Choice of Accounting Method for Valuation of Investment Securities: Evidence from Hong Kong Firms

This study examines whether Hong Kong managers choose “benchmark” or “alternative” valuation method for investment securities, after the Hong Kong SSAP 24 became effective starting with fiscal‐year ending December 31, 1999. Tests are conducted on a sample of 292 firms, out of which 155 Hong Kong firms reported unrealized gains and losses and 128 firms that did not report holding gains/losses, but reported investment securities. The findings indicate that firms with strong relative performance, i.e. current year's EPS higher than that of the last year, chose the alternative valuation method when the investment securities had holding gains and recognized the unrealized holding gains in the equity section of the balance sheet. This finding is consistent with the Cookie Jar hypothesis because these holding gains would be used in the income statement in future periods, when needed. With regard to firms with strong relative performance and holding losses, the findings indicate that the benchmark valuation was used. The losses were reported in the income statement to the extent that they did not reduce the EPS below that of the last year. This finding is consistent with the Income Smoothing Hypothesis, because the use of benchmark valuation reduced EPS of the current year to bring it in line with that of the last year. Evidence on firms with weak economic performance and holding gains or losses provided weak support to the Income Smoothing Hypothesis and Big Bath Hypothesis. Additionally, the results indicate that the firms with high debt‐equity ratio preferred the benchmark method and recorded securities at cost. This treatment provided managers with an opportunity to liquidate or reclassify the securities in future periods and use the accrued gains, when needed. The findings are inconclusive with regard to the impact of bonus plan on the choice of valuation method.     

The Predictive Ability of Geographic Segment Information at the Country, Continent, and Consolidated Levels

This study examines whether geographic information disclosed at an increasingly disaggregated level (specifically, consolidated vs. continent vs. country) results in increased predictive ability of company operations (specifically, sales, gross profit, and earnings). Multinational corporations (MNCs) are formed using a simulated merger approach by combining the annual operating results of six individual firms, one from each of six countries. This approach makes it possible to compare the forecasting accuracy of data disclosed at the country, continent, and consolidated levels, not possible using current geographic segment disclosures. Previous studies using year-ahead forecast models implicitly assume the predictive factors included in the models are significant in forecasting operating results. Using regression forecast models, this study tests whether the predictive factors included in the models are effective in forecasting operating results by examining the direction, size, and significance of the regression coefficient estimates. The coefficients provide evidence that exchange rate changes, inflation, and real GNP growth are useful in forecasting annual sales and gross profit. Whereas, at least for this sample and this time period, exchange rate changes, inflation, and real GNP growth are not significant variables in forecasting annual earnings. The results indicate that the accuracy of forecasts increase as sales and gross profit are disclosed at a more disaggregated geographic level. The hypothesized relationship between consolidated, continent, and country levels, while holding strongly under perfect foresight, holds to a lesser extent using forecasts of exchange rates, inflation, and real GNP.     

Foreign Currency Translation Under Two Cases-Integrated and Isolated Economies

Beaver and Wolfson (1982 BW) identify economic interpretability and symmetry as desirable properties for financial statement translation. They then analyze translation methods with respect to these properties assuming perfect and complete markets between and within both countries (referred to, here, as the integrated economies case).
This study extends BW's analysis by examining isolated economies characterized by perfect and complete internal markets and a random relationship between prices and exchange rates. In BW's integrated economies case, inflation differentials drive exchange rate changes. No exchange risk exists, although monetary assets are exposed to the risk of unexpected inflation. Isolated economies expose monetary and nonmonetary items to both exchange and inflation risk.
In both cases, economic interpretability and symmetry can be achieved only by current value accounting translated at current exchange rates. In the integrated economies case, symmetry alone is achieved through current value accounting translated by current exchange rates for monetary items and historical costs translated by historical rates for nonmonetary items. In the isolated economies case, symmetry alone is achieved through current value accounting for monetary items and historical cost for non-monetary items, all translated at the current rate. In both cases, including translation gains or losses in income is a condition for these results.
This extension of BW demonstrates (1) the translation rate required for symmetry depends upon the assumed relationship between prices and exchange rates, (2) a well-defined economic scenario exists where historical cost accounting using current rate translation results in symmetry, and (3) the results depend on including translation gains and losses in income.     

