Tax-Adjusted Discount Rates with Investor Taxes and Risky Debt

This paper derives a tax-adjusted discount rate formula with a constant proportion leverage policy, investor taxes, and risky debt. The result depends on an assumption about the treatment of tax losses in default. We identify the assumption that justifies the textbook approach of discounting interest tax shields at the cost of debt. We contrast this with an alternative assumption that leads to the Sick (1990) result that these should be discounted at the riskless rate. These two approaches represent polar cases. Each generates its results by using a different simplifying assumption, and we explain what determines the correct treatment in practice. We also discuss implementation of the valuation procedure using the capital asset pricing model.     

论抛锚式教学在大学英语阅读教学中的应用

抛锚式教学模式是深受目前西方盛行的建构主义学习理论影响的一种重要的教学模式。现在我校的大学英语教材的编非常适合这种教学方法。教师根据实际情况为以学生为主导设计课堂内容,让学生建构起对教学中的理念的认知,从而真正起到教书育人的双重效果。     

An Insurance Market Simulation With Both Adverse and Advantageous Selection

The theory of adverse selection predicts that high‐risk individuals are more likely to buy insurance than low‐risk individuals if asymmetric information regarding individuals’ risk type is present in the market. The theory of advantageous selection predicts the opposite—a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom‐based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands‐on experience, and supplements current textbooks by bringing their content up to date with current research.     

Alternative modeling for long term risk

In this paper, we propose an alternative approach to estimate long-term risk. Instead of using the static square root of time method, we use a dynamic approach based on volatility forecasting by non-linear models. We explore the possibility of improving the estimations using different models and distributions. By comparing the estimations of two risk measures, value at risk and expected shortfall, with different models and innovations at short-, median- and long-term horizon, we find that the best model varies with the forecasting horizon and that the generalized Pareto distribution gives the most conservative estimations with all the models at all the horizons. The empirical results show that the square root method underestimates risk at long horizons and our approach is more competitive for risk estimation over a long term.     

基于情景的操作风险计量方法研究

《巴塞尔资本协议II》鼓励金融机构使用高级计量法计算监管资本,以此更加准确地反映金融机构的操作风险水平。其中,基于情景的计量法融合损失分布法、记分卡法的优势,能够更加前瞻性地计量操作风险资本。本文深入研究基于情景的计量法的流程、建模技术以及实际应用情况,提出应重视SBA在我国的应用和实践、建立完整的基于隋景的计量法体系、注重克服基于SBA可能存在的问题等建议,有利于国内银行根据实际情况考虑使用SBA计量操作风险监管资本和经济资本。     

The importance of cash flow disclosure and cost of capital

We examine whether the choice of cash flow disclosure under International Accounting Standard 7 has an influence on the cost of capital incurred by Australian listed companies. Results indicate that indirect method companies incur a significantly higher ex-ante cost of equity than direct method companies using a combined equity model approach. We also demonstrate that using an optimal weighted combination of equity models reduces model variance and bias compared to using a single equity model. Our findings support mandating the direct method and have the potential to induce companies to report the direct method to increase company value.     

Computing present values: Capital budgeting done correctly

This paper shows that the standard textbook formula for computing the present value of a future random cash flow – the discounted expected value – is formally incorrect and can generate significant errors when used to compute present values. The correct present value method is provided as well as a simple adjustment to the textbook formula which can be used to obtain an approximation to the correct value.     

Asset allocation when guarding against catastrophic losses: a comparison between the structure variable and joint probability methods

We apply a bivariate approach to the asset allocation problem for investors seeking to minimize the probability of large losses. It involves modelling the tails of joint distributions using techniques motivated by extreme value theory. We compare results with a corresponding univariate approach using simulated and financial data. Through an examination of a simulated and real financial data set we show that the estimated risks using the bivariate and univariate approaches are in close agreement for a wide range of losses and allocations. This is important since the bivariate approach is significantly more computationally expensive. We therefore suggest that the univariate approach be used for the typical level of loss that an investor may want to guard against. This univariate approach is effective even if there are more than two assets. The software written in support of this work is available on demand and we describe its use in the appendix.     

