Effects of model specification on tests for unit roots in macroeconomic data

Tests for unit roots in autoregressive models (tests for stationarity) are popular in the macroeconomics literature. Monte Carlo experiments in Schwert (1987) show that unit root tests derived for pure autoregressive processes have different sampling distributions when the true process is a mixed autoregressive-integrated moving average (ARIMA) process. Tests suggested by Said and Dickey, 1984, Said and Dickey, 1985, Phillips (1987), Phillips and Perron (1986), and Dickey and Fuller, 1979, Dickey and Fuller, 1981 are applied to a variety of monthly and quarterly macroeconomic time series to illustrate the effects of ARIMA model specification on inferences about stationarity.     

Corporate tax avoidance: data truncation and loss firms

Loss firms are an economically significant and growing segment of the population of publicly traded corporations. Relatively little is known about the tax positions of loss firms because the firms are typically dropped from tax avoidance studies. We develop a new measure of corporate cash tax avoidance that is meaningful for all observations and reflects the extent to which a firm is tax-favored. We examine the extent to which inferences about corporate tax avoidance over the past twenty-seven years change when we examine the full population of firms, as opposed to a profitable and/or taxable subsample. In contrast to prior research findings, our results suggest that on average firms are tax-disfavored, by which we mean cash taxes paid exceed the product of the firm’s pre-tax book income and the statutory tax rate. In addition, many industries that appear to be tax-favored in profitable subsamples are tax-disfavored when the entire population is examined. We also find that the extent to which firms are tax-disfavored is increasing over time, and that domestic firms are more tax-disfavored than multinationals.     

Auditors' perception of management: Determinants and consequences

An experiment was conducted to examine the determinants and consequences of auditors' perceptions of management. Based on the theory of correspondent inference (Jones & Davis, 1965), the following hypotheses were formulated: (1) auditors are most likely to make a dispositional inference about management when a transaction deviates from expectations and is made under conditions of high choice; (2) auditors are more likely to make a dispositional inference about the management of a new client than that of a continuing client; and (3) dispositional inferences about management will affect auditors' subsequent judgments. The results support the first hypothesis. Contrary to the second hypothesis, subjects' dispositional inferences about management did not differ significantly between the continuing client and the new client conditions. Finally, the materiality threshold of auditors was found to be significantly associated with their inferences about management.     

Measurement and the Australian Conceptual Framework

The nature of accounting dictates that it be concerned with the process of "measurement". However, only in recent decades has debate about the concept of measurement appeared in accounting literature. This article identifies problem areas and pitfalls that need to be addressed, and contributes to the debate about measurement. It examines the importance of "measurement" to accounting, definitions of the term and what measurement involves. This leads to the consideration of statements and inferences that can be made about the outputs of the measurement process, and to proposed guidelines for the development and assessment of a conceptual framework document.     

Can the academic literature contribute to the debate over mandatory audit firm rotation?

Recently, the Public Company Accounting Oversight Board (PCAOB) issued a concept release soliciting public recommendations to improve auditor independence and audit quality (PCAOB, 2011). The focus of the release is on mandatory audit firm rotation (MAFR) with a request for commentaries addressing the advantages and disadvantages of MAFR. In this paper, we briefly summarize the recent literature on mandatory audit firm rotation and suggest how it can be useful to regulators as they consider the implementation of mandatory rotation. We find that the conclusions reached about the possible effectiveness of MAFR appear to depend on the type of data used (voluntary vs. mandatory auditor changes), suggesting that regulators should exercise care when drawing inferences from past audit firm rotation research.     

Are Trade Size‐Based Inferences About Traders Reliable? Evidence from Institutional Earnings‐Related Trading

The use of observed transaction sizes to differentiate between “small” and “large” investor trading patterns is widespread. A significant concern in such studies is spurious effects attributable to misclassification of transactions, particularly those originating from large investors. Such effects can arise unintentionally, strategically, or endogenously. We examine comprehensive records of a sample of institutional investors (i.e., “large” traders), including their order sizes and overall position changes, to assess the degree to which such misclassifications give rise to spurious inferences about “small” and “large” investor trading activities. Our analysis shows that these institutions are heavily involved in small transaction activity. It also shows that they increase their order sizes substantially in announcement periods relative to nonannouncement periods, presumably as an endogenous response to earnings news. In the immediate earnings announcement period, transaction size‐based inferences about directional trading are quite misleading—producing spurious “small trader” effects and, more surprisingly, erroneous inferences about “large trader” activity.     