The London Business School with Gower Publishing

Stage 3 is being widely heralded as a success. In fact compared with the government's initial aspirations, the guidelines particularly in the private sector have been exceeded by 50 per cent. Far from marking continued restraint. Stage 3 allowed massive - and unsustainable - increases in real take home pay thanks to favourable factors on inflation and generous tax cuts. The outcome has proved very close to forecasts we made before any guidelines were prepared and it suggests that incomes policy has played little part in holding down earnings in the private sector.
Looking ahead to Stage 4, we discuss the ability of firms to pay high wage increases given the development of the exchange rate and world prices. If the exchange rate is held (which is possible if current monetary policy continues) the increase in earnings in 1978/79 should be restricted to about 11–12 per cent.     

Forecast Summary

The sluggish response of the current account to severe monetary tightening has put pressure on the exchange rate, which was instrumental in the decision to raise base rates to an eight-year high of 15 per cent. In so doing, the government has declared itself ready to risk recession to hold the pound - its main bulwark against rising inflation. Our forecast illustrates the risk. Compared with June, when we saw the economy avoiding a hard landing in the short term (at the cost of a protracted battle to reduce inflation over the medium term), the present forecast projects a sharp deceleration in output next year. Over the medium term output grows a disappointing 2 per centp.a., unemployment starts to rise and it is not until 1992 that retail price inflation is back below 5 per cent.     

THE 1987 BUDGET

Our pre-Budget forecast published last month correctly anticipated the main Budget measures (with the exception of the decision not to re-valorise excise duties) and is very close to the Treasury's own forecast. We have updated the forecast for the Budget measures and other new information. Compared with the February Economic Outlook, our post-Budget assessment has revised down slightly the short-term forecast for output, inflation and the current account deficit. Consequently we share the Treasury's view that output will rise 3 per cent this year, but we are a little more optimistic on the outlook for inflation and the current account.
In holding the PS BR to last year's expected outturn of £4bn, and more particularly in cutting the PSFD by £11/2zbn, the Budget represents a tightening in fiscal policy. Whether the overall policy stance is tightened depends on the response of the monetary authorities. Early indications are that the government will prevent interest rates from falling as far or as fast as they would otherwise do and that the exchange rate will be allowed to rise. This implies a tightening of policy in order to head off problems on inflation or the balance of payments. This argument is supported by the Treasury's own forecast, which is more pessimistic on both inflation and the current account than its predecessor in the Autumn Statement, and explains the Chancellor's decision not to re-valorise excise duties. The post-Budget forecast incorporates this change in policy. We now assume that the sterling index averages 70 this year and that base rates fall to 9 per cent by the end of the year.     

Forecast Summary

Led by private sector demand, the economy has grown very rapidly in the last 12 months, Output has risen nearly 6 per cent and unemployment has fallen by over ½ million but the current account deficit has widened dramatically and wage and price inflation is increasing. Monetary policy has been tightened sufficiently, we believe, to produce a gradual reduction in the current deficit over the medium term and to prevent inflation from breaking the 7 per cent level which a higher mortgage rate will ensure early next year. But, as demand is reined back, there is a cost to output which rises 3 per cent next year, 2–2½ per cent thereafter. Unemployment continues to fall, dropping below 2 million at the end of next year and reaching 1.8 million by 1992.     