Measuring the convergence of national accounting standards with international financial reporting standards: The application of fuzzy clustering analysis

A single set of accounting standards is considered the path to achieving accounting convergence globally. Given the important role that formal harmonization/convergence plays in the accounting profession and global capital markets, this study focuses on the methods and methodology for the measurement of formal accounting convergence. Based on our review and evaluation of the existing methods for measuring the level of harmonization/convergence between any two sets of accounting standards, we propose using a new method of matching and fuzzy clustering analysis to assess the convergence progress of national accounting standards (NAS) with International Financial Reporting Standards (IFRS) from whole and single standards, respectively. Single standards are clustered according to their convergence level, which may indicate further convergence emphasis. As an illustrative example, the achievements made in China are evaluated using this new method. The results reveal that this new method can measure the convergence level of NAS with IFRS more clearly and informatively.     

Relative accuracy and predictive ability of direct valuation methods, price to aggregate earnings method and a hybrid approach

In this paper, we assess the relative performance of the direct valuation method and industry multiplier models using 41 435 firm‐quarter Value Line observations over an 11 year (1990–2000) period. Results from both pricing‐error and return‐prediction analyses indicate that direct valuation yields lower percentage pricing errors and greater return prediction ability than the forward price to aggregated forecasted earnings multiplier model. However, a simple hybrid combination of these two methods leads to more accurate intrinsic value estimates, compared to either method used in isolation. It would appear that fundamental analysis could benefit from using one approach as a check on the other.     

Endogeneity in Accounting and Finance Research: Natural Experiments as a State‐of‐the‐Art Solution

This paper provides a discussion of endogeneity as it relates to finance and accounting research. We discuss the textbook solutions: two‐stage least squares, instrumental variables, differenced generalized method of moments (GMM) and system GMM and provide a unifying framework showing how they are related. We consider the limitations of these techniques and then detail a state‐of‐the‐art solution, utilizing a natural experiment as a way of mitigating endogeneity and building stronger theory.     

Nonmonetary asset exchanges revisited: An updated pedagogical approach

This paper reviews current GAAP for nonmonetary asset exchanges, presents a pedagogical approach that instructors and textbook authors can use to clarify their coverage of this topic, and highlights intermediate accounting textbooks that provide complete, accurate coverage of this topic.     

Commentary on: 'Accountability of accounting educators and the rhythm of the university: resistance strategies for postmodern blues'

Abstract

This Teaching Note reports on the support available in textbooks for graphicacy that will help students understand the complexities of graphical displays. Graphical displays play a significant role in financial reporting, and studies have found evidence of measurement distortion and selection bias. To understand the complexities of graphical displays, students need a sound understanding of graphicacy and support from the textbooks available to them to develop that understanding. The Teaching Note reports on a survey that examined the textbooks available to students attending two Scottish universities. The support of critical graphicacy skills was examined in conjunction with textbook characteristics. The survey, which was not restricted to textbooks designated as required reading, examined the textbooks for content on data measurement and graphical displays. The findings highlight a lack of support for graphicacy in the textbooks selected. The study concludes that accounting educators need to scrutinize more closely the selection of textbooks and calls for more extensive research into textbooks as a pedagogic tool.     

Impact of idiosyncratic volatility on stock returns: A cross-sectional study

This paper proposes a new approach to estimate the idiosyncratic volatility premium. In contrast to the popular two-pass regression method, this approach relies on a novel GMM-type estimation procedure that uses only a single cross-section of return observations to obtain consistent estimates. Also, it enables a comparison of idiosyncratic volatility premia estimated using stock returns with different holding periods. The approach is empirically illustrated by applying it to daily, weekly, monthly, quarterly, and annual US stock return data over the course of 2000–2011. The results suggest that the idiosyncratic volatility premium tends to be positive on daily return data, but negative on monthly, quarterly, and annual data. They also indicate the presence of a January effect.     