On the exclusion of assets from tests of the two-parameter model: A sensitivity analysis

This study investigates the sensitivity of tests of the CAPM to different sets of asset returns. Tests are conducted with market portfolios that include returns for bonds, real estate, and consumer durables in addition to common stocks. Even when stocks represent only 10% of the portfolio's value, inferences about the CAPM are virtually identical to those obtained with a stocks-only portfolio. In contrast, inferences are sensitive to the set of assets used in the tests.     

The future of deforestation in the Brazilian Amazon

Concern about the future of Amazonian forests is growing as both the extent and rate of primary forest destruction increase. We combine spatial information on various biophysical, demographic and infrastructural factors in the Brazilian Amazon with satellite data on deforestation to evaluate the relative importance of each factor to deforestation in the region. We assess the sensitivity of results to alternative sampling methodologies, and compare our results to those of previous empirical studies of Amazonian deforestation. Our findings, in concert with those of previous studies, send a clear message to planners: both paved and unpaved roads are key drivers of the deforestation process. Proximity to previous clearings, high population densities, low annual rainfall, and long dry seasons also increase the likelihood that a site will be deforested; however, roads are consistently important and are the factors most amenable to policymaking. We argue that there is ample evidence to justify a fundamental change in current Amazonian development priorities if additional large-scale losses of forests and environmental services are to be avoided.     

Financial statement recasting and credit risk assessment

This article examines the importance of adjustments to corporate financial statements for credit risk assessment. Prior research has tended to examine individual adjustments one at a time. As correlations among adjustments and control variables may bias inferences when researchers examine a single adjustment and ignore other adjustments, our results provide important new information about previous research by documenting whether or not such bias exists. We find that financial statement recasting adjustments – which aim to better reflect firms' indebtedness, financing costs and recurring earnings than reported financial numbers – are reflected in bond yield spreads and have an economically significant impact on credit pricing and loss forecasting. Among individual adjustment categories, we find that those for off‐balance‐sheet leases, defined benefit pensions and securitized debt have an economically significant impact on credit pricing and loss forecasting.     

INDIVIDUAL EQUITY RETURN DATA FROM THOMSON DATASTREAM: HANDLE WITH CARE!

We compare individual U.S. equity return data from Thomson Datastream (TDS) with similar data from the Center for Research in Security Prices (CRSP) to evaluate TDS for use in studies involving large numbers of individual equities in markets outside the United States. We document important issues of coverage, classification, and data integrity and find that naive use of TDS data can have a large impact on economic inferences. We show that after careful screening of the TDS data, inferences drawn from TDS data are similar to those drawn from CRSP. We illustrate the importance of the screens we develop using U.S. TDS data by applying the screens to TDS data from four European equity markets.     

Use of Forecasts of Earnings to Estimate and Compare Cost of Capital Across Regimes

Abstract:   I critically examine several of the methods used in the recent literature to estimate and compare the cost of capital across different accounting/regulatory regimes. I focus on the central importance of expectations of growth beyond the short period for which forecasts of future pay‐offs (dividends and/or earnings) are available. I illustrate, using the stocks that comprised the Dow Jones Industrial Average (DJIA) at December 31, 2004, as an example, the differences between the growth rates implied by the data, and growth rates that are often assumed in the literature. My analyses show that assumptions about growth beyond the (short) forecast horizon may seriously affect the estimates of the expected rate of return and may lead to spurious inferences.     