企业控制权转移的长期绩效研究

基于财务数据法和长期持有超额收益法,本文研究了控制权转移企业的长期绩效以及影响长期持有收益的因素。实证结果表明:从长期来看,上市公司控制权转移并没有给企业绩效带来显著的改善。同时,控制权比例和行业属性对控制权转移企业长期持有超额收益率具有显著影响;相对于企业价值而言,控制权转移时机和资产整合更为重要。     

The London Business School with Gower Publishing: Forecast Release: EARNINGS AND UNEMPLOYMENT IN THE CAR INDUSTRY: THE BEST AND WORST OF BRITISH INDUSTRY

The Chancellor has described the cost in terms of lost output and higher unemployment of getting inflation down as ‘well worth paying’. Yet the trade-off so far is a miserable 1.25 per cent off the underlying rate of growth of earnings for an unemployment increase approaching 600,000, some 2–3 per cent off the underlying rate of inflation for a 3 per cent drop in GDP and a 7 per cent fall in manufacturing output. The question is clear: why is it that in the UK we seem to have to pay such a high price in terms of lost output and higher unemployment to make only modest progress on reducing wage and price inflation? One possible answer is in terms of the NAIRU; another stems from the way in which we measure retail price inflation. Using the example of the car industry as a backdrop, we examine the relationship between unemployment and inflation and ask whether there is a role for government to play in improving the trade-off. Our conclusion is that the present non-interventionist stance is probably appropriate but that the government should be doing more to educate both sides of the wage bargain - a challenge picked up by the Prime Minister in his recent speech to the CBI. This is especially appropriate at the present time, because price inflation is falling but wage inflation is lagging behind. It is not a cut in real wages that is required but an equi-proportionate deceleration in both wages and prices. By joining the ERM, we will ultimately obtain German rates of inflation; low wage settlements would both shorten the time-scale and reduce the unemployment cost of convergence.     

The London Business School Gower Publishing

The worldwide monetary tightening, which was necessary to contain the inflationary effects of last year's cyclical upturn, is close to having run its course. The boom is giving way to a period of slower but more sustainable growth, while the distribution and structure of demand has turned out to be more favourable than could have been anticipated. The US economy has successfully slowed (but recession seems unlikely), whilst Japan and Europe are still expanding rapidly. The world economy thus continues to grow at a rate of around 2.75 per cent, allowing modest reductions in international current account imbalances. The impact of interest rates has been felt mainly by consumers and in the housing market, and has had only a limited effect on investment and trade. So demand has been reduced but not at the expense of a capacity expansion which will, through productivity gains, dampen inflationary pressures. We expect world inflation to fall slowly front a little above 4 per cent currently to around 3 per cent by 1992. This is above the declared objectives of policy makers but is as close to the hoped-for soft landing as may be achievable.     

The London Business School with Gower Publishing

Last year saw the most coordinated cyclical upturn in the world economy since the early I970s, with OECD output rising 4per cent, industrial production and world trade even more rapidly. The boom in demand, which followed five years of continuous expansion, has outstripped supply and prices have begun to accelerate. To tackle inflation, the G7 monetary authorities have tightened policy over the last year, reversing the short-lived drop in interest rates necessitated by the stock market crash. This tightening may have to go further, especially in Germany and Japan where the effects of a rising oil price and higher indirect taxes are being exacerbated by currency depreciation. Although the rise in interest rates came too late to stop inflation rising, it has beet pursued with sufficient vigour to prevent inflation from seriously breaching the 5 per cent level. It is on these grounds that we forecast a relatively soft lending for the world economy on output, with growth continuing at 2.5–3per cent, accompanied by a limited reduction in inflation which stays in the 4–5per cent range. Progress on current account balances is also likely to be sluggish: in the absence of a serious attack on the budget deficit, the US deficit is likely to stay in the region of $140bn a year.     

Forecast Summary

The outlook is conditioned by our assumption that sterling enters the ERM, probably in the autumn, at a central DM parity not very different from the current rate and that this exchange rate is held over the medium term. Fiscal and monetary policy have to be made consistent with a stable pound, which rules out tax cuts and restricts the fall in base rates to 12 per cent. The benefits of the ERM are to be seen in a reduction in the underlying rate of inflation to below 5 per cent by 1992. But ERM participation is not costless. The downside is four years of output growth averaging below 2 per cent and higher unemployment. The ERM offers the possibility of low inflation and steady growth in the second half of the 1990s: it is not a 'quick fix' for the current problems facing the UK economy.     

