Conservatism, growth, and return on investment

Return on Investment (ROI) is widely regarded as a key measure of firm profitability. The accounting literature has long recognized that ROI will generally not reflect economic profitability, as determined by the internal rate of return (IRR) of a firm’s investment projects. In particular, it has been noted that accounting conservatism may result in an upward bias of ROI, relative to the underlying IRR. We examine both theoretically and empirically the behavior of ROI as a function of two variables: past growth in new investments and accounting conservatism. Higher growth is shown to result in lower levels of ROI provided the accounting is conservative, while the opposite is generally true for liberal accounting policies. Conversely, more conservative accounting will increase ROI provided growth in new investments has been “moderate” over the relevant horizon, while the opposite is true if new investments grew at sufficiently high rates. Taken together, we find that conservatism and growth are “substitutes” in their joint impact on ROI.     

Financial accounting return on investment and financial leverage

This note presents a method for teaching the concept of financial leverage and its relationship to accounting rates of return. Typically, financial leverage is only briefly mentioned in introductory accounting textbooks, and it is rarely related explicitly to rates of return on total assets and on common stockholders' equity. Yet the concept is an important one for financial managers. We have developed and class tested a numerical illustration to explain in a conceptually sound manner why the two rates of return differ. Accounting instructors who share our view that financial leverage should be covered more thoroughly in the introductory accounting course will find this example to be a useful supplement. The example can also be used as a way to develop critical thinking skills or to enhance a user orientation.     

Predicting base station return on investment in the telecommunications industry: Machine-learning approaches

Investment in the right location ensures sustainable competition. In the telecommunication sector, the number of base stations (BSs) is one of the most significant investment parameters. When a potential BS is subject to be selected, practitioners will first consider investing in a BS where the return on investment (ROI) is highest. Therefore, the quantifiable objectives are distinctly defined, as it makes sense to choose maximizing features that raise per unit investment. This study provides a solution to evaluate the best BS installation alternative with machine-learning approaches as well as to estimate ROI value by changing the properties that affect the ROI value. For this purpose, the estimation performance of logistic regression, random forest, and XGBoost methods are compared and further strengthened by random forest hyperparameter optimization to provide the best performance. The model, with a success rate of 98.7% according to the $F$-score, showed that it was a robust algorithm. The three most essential features for the ROI value are determined to be voice traffic, data traffic, and frequency cost. These parameters enable a review of the prediction results of telecommunications managers and planning specialists responsible for BS investment.     

A closer look at return predictability of the US stock market: evidence from new panel variance ratio tests

This paper examines the return predictability of the US stock market using portfolios sorted by size, book-to-market ratio and industry. We use novel panel variance ratio tests, based on the wild bootstrap proposed in this paper, which exhibit desirable size and power properties in small samples. We have found evidence that stock returns have been highly predictable from 1964 to 1996, except for a period leading to the 1987 crash and its aftermath. After 1997, stock returns have been unpredictable overall. At a disaggregated level, we find evidence that large-cap portfolios have been priced more efficiently than small- or medium-cap portfolios; and that the stock returns from high-tech industries are far less predictable than those from non-high-tech industries.     

A comprehensive look at stock return predictability by oil prices using economic constraint approaches

This study investigates the predictability of oil return on stock market return using a series of economic constraints. We find that oil return has a more powerful and stable prediction ability than its asymmetric form using an unconstrained approach and three constraint approaches. A new constraint, regarding the three-sigma rule, can obtain a higher forecast accuracy than other methods. Moreover, compared to univariate macro models, incorporation of oil return can increase the average forecasting performance of 14 macroeconomic predictors. Finally, the predictive performance of oil returns varies during different periods linking to the business cycle, geopolitical risk, and financial crisis. The predictability source of oil returns can be explained from the discount rate channel and the sentiment channel.     

Rethinking Oz: More than policy,the underlying mindset

Do Australians see themselves as larrikins or victims? In this essay, I examine the entrenched assumptions Australians most commonly bring to their understandings of their present and future world. While some contemporary Aussies choose a unique voice, most others have swapped their British legacy for the can-do illusions of the Wizard of Oz.. Will Australia break out of its ingrained thinking to create a new future? Does Oz realise that the attending problems cannot necessarily be solved by the industrialist, short-term thinking that bred them? The present authoritarian thought system reaches back through two millennia of Western civilisation, almost unchallenged. It lacks long-term vision. This industrialist perspective still largely defines the understandings Australians have about their choices for the future, limiting our creativity for dealing with the dilemmas and opportunities ahead. This mindset is linear, exclusionary and competitive. It seeks either to take charge of nature's rhythms or ignore them. An emerging mindset of networking, rather than top–down control, may be starting to clear the smog. This new way of thinking is organic, inclusionary and collaborative—and certainly aware of longer-term horizons. It could replace the buccaneering, conformist mentality with self-responsibility and respect for diversity. Recent attempts to reinvent Oz with long-term vision fail to stand outside the mindset that frames competitive Westminster politics, limited by its institutionalised confrontation and either–or thinking. Oz could well make a “pledge to future generations” when examining alternative mindsets.     

Discussion of “Conservatism, growth and return on investment”

Providing data for the measurement of financial performance is a key objective of financial reporting. Rajan, Reichelstein, and Soliman (2007, Conservatism, growth and return on investment, Review of Accounting Studies, this issue) provide new insights into the well known biases involved in measuring return on investment (ROI) on the basis of accrual accounting. They analyze the relationships among ROIs, growth rates, accrual policies and cash flow profiles in a fairly general steadystate model (only the last parameter is severely restricted). New and interesting results outside steady-state are presented as well. In the empirical part of the paper Rajan et al. demonstrate that the biases involved are systematic and economically significant. Hence empiricists must pay attention (whatever their sample sizes). Hopefully this paper will generate renewed interest in the analytical aspects of accrual accounting.     

