On Accounting-Based Valuation Formulae*

This paper considers accounting-based valuation formulae. Its initial focus is on two problems related to residual income valuation (RIV). First, insofar valuation depends on theresent value of expected dividends per share, applying RIV requires clean surplus accounting on a per share basis. Awkwardly, equity transactions that change the number of shares outstanding generally imply eps ≠ Δ bvps − dps. A clean surplus equality holds only if one “re-conceptualizes” either end-of-period bvps or eps as a forced “plug”. Second, one cannot circumvent the per share issue by evaluating RIV on a total dollar value basis unless one introduces relatively subtle MM-type restrictions. In light of RIV’s unsatisfactory aspects, the paper proposes an alternative to RIV. This new approach maintains a strict eps-focus. It derives by replacing bvps _t in RIV with eps _{t +1} capitalized (i.e. divided by r). One obtains a formula such that the current market price equals next-period expected earnings capitalized plus the present value of expected abnormal earnings growth, referred to as AEG. A number of propositions then demonstrate the advantages of the AEG approach as compared to RIV. These results follow because eps _t+1 capitalized generally approximates market price better than bvps _t .*An earlier version of this paper was titled “Residual Income Valuation The Problems”.This revised version was published online in August 2005 with a corrected cover date.     

A writing intervention for the accounting classroom: dealing with the problem of faulty modifiers

Good communication skills continue to be viewed as critical for success in accounting. This paper demonstrates a writing-skills “intervention” that deals with faulty modifiers, a grammatical problem that can inhibit accounting students and professionals from achieving the clarity and conciseness widely regarded as essential in the accounting profession. The intervention consists of a handout distributed to students – fashioned to sensitize them to the pervasiveness of faulty modifiers and help them avoid the problem – and an in-class discussion of the handout. By design, this intervention is both inexpensive and unobtrusive. For the accounting instructor, we provide in the body of the paper a technical, but unpedantic and informal, analysis of faulty modifiers, including numerous examples of the problem, accompanied by alternative corrections. To date, few papers in the accounting education literature that deal with writing problems present direct assessment evidence. To assess the efficacy and perceived value of our learning intervention, we collected assessment data – both direct (i.e., a set of three diagnostic tests) and indirect (i.e., feedback from a student questionnaire) from two institutions at which our learning intervention was tested. These data suggest than an intervention of the sort described here can be valuable in remedying discrete weaknesses of student writing. In a larger sense, we believe our paper can be used as a model for the development of similar “interventions” that cover other grammatical problems, and that can serve either as stand-alone entities (similar to the method proposed by Reinstein and Houston (2004) [Using the Securities and Exchange Commission’s “plain English” guidelines to improve accounting students’ writing skills. Journal of Accounting Education, 22, 53–67]) or as complementary resources to more comprehensive and formal writing programs.     

The pattern of PPB rejection: Something about organizations, something about PPB

“Pathology” is defined in Webster's dictionary as “… the study of the essential nature of diseases and especially of the structural and functional changes produced by them”. Thus, a pathological study can reveal information concerning both a disease or toxin and the organism to which it is introduced.Planning, programming and budgeting (PPB) was introduced in not-for-profit organizations in order to improve organizational planning and control. It failed. The purpose of this paper is to conduct a study in pathology concerning PPB and the not-for-profit organization. PPB is considered to be the toxin. The not-for-profit organization is considered to be the organism. The scalpels employed in conducting the examination were forged in the organizational, planning and control, and general systems theory literatures.     

Syndicated Loans

This paper analyzes the market for syndicated loans, a hybrid of private and public debt, which has grown at well over a 20% rate annually over the past decade and which totaled over $1 trillion in 1997. We identify empirically the factors that influence a bank or nonbank's decision to syndicate a loan and the determinants of the proportion of the loan sold in the event of syndication. The evidence reveals a loan is more likely to be syndicated as information about the borrower becomes more transparent, as the syndicate's managing agent becomes more “reputable”, and as the loan's maturity increases. The lead manager holds larger proportions of information-problematic loans in its own portfolio. Loan syndications, like loan sales, appear to be motivated, in part, by capital regulations, and the liquidity position of the agent bank influences the likelihood of syndication, but not the extent. Our results confirm that information and agency problems affect the salability of debt claims and the extent to which a loan is “transaction oriented” rather than “relationship oriented” in the sense of A. Boot and A. Thakor (2000, J. Finance54, 679–713). Journal of Economic Literature Classification Numbers: D82, G20, G21, G24.     

Who herds?

