CAPM and APT-like models with risk measures

The paper deals with optimal portfolio choice problems when risk levels are given by coherent risk measures, expectation bounded risk measures or general deviations. Both static and dynamic pricing models may be involved. Unbounded problems are characterized by new notions such as (strong) compatibility between prices and risks. Surprisingly, the lack of bounded optimal risk and/or return levels arises for important pricing models (Black and Scholes) and risk measures (VaR, CVaR, absolute deviation, etc.). Bounded problems present a Market Price of Risk and generate a pair of benchmarks. From these benchmarks we introduce APT and CAPM-like analyses, in the sense that the level of correlation between every available security and some economic factors explains the security expected return. The risk level non correlated with these factors has no influence on any return, despite the fact that we are dealing with risk functions beyond the standard deviation.     

Choice and change of measures in performance measurement models

This paper uses management control, resource-based, systems-based and contingency-based strategy theories to describe a large U.S. manufacturing company's efforts to improve profitability by designing and using a performance measurement model (PMM). This PMM includes multiple performance measures relevant to its distribution channel for products, repair parts and maintenance services. The PMM is intended to reflect the company's understanding of performance relations among strategic resources, operational capabilities, and desired financial outcomes. The PMM also reflects its intended distribution strategy, the types of performance necessary to achieve that strategy by its distributors, and its desired financial outcomes. Furthermore, the company uses the model to evaluate its North American distributors and intends to use these evaluations as a partial basis for annual and long-term rewards. Thus, the PMM embodies the measurable portion of the firm's management control system of its distribution channel.The study addresses four research questions: (1) Are measure attributes important considerations for performance measure choice? (2) Does the importance of attributes differ according to firm strategy? (3) Does the importance of attributes for design and use differ according to firm strategy? (4) Does a company trade-off some individual attributes for others? The questions are investigated using qualitative and quantitative analyses of archival documents and interviews with top managers and distributors. Principal findings are that measure attributes are important considerations for choice and change of performance measures, design attributes are more important than use attributes, the importance of attributes does not appear to differ according to strategy, and some individual attributes are traded-off for other attributes.     

Contagion effect on bond portfolio risk measures in a hybrid credit risk model

This paper illustrates how modelling the contagion effect among assets of a given bond portfolio changes the risk perception associated to it. This empirical work is developed in a hybrid credit risk framework that incorporates recovery rate risk. Dependence structures among firms and between external shocks affecting firms together are considered. The presence of correlations among firm leverage ratios and the interrelation between default probabilities and recovery rates produces clusters of defaults with low recovery rates. This has a major impact on standard risk measures such as Value-at-Risk and conditional tail expectation. Consequently, an appropriate measurement of the contagion has a tremendous effect on the capital requirement of many financial institutions.     

Associations between strategic resource importance and performance measure use: The impact on firm performance

This study investigates the relation between managers’ perception of the importance of several types of performance measures and managers’ assessment about the importance of the firm's strategic resources that sustains its competitive advantage. Furthermore, it investigates whether there is a significant association between the importance of performance measures and firm performance, and thus, whether performance measures are mediating variables in the relation between the importance of strategic resources and performance. Using survey data from 107 companies, the results indicate that managers place importance on multiple measures and show some evidence that the importance of performance measures mediates the association between the importance of strategic resources and performance. Implications and insights are discussed, along with ideas for future research.     

The effect of causal knowledge on individuals' perceptions of nonfinancial performance measures in profit prediction

Although organizations commonly report nonfinancial performance measures (NFPMs) associated with profitability, prior research does not address the extent to which the provision of causal knowledge affects individuals' perceptions of the predictive content of such measures. This study examines how providing NFPMs together with different types of causal knowledge (i.e., strong, weak, or none) affects the perceived usefulness of the measures in a profit prediction context. Weak causal knowledge is defined as the direction of the relationship between an NFPM and earnings, while strong causal knowledge is a complete explanation underlying the relationship. The results provide evidence that providing weak causal knowledge increases individuals' perceptions of the predictive content of an NFPM compared to providing no causal knowledge; however, providing strong causal knowledge does not incrementally affect perceptions beyond providing only weak causal knowledge. These findings have implications for the type of information organizations report concurrently with NFPMs.     

基于战略风险管理模式下的养老保险公司风险管理分析

战略风险管理模式是金融企业比较流行的一种全面风险管理模型。本文在分析养老保险公司业务经营及风险管理特殊性的基础上,应用战略风险管理基本思想,提出了当前形势下养老保险公司风险管理的核心问题,并对公司目前面临的风险类别、风险因素以及风险管控措施进行了分析研究。     

The effects of tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments

Prior research suggests that internal auditors’ judgements are subject to management influence resulting in compromised risk assessments. This study investigates the effects of the tone at the top and coordination with external auditors on internal auditors’ fraud risk assessments. Results of an experiment involving 64 internal auditors indicate that when the tone at the top is poor, rather than favouring management, internal auditors report a higher risk of intentional misstatements and that coordination with external auditors can further reduce expectations of the incidence of intentional misstatements.     

