Individual investors’ information use,subjective expectations,and portfolio risk and return

What information do individual investors use when making their financial decisions and how is it related to their stock market expectations, their confidence in these expectations, and the risk and return of their stock portfolios? I study these questions by combining survey data on the information usage among individual investors in Sweden with detailed registry data on their stock portfolios. I find that investors use filtered financial information (e.g. information packaged by a professional intermediary) more frequently than they use unfiltered financial information (e.g. information from annual reports and financial statements). Investors who frequently use filtered financial information are, however, more confident in their stock market expectations and take larger risks in their stock portfolios. Investors that instead use unfiltered financial information take lower portfolio risks and obtain higher portfolio returns. The findings in this paper thus suggest that investors can improve their financial decisions by using more unfiltered financial information rather than filtered financial information when they make their financial decisions.     

Internal control material weakness, analysts’ accuracy and bias, and brokerage reputation

The main purpose of this paper is to examine the impact of internal control material weaknesses (ICMW hereafter) on sell side analysts. We find that ICMW reporting firms have less accurate analyst forecasts relative to non-reporting firms when the reported ICMWs belong to the Pervasive type. ICMW reporting firms have more optimistically biased analyst forecasts compared than non-reporting firms. The optimistic bias exists only in the forecasts issued by the analysts affiliated with less-highly-reputable brokerage houses. The differences in accuracy and bias between ICMW and non-ICMW firms disappear when ICMW disclosing firms stop disclosing ICMWs. Collectively, our results suggest that the weaknesses in internal control increases forecasting errors and upward bias for financial analysts. However, a good brokerage reputation can curb the optimistic bias.     

Culture,institutions, and financing choices: How and why are they related?

This paper explains the need for supplementing traditional financial and economic factors with softer cultural and institutional measures in explaining the determinants of firm financing. The theoretical arguments are based on the incompleteness of contracts and therefore the important role of ethics and behavioral norms in the need and cost of enforcing such contracts. The practical argument is simply that adding these soft factors to traditional economic factors provides a better and more complete explanation of firm financing. This paper notes the lack of such literature in mainstream finance journals in spite of these demonstrated needs. Finally, this paper introduces the papers in this issue and their contributions.     

IPO Auctions: English,Dutch, … French,and Internet

Unseasoned shares are sold through the Book Building process in the United States and the United Kingdom, fixed price offerings in several countries, uniform price auctions in Israel or the new internet-based Open IPO mechanism, and an auction-like mechanism called the Mise en Vente in France. We analyze and compare the performance of these various IPO mechanisms within the context of a unified theoretical model. Fixed price offerings lead to inefficient pricing and winner's curse. Dutch auctions can also lead to inefficiencies, to the extent that they are conducive to tacit collusion by investors. The Book Building and Mise en Vente can lead to optimal information elicitation and price discovery. We document empirically the similarity between the Book Building and the Mise en Vente. We discuss the implications of our analysis for the design of optimal Internet IPO auctions. Journal of Economic Literature Classification Numbers: G24, G3, D82.     

Evaluating lotteries,risks, and risk‐mitigation programs

Two experiments were designed to explore the existence of systematic differences in risk perceptions and risk attitudes between Chinese and US participants. The first experiment involved ranking monetary lotteries using measures of perceived riskiness and willingness to pay (WTP). Several simple heuristics were evaluated to predict perceived riskiness and WTP. Using WTP responses, Cumulative Prospect Theory functions were determined for participants from both countries. The second experiment involved ranking multi‐attribute real‐world risks and associated risk‐mitigation programs using measures of concern and preference, respectively. Compared to their US counterparts, Chinese participants are found to be less risk averse, more concerned about risks with higher catastrophic potential, and more in favor of risk‐mitigation programs with greater scope of benefit. The results also reveal higher within‐group agreement by Chinese participants for all tasks. For both national groups, the within‐group agreement was highest when ranking risk‐mitigation programs, but lowest when ranking lotteries with negative expected value. The implications of cross‐cultural versus cross‐task variation are discussed.     

Electronic spreadsheet technology in the teaching of accounting and taxation—Uses,limitations, and examples

Three advantages of using electronic spreadsheets in classroom settings are identified: 1. spreadsheets provide applied settings in which to learn their usage, 2. spreadsheets aid students in understanding complex accounting problems and 3. the power of spreadsheet templates can be demonstrated. We also identify three limitations of the classroom use of electronic spreadsheets: 1. the extra time commitment for faculty and students, 2. the inherent danger of reducing repetitive problem practice and 3. the lack of any pedagogical benefits in certain accounting contexts. These benefits and limitations are combined to form an overall pedagogical strategy. In addition, several spreadsheet templates are provided as illustrations for our arguments.     

Accounting licensure,quality, and the “cadillac effect”

Empirical evidence from several professions suggests that licensing laws usually do not enhance the quality of service received by consumers, as alleged by licensing advocates. Moreover, licensing often reduces the availability of low-cost service to low-income consumers (the “Cadillac Effect”). This study applies these concerns to public accountancy. By comparing the malpractice coverage and fee structure of certified public accountants with their noncertified counterparts, the study finds that accounting licensure 1) is not related to service quality, and 2) may result in small businesses having to incur higher costs for accounting services.     

Predicting premiums for the market, size, value, and momentum factors

This paper investigates the out-of-sample predictability of monthly market as well as size, value, and momentum premiums. We use a sample from each of the US and the Swiss stock markets between 1989 and 2007. Using the Swiss sample provides an important new perspective as the repeated evaluation of the same (US) data set leads to data mining problems. To avoid data mining in our predictability study, we test both statistical significance and robustness in the two samples. Our key results are as follows. We find no robust indication that the market premium is predictable, which is also true for the momentum and value premiums. It cannot be excluded that the results from the US may be caused by data mining in light of the results from the Swiss sample. However, the size premium seems to be somewhat predictable, due to the credit spread. We theorize that there are three possible reasons for this rare evidence for predictability. First, predictability may have disappeared over the last decade, as academic research made the respective information public. Second, predictability seems, as we demonstrate, not to be robust to the choice of methodology. Third, robustness tests in the Swiss sample reveal that many of the supposedly statistically significant interrelations from the US sample may be attributed to randomness, which, in that case, would be data mining. Therefore, we think that future discussions of predictability should address the issue of data mining by applying robustness tests.

Corruption and the shadow economy: like oil and vinegar, like water and fire?

From a theoretical point of view, the relationship between corruption and the shadow economy is ambiguous: They can either be substitutes or complements. This paper contributes to this debate by using a structural equation model with two latent variables to extract information on various dimensions of corruption and the shadow economy. Analyzing a sample of 51 countries around the world over the period 2000 to 2005, we present empirical evidence for a complementary (positive) relationship of corruption and the shadow economy.     

How to interact,when and with whom? SMEs and public procurement

Research consistently shows that small and medium enterprises (SMEs) struggle with public procurement processes. The aim of this paper is to extend the research agenda using the lens of supplier development. Dyadic mentoring theory is used to classify three role sets that buyers are willing to use in order to develop small firms. This paper's findings distinguish budget holders from traditional buyers in terms of how and what processes they are willing to use to develop SMEs. Role theory is used in the paper to explain the different mentor behaviours.