Taxing audit markets and reputation: An examination of the U.S. tax shelter controversy

From 2002 to 2007, the nation's largest CPA firms faced allegations of illegal activity related to the sale of tax shelters: EY, KPMG and PwC paid fines; KPMG was investigated by a federal grand jury; and EY faced a criminal inquiry. These shelter events occurred shortly after the 2002 collapse of Arthur Andersen, when policy makers were concerned about audit market concentration. This is the first paper to provide a chronological summary of how the tax shelter controversy started and ended. We investigate the stock market reaction to tax shelter news developments between 2003 and 2005 to make inferences about the market's view of audit competition and CPA firm reputation. Our results are consistent with market concern over large audit firm concentration, evidenced by large negative returns for clients of all audit providers upon the KPMG grand jury investigation announcement. We also find that tax shelter activities impact both the reputation of the accounting profession and the individual CPA firms marketing tax shelter products.     

Tests of rationality,neutrality and market efficiency: A Monte Carlo analysis of alternative test statistics

This paper examines the small sample properties of three testing strategies used to analyze the rationality, monetary neutrality and market efficiency hypotheses. We focus on the original ‘two-step’ Barro test of the MRE hypothesis formed entirely from OLS results, a test that employs the correct variance-covariance formulae for these ‘two-step’ estimates, and Mishkin's FIMLE testing framework. Each test is examined under likely model respecifications. The findings highlight the extensive bias incurred by drawing inferences from simple unadjusted ‘two-step’ estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses.     

The choice of stratification points

Abstract

Extract

The importance of the problem of the optimum choice of stratification points, when conducting stratified sampling on a univariate population, has been pointed out by Dalenius (1950, 1957) In a simplified form, this problem may be given the following mathematical formulation.     

The Perceived Importance of an Ethical Issue as a Determinant of Ethical Decision-making for Accounting Students in an Academic Setting

In this study, we investigate the impact of an ethical decision-making construct, the ‘perceived importance of an ethical issue’ (PIE) for accounting students in an academic setting. One objective was to test the measure of this construct for generalizability in gauging ethical decision- making. The other objective was to draw inferences on the PIE construct for pedagogical purposes. Using tests of validity, the measure reasonably captured the ‘perceived importance of an ethical issue’ construct. In addition, the PIE construct was significantly related to both ethical judgment and behavioural intention. Implications for accounting educators and ethics training in business are discussed.     

A family view of population questions

To relate family situations to the population problem, viewing family decisions as one of the ultimate determinants of how many people there are on the globe and how rapidly the total population will increase, is proposed as a way of viewing the population problem of the world. Population problems of the developed countries with a growth rate of 1% or less per annum are different from those of the countries with a high growth rate and which have about 45-50% of the population below age 15. This group of young people, plus older people who no longer contribute to productive activity, form the dependency burden on a country. Some sociological and economic variables that affect family size decisions are discussed, and the importance of really understanding these variables in order to formulate better population policies is stressed.     

The Lead–Lag Relationship Between Stock Indices and Stock Index Futures Contracts: Further Australian Evidence

This article examines the lead-lag relationship in returns on stock index futures and the underlying stock index for the Australian market between 1992 and 1997. On average across the sample period, futures returns lead index returns by twenty to twenty-five minutes and there is some evidence of feedback from the equities market to the futures market. Analysis conducted on a year-by-year basis suggests that the extent to which the futures market leads the equities market has decreased over time and the relationship between the two markets has generally strengthened. This is consistent with an increase in the level of integration between the markets. The results suggest that prior research that compares lead-lag relationships across international markets and time periods in drawing inferences on the effects of market structure needs to be interpreted with caution.     

Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares

The test developed in Mishkin [1983] (hereafter, MT) is widely used to test the rational pricing of accounting numbers. However, contrary to the perception in the accounting literature, the exclusion of variables from the MT's forecasting and pricing equations leads to an omitted variables problem that affects inferences about the rational pricing of accounting variables. Only if the omitted variables are rationally priced is their exclusion irrelevant. Failure to recognize this issue leads accounting researchers to employ the MT without appreciating how omitted variables affect the inferences they draw. We demonstrate that when additional explanatory variables are included in the MT, the rational pricing of accruals is not rejected. That is, the accrual anomaly documented in Sloan [1996] vanishes when additional explanatory variables are incorporated into the MT. We also show that in accounting research settings, where samples are large, ordinary least squares (OLS) is equivalent to the MT. As a result, accounting researchers should consider using OLS or be more explicit about the exact advantages of the MT over OLS in their research setting.     

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm‐specific and market‐wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market‐wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research.