American option valuation using first-passage densities

This paper explores the advantages of pricing American options using the first-passage density of a Brownian motion to a curved barrier. First, we demonstrate that, under this approach, the exact computation of the optimal boundary becomes secondary. Consequently, a simple approximation to the optimal boundary suffices to obtain accurate prices. Moreover, the first-passage approach tends to give more accurate prices than the early-exercise-premium integral representation. We present two ways of implementing the approach. The first is based on an exact representation of the first-passage density. The second exploits the method of images, which gives us a family of barriers with first-passage densities given in closed form. Both methods are very easy to implement and give accurate prices. In particular, the images-based method is extremely accurate.     

Dangers in data adjustment: the case of rights issues and returns

In this paper we alert researchers to the potential for unrecognised errors in using adjusted price and daily return data. This problem is illustrated by considering the case of ex‐rights price adjustments. We present five alternative adjustment procedures that would be expected to generate similar results. We show, however, that these procedures result in significantly different dilution factors and returns. Our investigations suggest that the problem is associated with the theoretical valuation of the rights. In a substantial proportion of cases, the standard textbook model is inappropriate because of the non‐standard nature of the rights issue. Correcting for these non‐standard cases is a non‐trivial task since they constitute more than half of the issues. The extent of this problem does not appear to be well recognised. Deletion of non‐standard rights issues eliminates extreme values in dilution factors, but statistically significant differences remain. Our moral is simple; uncritical acceptance of data 'as is' from computer data files may lead researchers to erroneous conclusions. It also seems noteworthy that the standard textbook model of rights pricing only applied to a minority of Australian rights issues over recent years. This result has implications for the calculation of EPS under AASB 1027. As a by‐product, our analysis suggests that the ex‐rights daily return is close to zero.     

Intangible Asset Valuation Model Using Panel Data

In this paper, we design a valuation model for intangible assets using panel data, and empirically investigate the model validity. The approach using panel data is an evaluation method that uses unobserved firm-specific effects based on panel analysis. Our model first estimates production function using panel analysis, and then develops cost function using a duality approach. Next, we discount added value and costs resulting from intangible assets using fixed effects. Empirical analysis using the model compares the estimated parameter values in the nonlinear profit function consisting of production function and cost function with those in the production function alone, which becomes linear after logarithmic conversion, and finds that the two are generally similar. Additionally, the market value of equity is more closely associated with both the book value of equity and the value of intangible assets than with the book value of equity alone. These results support the validity of the model for evaluating intangible assets. This model is easy to apply in practice and is based on a simple idea. Further discussion of this model is warranted given the increasing importance attached to the value of intangible assets.     

Testing asset pricing models with changing expectations and an unobservable market portfolio

When the assumption of constant risk premiums is relaxed, financial valuation models may be tested, and risk measures estimated without specifying a market index or state variables. This is accomplished by examining the behavior of conditional expected returns. The approach is developed using a single risk premium asset pricing model as an example and then extended to models with multiple risk premiums. The methodology is illustrated using daily return data on the common stocks of the Dow Jones 30. The tests indicate that these returns are consistent with a single, time-varying risk premium.     

Multi-asset class mutual funds: Can they time the market? Evidence from the US,UK and Canada

The importance of asset allocation decisions in wealth management is well established. However, given its importance it is perhaps surprising that so little attention has been paid to the question of whether professional fund managers are skilful at timing market movement across asset classes over time. The timing literature has tended to concentrate on the timing skill of single asset class funds. Using data on US, UK and Canadian multi-asset class funds, we apply two alternative methodologies to identify the asset class timing abilities of managers. Overall, whether we apply a returns-based method or a holdings-based testing approach, we find evidence of only a tiny minority of funds with asset class timing ability.     

To boldly go where no man has gone before: integrating cognitive and physical features in scenario studies

A recent surge in the literature shows that scenario studies are very much back in vogue. The revival of the scenario approach to strategic planning, however, also shows that the method has developed rather one-sidedly both in theory and practice. The dominant trend in scenario thinking is that scenario construction is used primarily as a cognitive exercise, involving mental processes only. In this paper we aim to complement this development by arguing for a more integrated approach, involving both cognitive and “physical” features. Such an approach combines more traditional cognitive elements of scenario studies with, for example, organizational experiments, deliberately made small mistakes, and external corporate ventures. Moreover, we introduce a typology of scenario studies based on two salient assumptions that characterize the field.