Unfunded liabilities” and uncertain fiscal financing

A rational expectations framework is developed to study the consequences of alternative means to resolve the “unfunded liabilities” problem—unsustainable exponential growth in federal Social Security, Medicare, and Medicaid spending with no plan to finance it. Resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century. Beliefs based on that distribution determine the existence of and the nature of equilibrium. We consider policies that in expectation combine reaching a fiscal limit, some distorting taxation, modest inflation, and some reneging on the government's promised transfers. In the equilibrium, inflation-targeting monetary policy cannot successfully anchor expected inflation. Expectational effects are always present, but need not have a large impacts on inflation and interest rates in the short and medium runs.     

Equity‐based incentives and shareholder say‐on‐pay

We study the relationship between CEO pay‐performance sensitivity, pay‐risk sensitivity, and shareholder voting outcomes as part of the “say‐on‐pay” provision of the 2010 US Dodd‐Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay‐performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity‐based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity‐based incentives from the perspective of those most concerned with firm value and of the effectiveness of say‐on‐pay as a governance mechanism.     

Asking ‘Why’ in AI: Explainability of intelligent systems – perspectives and challenges

Recent rapid progress in machine learning (ML), particularly so‐called ‘deep learning’, has led to a resurgence in interest in explainability of artificial intelligence (AI) systems, reviving an area of research dating back to the 1970s. The aim of this article is to view current issues concerning ML‐based AI systems from the perspective of classical AI, showing that the fundamental problems are far from new, and arguing that elements of that earlier work offer routes to making progress towards explainable AI today.     

Suppliers’ and customers’ information asymmetry and corporate bond yield spreads

This study investigates the information asymmetry effects of suppliers and customers on a firm’s bond yield spreads by employing American bond market data from 2001 to 2008. This study finds that both suppliers’ and customers’ information asymmetry effects significantly explain a firm’s bond yield spreads. Besides, the information asymmetry effects of more important suppliers and customers are more significant than those of less important ones. The results are robust even after controlling for other well-known firm specific and economic variables.     

Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds

We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits variation in the cross‐section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight‐to‐safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories in which the price of risk is a nonlinear function of market volatility.     

Price Discovery in Near‐ and Away‐from‐the‐Money Option Markets

This paper examines the relative price discovery roles of near‐ and away‐from‐the‐money option markets. The evidence shows that, when considering multiple options with different strike prices jointly, option markets have an average information share of 17.6%. However, no individual option market dominates in the price discovery process, higher and lower trading activity options (i.e., near‐ and away‐from‐the‐money options, respectively) each contribute approximately equally to this process. The main implications of these results are that (1) collectively, option markets process a substantial amount of new stock price‐related information, and (2) looking across strike prices, option markets appear to be informationally nonredundant.     

Consumer‐surplus‐enhancing collusion and trade

That collusion among sellers hurts buyers is a central tenet in economics. We provide an oligopoly model in which collusion can raise consumer surplus. A differentiated‐product duopoly operates in two geographically separated markets. Each market is home to a single firm, but can import, at a cost, from the foreign firm. Under some circumstances, a perfect cartel, relative to duopolistic competition, raises the price of the imported good and lowers the price of the home good. This raises welfare for most consumers and increases aggregate consumer surplus. A similar possibility result applies to autarky. Our analysis applies beyond the spatial setting.     

Management Guidance Pre‐ and Post‐Restatement

We examine whether the quality of restating firms’ management guidance differs in periods before and after restatement announcements. While characteristics of restating firms and the consequences of restatement have been a central topic in accounting and auditing research, the quality of management guidance around restatements is less well understood. We consider two competing characterizations of the link between management forecast accuracy and bias and restatement (an event that tends to signal poor financial controls): “Forecast–Opportunism Explanation” and “Forecast–Ability Explanation”. Under the Forecast–Opportunism Explanation, pre‐restatement weaknesses in financial controls enable managers to manipulate earnings toward forecasts and to meet or exceed opportunistically biased forecasts, and the post‐restatement strengthening of financial controls constrains opportunistic behavior. Under the Forecast–Ability Explanation, pre‐restatement weaknesses in financial controls impede managers’ ability to issue accurate forecasts, and post‐restatement improvements remove impediments so that the accuracy of forecasts improves; forecast bias remains unaffected. Evidence indicates that before a restatement, restating firms’ forecasts are more accurate and relatively more downwardly biased than control firms’ forecasts. Post‐restatement, restating firms have less accurate and less downwardly biased management guidance. Our overall results are consistent with the Forecast–Opportunism Explanation.     

Customer account relationships and e-retail banking usage<Superscript>1</Superscript>

Financial institutions are actively developing new electronic banking products for their retail customers. To date, the market leaders have drawn a disproportionably higher share of e-retail banking customers. In response, smaller institutions have become quite active in exploring ways to participate profitably in online banking. A major influence is from a customer relationship management (CRM) perspective, where institutions try to limit the outflow of current customers and direct high-value customers to potential products from a multi-product service offering array. These efforts can succeed only if retail bank marketers focus the promotion of the new products and services that can utilise this channel toward those customers who are most likely to find them attractive. The first aim of this study was to examine the role that online and electronic banking play in defining the customer's primary financial relationship. The analysis of 701 retail customers of a financial institution presented in this study suggests that banks and other institutions are highly vulnerable to loss of customers to rivals with extensive online services. A second aim was to examine to what extent information on banking relationships is able to extend CRM analysis beyond that offered by typical demographic and income data. Current customer account relationships are found to be highly predictive of use of electronic services use in general. And, interest in the use of specific online services is related to differing customer relationships in addition to ordinary demographic and balance information. These findings can be useful for retail banking in identifying potential high-value users from a customer relationship management perspective.