国家风险对我国出口贸易效应的实证分析

2008年金融危机导致全球贸易环境恶化,国家风险加大,我国出口贸易规模下降。本文运用回归模型,分析了金融危机前后中国的国别出口规模与其对应进口国的国家风险之间的相关性以及出口市场结构对相关性的影响。论文提出在国家风险评级相对下调的发达市场,中国要缓解出口的下滑,以及在收入水平较低的新兴市场,中国要扩大对其出口规模,及时识别、防范并化解国家风险具有重要意义。论文从出口信用保险的角度为我国化解国家风险、发展对外贸易提出了相关政策性建议。     

The performance of insolvency prediction and credit risk models in the UK: A comparative study

Theoretically-driven, market-based contingent claims models have recently been applied to the field of corporate insolvency prediction in an attempt to provide the art with a theoretical methodology that has been lacking in the past. Limited studies have been carried out in order directly to compare the performance of these models with that of their accounting number-based counterparts. We use receiver operating characteristic curves to assess the efficacy of thirteen selected models using, for the first time, post-IFRS UK data; and investigate the distributional properties of model efficacy. We find that the efficacy of the models is generally less than that reported in the prior literature; but that the contingent claims models outperform models which use accounting numbers. We also obtain the counter-intuitive finding that predictions based on a single variable can be as efficient as those which are based on models which are far more complicated – in terms of variable variety and mathematical construction. Finally, we develop and test a naïve version of the down-and-out-call barrier option model for insolvency prediction and find that, despite its simple formulation, it performs favourably compared alongside other contingent claims models.     

The impact of litigation risk on the strategic timing of management earnings forecasts

This paper examines whether managers strategically time their earnings forecasts (MEFs) as litigation risk increases. We find as litigation risk increases, the propensity to release a delayed forecast until after the market is closed (AMC) or a Friday decreases but not proportionally more for bad news than for good news. How costly this behaviour is to investors is questionable as share price returns do not reveal any under‐reaction to strategically timed bad news MEF released AMC. We also find evidence consistent with managers timing their MEFs during a natural no‐trading period to better disseminate information.     

Effects of the fraud triangle on students’ risk assessments

This study is motivated by Bailey’s [Bailey, C. D. (2004). An unusual cash control procedure. Journal of Accounting Education, 22, 119–129]. A disappointing 89% of Bailey’s 502 students appear to have overestimated the risk of an asset misappropriation. This study presents the results of two quasi-experiments that test whether students’ risk assessments are affected by the type of model presented to them immediately preceding their risk assessments. One group was provided an overview of the widely used Committee of Sponsoring Organizations (COSO), Internal Control—Integrated Framework and the second group was provided a briefing on the Fraud Triangle, a model originally developed by criminologist, Donald R. Cressey (1973). As predicted, students who were provided an overview of the fraud triangle committed fewer Type I and Type II errors than students who were provided an overview of COSO. The results from this study contribute to the literature on risk assessment by demonstrating how the fraud triangle could, in some situations, lead to better risk assessments.     

Variance analysis and linear contracts in agencies with distorted performance measures

This paper investigates the role of variance analysis procedures in aligning objectives under the condition of distorted performance measurement. A risk-neutral agency with linear contracts is analyzed, whereby the agent receives post-contract, pre-decision information on his productivity. If the performance measure is informative with respect to the agent’s marginal product concerning the principal’s objective, variance investigation can alleviate effort misallocation. These results carry over to a participative budgeting situation, but in this case the variance investigation procedures are less demanding.     

The effect of CEO reputation and explanations for poor performance on investors’ judgments about the company’s future performance and management

Two experiments are conducted in which MBA students make judgments about a company’s future performance and management’s reputation after the company reports poor financial results. Information about the CEO’s pre-existing reputation is manipulated at three levels (favorable, unfavorable, or none) and the plausibility of management’s explanation is manipulated at two levels (plausible or implausible). Generally, the results indicate that management’s explanations influence investors’ judgments of the company’s future performance and that judgments about management were jointly influenced by both manipulated factors. Specifically, our results indicate that a pre-existing favorable management reputation is an enduring trait that is not damaged even when management offers an implausible explanation. Our results are consistent with Mercer (2004) but inconsistent with other research (40 and 53) suggesting that a good reputation is easily lost. Our results also indicate that offering a plausible explanation improves the reputation of managers with an unfavorable reputation. We also find that judgments about management’s intentions for explaining poor performance represent a partial mediator for judgments about management’s reputation. Finally, we provide evidence that judgments about the company’s future performance and management’s reputation are consequential in that they are associated with investors’ equity judgments.     