More than meets the eye: Convertible bond issuers' concurrent transactions

We document that, in recent years, over 60% of convertible bond issuers conduct concurrent transactions including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We investigate the determinants of issuers' choice of concurrent transactions and find that a proxy for capital supply (flows to convertible bond arbitrage hedge funds) is a significant determinant. Option purchases are more likely when capital supply is low and the convertible is dilutive to earnings. SEOs are more likely when firms have valuable growth opportunities and capital supply is low. Convertible issuers establish lending programs when arbitrageurs likely encounter difficulty shorting their stock, suggesting that these firms facilitate short selling in their own stock. These results suggest that, in the convertible bond market, the influence of capital supply extends beyond the issuance decision to the use of concurrent transactions and that these transactions offer important flexibility to issuers. We find that average equity market announcement effects differ when issuers conduct concurrent transactions. Consistent with models of adverse selection, concurrent transactions that reduce the dilutive impact on earnings, thereby making the design more debt-like, are associated with less negative announcement effects. Conversely, concurrent transactions that increase the dilutive impact on earnings, thereby making the design more equity-like, are associated with more negative announcement effects.     

More than imagination: Making social and critical accounting real

We offer a critical consideration of the roles of cognitive dissonance, imagination, and critical thinking in accounting education, suggesting that all three are important elements of critical and emancipatory accounting education, but that they must be set within a context that is rooted in the “real lives” of students and teachers alike, seeking to both understand the world and to challenge it.     

Public interest accounting: A look at the issues

Within the last ten years, a very unique and controversial accounting organization, Accountants for the Public Interest, has been developed to assist previously unrepresented citizens and organizations in financial matters involving issues of broad public concern. This paper examines the fundamental issues that must be resolved in the minds of practicing accountants as regards implementation of the services, if the public interest accounting concept is to survive.     

BI：文化建设重于系统建设

贾凤军（以下简称贾）：一谈到商业智能（BI），人们就会想到数据仓库，似乎两者是不可分的。我个人认为，BI与数据仓库没有必然的联系。认为没有数据挖掘就没有BI，是一个认识的误区。理论上讲，数据挖掘技术能够为企业提供需要的数据，但这些数据能否成为决策的依据，关键还是取决于决策者或执行者本身。数据挖掘如同给导弹提供了制导数据，但如果导弹的推进系统、爆破系统技术跟不上，即使发射出去也不具有威力。BI应用的关键是业务与技术要找到结合点，     

More heat than light: Investor attention and bitcoin price discovery

We investigate how increased attention affects bitcoin's price discovery process. We first decompose bitcoin price into efficient and noise components and then show that the noise element of bitcoin pricing is driven by high levels of attention. This implies that high levels of attention are linked with an increase in uninformed trading activity in the market for bitcoin, while informed trading activity is driven by arbitrage rather than attention.     

Art as an investment: risk, return and portfolio diversification in major painting markets

The present paper examines risk, return and the prospects for portfolio diversification among major painting and financial markets over the period 1976–2001. The art markets examined are Contemporary Masters, French Impressionists, Modern European, 19th Century European, Old Masters, Surrealists, 20th Century English and Modern US paintings. The financial markets comprise US Treasury bills, corporate and government bonds and small and large company stocks. In common with the published literature in this area, the present study finds that the returns on paintings are much lower and the risks much higher than conventional investment markets. Moreover, while low correlations of returns suggest that opportunities for portfolio diversification in art works alone and in conjunction with equity markets exist, the construction of Markowitz mean‐variance efficient portfolios indicates that no diversification gains are provided by art in financial asset portfolios. However, diversification benefits in portfolios comprised solely of art works are possible, with Contemporary Masters, 19th Century European, Old Masters and 20th Century English paintings dominating the efficient frontier during the period in question.     

Profit pools: a fresh look at strategy

In charting strategy, many managers focus on revenue growth, assuming that profits will follow. But that approach is dangerous: today's deep revenue pool may become tomorrow's dry hole. To create strategies that result in profitable growth, managers need to look beyond revenues to see the shape of their industry's profit pool. The authors define an industry's profit pool as the total profits earned at all points along the industry's value chain. Although the concept is simple, the structure of a profit pool is usually quite complex. The pool will be deeper in some segments of the value chain than in others, and depths will vary within an individual segment as well. Segment profitability may, for example, vary widely by customer group, product category, geographic market, and distribution channel. Moreover, the pattern of profit concentration in an industry will often be very different from the pattern of revenue concentration. The authors describe how successful companies have gained competitive advantage by developing sophisticated profit-pool strategies. They explain how U-Haul identified new sources of profit in the consumer-truck-rental industry; how Merck reached beyond its traditional value-chain role to protect its profits in the pharmaceuticals industry; how Dell rebounded from a misguided channel decision by refocusing on its traditional source of profit; and how Anheuser-Busch made a series of astute product, pricing, and operating decisions to dominate the beer industry's profit pool. The companies with the best understanding of their industry's profit pool, the authors argue, will be in the best position to thrive over the long term.     

Conditioning manager alphas on economic information: another look at the persistence of performance

This article presents evidence on persistence in the relativeinvestment performance of large, institutional equity managers.Similar to existing evidence for mutual funds, we find persistentperformance concentrated in the managers with poor prior-periodperformance measures. A conditional approach, using time-varyingmeasures of risk and abnormal performance, is better able todetect this persistence and to predict the future performanceof the funds than are traditional methods.