This paper develops a test for herding in forecasts by professional financial analysts that is robust to (a) correlated information amongst analysts; (b) common unforecasted industry-wide earnings shocks; (c) information arrival over the forecasting cycle; (d) the possibility that the earnings that analysts forecast differ from what the econometrician observes; and (e) systematic optimism or pessimism among analysts. We find that forecasts are biased, but that analysts do not herd. Instead, analysts “anti-herd”: Analysts systematically issue biased contrarian forecasts that overshoot the publicly-available consensus forecast in the direction of their private information.     

The external organizational environment and its impact on management information systems

It is argued in this paper that organizations are “living purposeful” or “adaptively rational” systems whose survival depends on their ability to interact successfully, on a continual basis, with the surrounding environment. Three states of the external organizational environment — controllable, partially controllable and uncontrollable — are identified, and the information characteristics of each state are discussed. The approaches that organizations can adopt to collect information on the environment are also discussed; these approaches use externally-based data sources and modeling and/or analytic techniques. On these bases, we consider effective strategies and methodologies which organizations can adopt for processing, evaluating and communicating information about the external environment to satisfy decision-making requirements.     

tay's as good as cay: Reply

In a recent comment on our published work [Lettau, M., Ludvigson, S., 2001. Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56, 815–850], Michael Brennan and Yihong Xia [2005. tay's as good as cay. Finance Research Letters 2, 1–14] advance the following argument: A “mechanistic” variable tay, where t is a linear time trend, forecasts stock returns. Since “t has no foresight,” the argument goes, the predictive power of this variable must be attributable to what they call “look-ahead bias.” The authors assert that cay is subject to the same look-ahead bias (generated because we use the full sample to estimate the cointegrating parameters in cay), implying that its forecasting power must be spurious. In this response, we explain why this critique is misplaced.     

Price clustering in foreign exchange spot markets

This paper documents the existence of price clustering in the foreign exchange spot market for the German mark, the Japanese yen, the United Kingdom pound, the French franc, the Italian lira, and the Swedish krona. The U.S. dollar exchange rate indicative quotes for these currencies tend to exhibit clustering around right-most digits that end in either a “zero” or a “five.” The tendency for exchange rates to cluster has increased with increases in trading volume and volatility. Moreover, the tendency for exchange rates to cluster differs across currencies.     

The accounting of “The Meeting”: Examining calculability within a “Fluid” local space

This study traces events in an empirical setting where a key local space, “The Meeting”, was made calculable. Building on field data from interviews and documentary sources at ABB Industry/Finland, the study theorizes in the interpretive genre, elaborating on the notion of the calculable space. It argues the following: Accounting can be extended into un-formalized and more elusive local spaces – into “fluid” spaces which are not clearly mapped within the organizational hierarchy, and which lie beyond recognized responsibility units or physically distinct cells at the factory floor. By opening visibility into the discretion of these “fluid” local spaces, a tighter alignment between programmatic ideals and real action at the organizational grass-root can be achieved. Self-devised non-financial measurement, mediating local tensions and the interests of “autonomous” actors, becomes the technology of government in this process of normalization – which is, however, not to be acknowledged as being unproblematic.     

Psychology, meaning and the challenges of longevity

Humankind has begun to reap one of the most valued harvests of its scientific and technological pursuits: a significant increase in human longevity. We now live longer than ever before, due in large part to advances in medicine and health care that provide those who have the opportunity to afford them a lifespan that for many approaches or exceeds the 100-year mark. It is now within the realm of possibility that people will live lives of 125 years or more within the next century. However, our ability to increase physical longevity may have outstripped our ability to deal individually and socially with these new lives, these new existences that go well beyond what has traditionally been considered a “working life”. How well-prepared are we psychologically to cope with the meaning of a life that extends to as much as 150 years or more? In this new “age of longevity”, what are the challenges for psychology as a resource for humanity in its quest to give definition to the experience of being alive, as well as for managing the affairs of everyday life? Traditional developmental theories in psychology tend to articulate early stages of life in detail, but are generally mute on the matter of later life. Cognitive psychology has been inclined to view longevity as leading to a deterioration of mental faculties due to “aging”. This paper examines the psychological implications of increased lifespans from an optimistic perspective by reviewing current developments in research on cognition, emotion and aging. The review identifies trends in psychology that, if emphasized and strengthened, may lead to improved theoretical frameworks that cast longevity in a positive light, and that identify how people can find meaning and fulfillment throughout their whole lifespan.