Strategy,Valuation, and Forecast Accuracy: Evidence from Italian Strategic Plan Disclosures

Using a sample of 264 strategic plan presentations by Milan Stock Exchange firms during 2001–2012, we present evidence of both a security price reaction and an increase in the accuracy of analysts’ earnings forecasts pursuant to plan disclosure. In the cross-section, the information content of the plan disclosures and the accuracy increase are incrementally associated with the extent of forward-looking narrative disclosures in the plan, after controlling for other disclosures within and outside the plan presentation and the fact that the firm has self-selected into the sample. Both quantitative and qualitative narrative disclosures are informative to investors and analysts. The results are driven by narrative disclosures about company strategy and action plans rather than about the business environment in which the company operates. Our study informs the current debate on the use of voluntary comprehensive, integrated, long-run-oriented strategic plan disclosure as a potential complement for disclosures such as quarterly earnings forecasts that have been described as an example of ‘short-termism’.     

The London Business School with Gower Publishing

With the benefit of hindsight, we can see that the course of the world economy in 1988 was a product not so much of the stock market crash of October 1987 but of the reaction to the crash. Monetary policy and to a lesser extent fiscal policy were eased and consumer spending responded to cuts in interest rates and rising real incomes. With the world recovery in its sixth year, capacity pressures began to emerge and investment also boomed, helped by a lower cost of capital. As a result of this strong private sector demand, OECD output increased 4 per cent in 1988 as a whole and industrial production and world trade rose even more rapidly. Against the background of buoyant demand and output, inflationary fears have resurfaced. Since the spring monetary authorities in most countries have been tightening policy, raising interest rates by early 1989 above the levels which helped bring about the stock market crash. Their aim is to effect a slowdown in demand before a significant upward movement in inflation and inflationary expectations takes hold. In our judgement the present policy stance will achieve its aim of a "soft landing" for the world economy. The pick-up in world inflation is contained below 5 per cent and by the second half of this year inflation eases, paving the way for a relaxation of monetary policy. Output growth slows from 4 per cent to 3 percent in 1989 and 2 per cent in 1990, picking up again as interest rates are lowered in 1991–2.     

The London Business School with Gower Publishing

The world economy is just starting to emerge from the second trough of a "W-shaped" recession. Compared with the experience after the first oil shock, when industrial production fell by 12 per cent, bringing inflation quickly down from 14 per cent into single figures. the 1980 world recession was mild. Between the first and third quarters industrial output fell 5 per cent; it recovered in the fourth quarter and inflation stopped falling. As a result governments - and this is especially true of the United States - look "another bite at the cherry": monetary policy was tightened and interest rates rose. The effect over the last six months has been to produce a second dip in output. The renewed attack on inflation has, however, been successful and inflation is now well in single figures and falling. Consequently a general easing of policy is evident and a recovery of output in the second half of 1982 and into 1983 remains our forecast.     

WORLD OUTLOOK

World output, which was strengthening immediately prior to last October, appears to have barely suffered in the short term from the stock market crash. Apart from an early reaction by US consumers - since reversed - demand is proving robust and in early 1988 OECD industrial production is, we estimate, 6 per cent up on year-earlier levels, with GNP more than 4 per cent higher. Indeed such is the strength of activity that the present balance of risk is not that recession is imminent but that inflation may pick up again. In the United States, where activity rates are at their highest level for eight years and unemployment is at a fourteen-year low, monetary policy has been tightened and interest rates are moving higher. The Bundesbank is keen to follow suit and the BoJ is keeping the situation under review. Nevertheless, with wages in most countries still adjusting to the low inflation rates of the last two years, there is little evidence yet that prices are accelerating.
We expect to see world interest rates edging higher in the second half of the year as recorded inflation picks lip. But we believe that underlying inflation remains low and that, even on the assumption that oil prices return to 18 a barrel, OECD consumer price inflation will peak early next year at a little over 4 per cent. Tighter monetary policy is also expected to hold back demand over the next 12 months. Consequently, we expect some weak- ness in output in the first half of next year but discount the possibility of a severe recession. GNP growth in the OECD area is forecast to decline from the 3 per cent rate of 1987–8 to a little over 2 per cent next year and to a sustainable 2½ per cent p.a. over the medium term.     