Inf-convolution of risk measures and optimal risk transfer

We develop a methodology for optimal design of financial instruments aimed to hedge some forms of risk that is not traded on financial markets. The idea is to minimize the risk of the issuer under the constraint imposed by a buyer who enters the transaction if and only if her risk level remains below a given threshold. Both agents have also the opportunity to invest all their residual wealth on financial markets, but with different access to financial investments. The problem is reduced to a unique inf-convolution problem involving a transformation of the initial risk measures.Received: December 2004, Mathematics Subject Classification (2000): 60G35, 91B28, 91B30, 46N10JEL Classification: C61, D81, G13, G22     

The effect of risk on intertemporal choice

The strong similarities between intertemporal and risky choice raised the possibility that risk and time delay were psychologically interchangeable in the way they influence preference. Consistent with the single‐process view, several previous studies have indicated that introducing uncertainty to intertemporal choice could decrease the degree of discounting future rewards just as adding time delay to it. However, the opposite effect has been observed in other cases. The present study examined the role of risk in intertemporal choice using the choice titration procedure. The results of two experiments indicated that risk and time delay had opposite effects on the preference in intertemporal choices. That is, the external uncertainty increased the degree of discounting future, whereas the opposite is true for time delays. Thus, our results were unfriendly to the single‐process theory. In addition, the present study demonstrated the presence of an immediacy effect as well as a magnitude effect in intertemporal choice regardless of whether or not the reward is certain.     

The effect of strategic and operating turnaround initiatives on audit reporting for distressed companies

Empirical research on the effect of turnaround initiatives on audit reporting is scant. This paper addresses this gap by examining audit reporting for distressed companies and its association with a broad array of strategic and operating turnaround initiatives. In particular, we study the association between business risk information and going-concern decisions for distressed clients. Using a sample of distressed firms in the US manufacturing industry, we find that both short-term cash flow potential as well as strategic growth and hence long-term cash flow potential are necessary for strategic turnaround initiatives to have a mitigating impact on the auditor’s going-concern decision. Strategic turnaround initiatives for which only one of these two conditions holds and operating turnaround initiatives appear to function as going-concern risk factors as they are associated with a higher likelihood that a going-concern opinion will be issued. We also find that specialist and non-specialist auditors assess the mitigating potential of some but not all turnaround initiatives differently. Overall, our results suggest that auditors’ strategic risk assessment (typically done in a business risk auditing context) is associated with the outcome of the audit process (the opinion).     

推进银行业战略转型需内外并举

系统回顾改革30年来取得的成绩和做法，1986年交通银行的恢复推动了当时国内银行业非常重要的战略转型。今天的战略转型同样也面临着新形势、新需要。推动银行业的战略转型有四个方面因素．全面开放后竞争臼趋激烈、资本市场发展的脱媒效应、利率市场化改革和银行经济资本考核。     

Internal auditors’ use of interpersonal likability,arguments, and accounting information in a corporate governance setting

Internal auditors play an important role in influencing managers’ judgments. Yet, the practitioner literature indicates that, because internal audit lacks the client services incentives of external audit, internal auditors often adopt a “policeman approach” that can lead to negative interpersonal relationships with managers. We investigate three variables fundamental to internal auditors’ ability to influence managers: (1) internal auditors’ interpersonal likability, (2) the information used to support their positions, and (3) whether they present that information in a thematically organized argument. We find that managers agree more with an internal auditor who is both likable and uses a thematically organized argument. We find further that this joint effect occurs regardless of whether the internal auditor’s information is relatively supportive or unsupportive of his position. Overall, our theory and findings suggest that an internal auditor can achieve agreement from managers on important corporate governance issues with this fairly straightforward presentation tactic, even when the underlying information is relatively unsupportive and managers otherwise tend not to agree with the internal auditor’s position. Our study contributes to accounting, psychology, and writing and discourse theories with new evidence of the effects of an argument structure (holding the underlying information constant) on users’ judgments, and how those effects depend on the likability of the source of information. Our findings have important implications for internal auditors, managers, external auditors, and others interested in corporate governance.     

Reorganization in bankruptcy and the issue of strategic risk

The decision by creditors to force the firm into bankruptcy, where bankruptcy includes reorganization, is shown to involve the valuation of a lottery over (cooperative) games rather than a lottery over specific monetary outcomes. In the absence of assumptions about strategic (negotiating) risk, the value of creditor claims is seen to be ambiguous. This paper extends Van Horne's model of the optimal initiation of bankruptcy proceedings to include the reorganization option and strategic risk. A modified decision rule is obtained to determine the optimal solution.     

Subjective adjustments to objective performance measures: The influence of prior performance

This field study examines whether and how supervisors’ subjective adjustments to objective performance measures are influenced by their prior subjective evaluations of employees. Evaluations were determined entirely subjectively in the sample internal audit organization in 2005. In 2006, the organization introduced a pay-for-performance incentive plan that established four objective measures of audit manager performance. Then, knowing the challenges of objectively measuring manager performance, the organization gave supervisors the discretion, mandate, and training to subjectively adjust each of the objective measures when performance as indicated on the individual measures misrepresented managers’ true performance.