“Grow old along with me! The best is yet to be, The last of life for which the first was made.” Robert Browning “Rabbi Ben Ezra”

I first encountered Browning’s works as an undergraduate, and being a pre-engineering student at the time my tendencies toward poetry were stunted to say the best. Few of the great works of literature my teachers compelled me to read at that stage of my life and development made enough of an impact to last beyond the length of the course requiring their reading. Much has changed since then and my interests in literature and what literature has to say that is of value for our lives has deepened. But Browning’s enthusiastic call to join him in aging has always been a fascination. Indeed, what could be more of a contradiction to modern attitudes about becoming elderly than to claim “the best is yet to be”? What can be more of a challenge to how we approach the relationship between being young and being old than to claim that the last of life is “for which the first was meant”? What can the possible rewards of the golden years be that transcend the glorious enthusiasms, unfettered optimisms, and just pure physical conveniences of being young? Or, was Browning simply trying to sucker us all into a fait accompli, the hopeful outcome of which is the envy of the very youth that the aged often envy so much?There is little enough envy of the aged today. I approach these years with great caution, recognizing that how I look upon those who are two decades older than myself will, in turn, condition me to see myself in those years much in the way that I see them now. “Aging” is not something anyone really wants to do. We want to, at best, “grow older”, a perspective that carries with it a more positive spin: growing wiser, growing up, or simply “growing” with all of its new-age connotations of personal enlightenment and becoming. I am not “aging”, I am “becoming at one”.The language we have adopted to talk about the time-course of life, and particularly about the years in the latter third of that course, does much to frame both how we live those years and how we anticipate them in our youth. Our expectations are ones of decline, physical debilitation and mental infirmity. We “retire”, as in withdrawal into seclusion, away from the mainstream of life and into the backwater eddy of inaction. On the shelf.Much of this view has been reinforced by how humanity has approached examining this aspect of its own time course through science. We study aging with an eye to how its effects influence the abilities of those so afflicted to perform or operate compared to those who still have a grasp on their full faculties. And, of course, we find that as people grow older, they do not approach life in the same way as do younger people.Part of our view on life comes from the very way in which science is funded: those interested in the last of life often receive their support from the National Institute on Aging, not the National Institute on The Last of Life for Which the First Was Made. Research agendas often focus on identifying sources of infirmity and potential prostheses, either physical or social, that can ease the lives of the elderly on their way toward achieving the goal of successful aging. All too often, success in aging means imposing relatively few demands on social resources or on the lives of younger people, such as family members. In our “ageist” society, elderliness is not generally equated with status and stature. Less and less, the young “listen” to the old out of deep interest in their lives and their experiences. Wisdom is the providence of the freshly matured and recently educated.The shortcomings of life in the advancing years are many and well-documented in the research literature. Memory spans decrease, information retrieval becomes less reliable, and new information is less readily assimilated. As people become older, they appear to rely more and more on automatic processing of information, quick associations and the like, rather than deliberative and conscious reasoning [1]. For the older mind, intuition is at least moderately preferred over analysis. For example, younger people tend to interpret stories analytically, focusing on details, while older people tend to focus less on a story’s details and more on its “gist” and its underlying significance to things that are important to them [2], and tend to do better at grasping and dealing with information in terms of its holistic meaning [3 and 4].The effects of these differences in information processing between young and old can be seen in practical matters of everyday life, such as decision making and judgment. Johnson [5], for example, found that older adults use simplifying decision strategies more often than younger adults. These strategies, such as noncompensatory rules that consider only the positive or the negative aspects of a decision option but not both, relieve one of the psychological burden of making complex and effortful tradeoffs, at the possible expense of efficiency and accuracy. Chasseigne et al. [6] found that as people age, they become less consistent in their use of information in making judgments and predictions; even reducing the overall information load and demands on memory does little to improve the reliability of their judgments. ¹     

Professional accounting development in Nigeria: threats from the inside and outside

Over the years several, sometimes conflicting, theories attempting to explain the development of professions have emerged. The “functionalist” and “interactionist” theories have since lost the spotlight to a more critical approach based on the Weberian concept of closure. Limitations in the concept and practice of this neo-Weberain concept have led to suggestions that research into the sociology of professions, should also include historical analyses of professionalism that capture historical specificities with the aim of generating theory that sees beyond “just massive historical variation” [Collins, R. (1990). Changing conceptions in the sociology of the profession. In R. Torstendahl, & M. Burrage, The formation of professions: Knowledge, state and strategy. London: Sage Publications]. Such research should also investigate the structural conditions under which the professionalisation process takes place [Johnson, T. (1977). The profession in the class structure. In R. Scase, Industrial society: Class, cleavage and control. London: George Allen and Unwin.]. In order to achieve this, there is the need to critically study the relationship of the State and the profession [Klegon, D. (1978). The sociology of professions: an emerging perspective. Sociology of Work and Occupations, 5, 3, 259–283.] and to document more extensively, the process, rather than the product, of closure [Chua, W. F., & Paullaos, C. (1993). Rethinking the profession-state dynamic: the case of the Victorian Charter Attempt, 1885–1906, Accounting, Organizations and Society, pp. 128–691; Chua, W. F., & Paullaos, C. (1998). The dynamics of “closure” amidst the construction of market, profession, empire and nationhood: an historical analysis of an Australian Accounting Association. Accounting, Organizations and Society, 23 (2), 155–187; Ramirez, C. (2001). Understanding social closure in its cultural context: accounting practitioners in France (1920–1939), Accounting, Organizations and Society.]. Such is the approach of this article, which focuses on the development of the accounting professions in Nigeria. It critically examines the profession/ State dynamics that have helped shape the outcome of the various episodes in the history of the accounting profession in Nigeria. An important influence in this dynamics is the nature of government in place (i.e. military or civilian).     