Forecast Summary

A pause in world activity held back UK industry in the first quarter of the year and, even though we expect faster growth from now on, we forecast total output growth of only 2 per cent this year. But next year a stronger world economy and pre-election tax cuts lift growth to 3 1/4per cent. Lower oil prices and falling interest rates help keep inflation at its current level both this year and, as long as wages respond, next. In the medium term we expect the growth rate to fall back but, assuming that a fairly tight fiscal policy is pursued by whichever government is in power, we predict that inflation stays below 3 per cent     

The London Business School with Gower Publishing

The Budget embodies many of the recommendations that we have put forward over the last year -on personal savings and the appropriate stance of macroeconomic policy - but a void remains on the key issue of ERM entry. With inflation set to rise above 9 per cent in the short term, there is a danger that an inflation l sterling depreciation cycle becomes entrenched. In fiscal terms, the Budget was broadly neutral and the Chancellor con- firmed that the strategy is to rely on high interest rates to support the exchange rate and tame inflation. This year, with base rates of 15 per cent, we expect the pound to remain reasonably stable but in 1991-2, as interest rates fall -which they are bound to ahead of the election -the pound could well come under pressure, so putting the government's inflation objectives at risk. ERM entry would provide the obvious support and is consistent with the Treasury forecast. Without it, inflation is unlikely to fall below 5 per cent next year.     

Forecast Summary

Backed by the lowest interest rates in fifteen years and a competitive exchange rate, we see the economy moving off the corrugated bottom of last year and recovery gathering pace as this year progresses. We expect output to rise 1.4 per cent this year, 0.5 per cent more than we forecast in October when we were expecting a far more cautious approach on interest rates, and 3 per cent in 1994. Here we have factored in another 1 per cent cut in base rates to coincide with the Budget on 16 March but this may prove to be the floor, especially if, as is rumoured, the Prime Minister has vetoed tax increases in the Budget for fear of derailing a fragile recovery. By the end of the year, however, we expect the trend in interest rates to be upwards to halt a sliding exchange rate and to cap the devaluation-induced price increases that will be feeding into domestic prices by then. On this basis we believe that inflation can be contained at 4 per cent underlying this year, 5 per cent in 1994 - outside the Chancellor's target range. While we are more sanguine than before on the outlook for output and inflation, major problems remain on the PSBR and the balance of payments. Beginning in the December Budget, the Government will have to raise taxes to avoid a debt spiral on the budget deficit and channel resources into net exports. Even on the basis of a £4bn tax hike in the first of the unified Budgets, we expect the PSBR to run along close to £50bn and the current account deficit in the £15bn-20bn range.     

What Is ‘Just and Reasonable’ in Rent Control?Why Historic Cost Is More Rational Than Current Value

A bstract . Rent control legislation must allow landlords to earn a "just and reasonable return" on their property. If the law prevents a landlord from attaining such a result he is entitled to seek relief by administrative or judicial process. The customary measure of 'just and reasonable return' is the current interest rate applied to current, fair market value. During a period of inflation such a calculation results in too high a measure. Because both interest rates and the value of tangible property rise together, rentals must increase at twice the inflation rate to meet the standard. Recent legal opinions evidence no appreciation or awareness of this. Furthermore, in a rent-controlled situation it is impossible to establish a valid current market value for a property. Both difficulties are overcome if a 'just and reasonable return' is based on historic cost rather than current market value. Arguments in favor of historic cost are made employing capital market analysis and classical rent theory.