Skinner's “Interpretation Panel”— A Means to Balance “Power”

The rules versus principles debate and the vital importance of context ‐ the circumstances‐specific nature of judgment ‐ are at the heart of Ross Skinner's suggestion for an “interpretation panel". International considerations and developments involving governance and regulation have created imbalances in power, expertise, and impartiality, increasing the importance of and need for such a panel. This analysis considers the nature of the problem, how professional judgment has been characterized, and why a panel would be appropriate to address, among other concerns, the audit committee's dilemma when accounting disputes arise. Evidence is provided that management turnover is higher in cases involving multiple restatements, governance problems, or regulators' sanctions. Although, intuitively, management turnover is likely to be associated with widely publicized restatements, some patterns suggest that it is a function of entity size, scope of management changes considered, and the manner in which the restatement was identified. Specifically, an identifiable source of discovery, as well as external involvement, is associated with a greater propensity for management change. In contrast, restatements linked to changes in available guidance from regulators are less likely to result in such turnover. One implication is that effective control design and monitoring to facilitate internal discovery of errors can decrease the likelihood of multiple restatements and reduce fault finding that leads to management change. The judgmental nature of restatements suggests that an infrastructure supporting “right‐mindedness” does have merit. An interpretation panel would increase the feasibility of principles‐based standards, facilitating timely resolution of accounting‐associated disputes and thereby enhancing the information environment underlying the allocation of capital.     

The Effects of Monetary Policy “News” and “Surprises”

There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or “surprise” shocks, which is smaller and more short‐lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or “news.” News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.     

Disclosure “Bunching”

This paper studies managers' preferences among information acquisition and disclosure policies when their firms are required to engage in “real‐time” or “continuous” financial reporting. The paper predicts that for many, but not all, processes describing the distribution of their firms' cash flows, when subject to such reporting requirements, managers will engage in disclosure “bunching,” that is, they will bunch the discretionary component of the information they acquire and disclose into a single point in time rather than spread the acquisition and disclosure of that information over time. We show that managers' preferred bunching period depends on managers' strategy for trading in their firms' shares, managers' risk aversion, the risk premium the capital market attaches to firms' shares, and the size of managers' initial ownership stakes in their firms. We also study and characterize how the equilibrium prices of firms' shares vary over time and also how managers' optimal trading strategies vary with their most preferred “bunching” strategies. Several extensions confirm the robustness of the optimality of disclosure “bunching.”     

From Accounting to “Forecounting”*

Using Ross Skinner's 1995 CA Magazine article, “Judgment in Jeopardy", as a stepping stone, we revisit the meaning of professional judgment in accounting in light of developments in standard setting, financial markets, and business operations that have taken place over the past two decades. We argue that it is time to change the view that accountants' professional judgment is the application of accounting‐based knowledge and experience in the selection of an appropriate accounting method. Accountants now face a standard‐setting context that emphasizes the estimation of future cash flows as well as new business and financial realities. This context implies that, in exercising their professional judgment to choose between forecast alternatives, accountants must rely on knowledge and experience from other disciplines (even though this is not well integrated into accounting). Hence, accounting must evolve from its traditional stewardship role to the new role of “forecount‐ing” (the estimation of future cash flows). The implications as well as the challenges of that evolution are discussed.     

Does Stock Return Momentum Explain the “Smart Money” Effect?

Does the “smart money” effect documented by Gruber (1996) and Zheng (1999) reflect fund selection ability of mutual fund investors? We examine the finding that investors are able to predict mutual fund performance and invest accordingly. We show that the smart money effect is explained by the stock return momentum phenomenon documented by Jegadeesh and Titman (1993) . Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners. Our finding that a common factor in stock returns explains the smart money effect offers no affirmation of investor fund selection ability.     

Corporate Governance and Value: Evidence from “Close Calls” On Shareholder Governance Proposals

The authors summarize the findings of their recent study of the effects of specific corporate governance provisions on firm value. Using a sample of governance provisions that were subjected to shareholder votes during the period 1997–2011, this study analyzes cases in which shareholder‐sponsored corporate governance proposals were either rejected or passed by a small margin (no more than 5% of the vote). By so doing, this study helps correct two limitations of the existing governance literature: (1) that the effects of expected governance changes are already incorporated in share prices (the “expectations” problem); and (2) that governance policies are often a consequence rather than a cause of other variables such as corporate performance and are thus correlated with many other firm characteristics (the “endogeneity” problem). The authors' findings show that expected improvements in corporate governance through the adoption of particular corporate governance provisions—particularly the removal of anti‐takeover provisions—is associated with both positive abnormal stock returns and improvements in long‐term firm operating performance. The authors estimate that the adoption of such governance proposals increases shareholder value by 2.6%, on average. Moreover, these returns are consistent with, and thus accurate predictors of, future changes in corporate investment (reductions of capital spending, in most cases) and improvements in operating performance.     

Exploiting the “Win But Does Not Cover” Phenomenon in College Basketball

Wolfers (2006) was the first to document that heavy favorites in college basketball win but fail to cover the pre‐game point spread at a statistically higher rate than expected. We generate a hedged strategy to exploit the “win but does not cover” phenomenon using two wagers: a bet on the underdog sides line and a bet on the favorite money line. While one bet is guaranteed to win regardless of the outcome, both bets win if the favorite wins but does not cover. We show that the minimum‐variance portfolio best exploits this anomaly, yielding an average return of 0.34% per game and a positive return in five of the seven seasons of college basketball analyzed.     

“Lucas” in the Laboratory

We study the Lucas asset pricing model in a controlled setting. Participants trade two long‐lived securities in a continuous open‐book system. The experimental design emulates the stationary, infinite‐horizon setting of the model and incentivizes participants to smooth consumption across periods. Consistent with the model, prices align with consumption betas and comove with aggregate dividends, particularly so when risk premia are higher. Trading significantly increases consumption smoothing compared to autarky. Nevertheless, as in field markets, prices are excessively volatile. The noise corrupts traditional generalized method of moment tests. Choices display substantial heterogeneity, with no subject representative for pricing.     

Accounting for “negative salvage”

Many businesses are overlooking a current cost of operation which should be matched against current revenues. This cost, really a bundle of related cost items, is incurred at the end of an asset's useful life. In the public utility sector the general term ascribed to this cost element is “negative salvage”. In this note some current examples of negative salvage are identified and some of the causes of negative salvage are discussed. The introduction of negative salvage into the classroom discussion of depreciation provides an interesting new example of the matching/allocation problem.     

Proposal to Formulate “Global Informal Workout Rules” Adopting “Asian Bankers' Association Informal Workout Guidelines” and “Model Agreement to Promote Company Restructuring by Informal Workout” with Some Minor Amendments

The INSOL 8 Principles is a set of model domestic rules for out‐of‐court workouts. Many Asian countries have created workout rules referring to the Principles. A uniform insolvency code applicable worldwide may be impossible to achieve. Instead, international professional associations such as the INSOL International and/or official international organizations such as the World Bank may be able to establish global informal workout rules that are applicable in cases to restructure multinational business enterprises that are indebted to multinational financial creditors. The “Asian Bankers' Association Informal Workout Guidelines” and the “Model Agreement to Promote Company Restructuring by Informal Workout” of 2005 are buried treasure tools. They could be transformed to global rules with some minor amendments with the consent of the Association. Copyright © 2013 INSOL International and John Wiley & Sons, Ltd