The average hospital

In 1998, the UK government introduced the National Reference Costing Exercise (NRCE) to benchmark hospital costs. Benchmarking is usually associated with “excellence”; the government emphasised the raising of standards in the 1997 White Paper “The New NHS: Modern, Dependable” that heralded the NRCE. This paper argues that the UK “New Labour” government's introduction of, and increasing reliance on, hospital cost benchmarking is promoting “averageness”. Average hospitals will be cheaper to run and easier to control than highly differentiated ones; they may also score more highly on certain measures of service improvement. The paper aims, through empirical investigation, both to demonstrate how the activities and processes of hospital life “become average” as they are transformed to comply with the cost accounting average and to indicate how the “average” is being promoted as the norm for hospitals to aspire to. To benchmark to average costs, comparisons are necessary. To compare hospital costs involves the creation of categories and classification systems for clinical activities. Empirical evidence shows that as doctors, patients and clinical practices are moulded into costed categories, they become more standardized, more commensurate and the average hospital is created.     

The illusion of managerial control

The design and implementation of organizational control systems based on a cybernetic model stand in need of revision. The revision is required by increasing numbers of reports of system ineffectiveness and, in some cases, failure. The paper suggests that a major reason for current difficulties resides in the “illusion of control” implied by theory and implemented in practice. An alternative definition of organizational control based in the concept of “multirationality” is proposed.     

An “American Dream” theory of corporate executive Fraud

In this paper, we first describe a “Broken Trust” theory that was introduced by Albrecht el al. [Albrecht, W. S., Albrecht, C. C., & Albrecht, C. O. (2004). Fraud and corporate executives: Agency, Stewardship and Broken Trust. Journal of Forensic Accounting, 5, 109–130] to explain corporate executive Fraud. The Broken Trust theory is primarily based on an “Agency” theory from economic literature and a “Stewardship” theory from psychology literature. We next describe an “American Dream” theory from sociology literature to complement Albrecht el al.'s (2004) Broken Trust theory. Like the Broken Trust theory, the American Dream theory relates to a “Fraud Triangle” concept to explain corporate executive Fraud. Finally, we provide some anecdotal evidence from recent high profile corporate executive Fraud to explore the American Dream theory. We conclude our thoughts on corporate executive Fraud from a teaching perspective.     

On the role of sunk costs and asset specificity in outsourcing decisions: a research note

The accounting literature has argued that firms overengage in outsourcing because they tend to ignore the transaction costs involved in buying services from external suppliers. A field experiment with managers of health care organizations shows that decision makers are actually quite sensitive to the asset specificity associated with the “buy” option in an outsourcing decision. However, they also appear inappropriately sensitive to the sunk costs inherent in most real-life outsourcing decisions, and may actually underengage in outsourcing. Prior commitment to internal procurement systematically reduced the willingness to outsource, relative to a pure “make or buy” scenario.     

Accounting and prudential regulation: from uncomfortable bedfellows to perfect partners?

Recent initiatives to improve the public information about individual firms have brought to the fore significant differences in perspective between accountants and prudential regulators. We examine the reasons for these differences and propose ways in which they could be reconciled within a broader framework aimed at identifying the type of information conducive to the proper functioning and stability of the financial system. We argue that such information should concern three characteristics: estimates of current financial condition; estimates of risk profile; and measures of the uncertainty surrounding those estimates. So far, efforts have mainly focused on the first characteristic, with the second having drawn attention only recently and the third having been largely neglected. We propose a strategy to reconcile different perspectives based on two principles: first, in the long-term, the “decoupling” of the objective of accurate financial reporting by the firm from that of instilling the desired degree of prudence in its behaviour; second, a “parallel transition” process towards that objective so that at all points the prudential measures can neutralise any undesirable implications of changes in financial reporting standards on financial stability.     

Leveraged investor disclosures and concentrations of risk

We analyze a model where investors (e.g., hedge funds) need to borrow from lenders with heterogeneous risk-exposures and risk-management motives. Investors may obtain advantageous terms of borrowing by disclosing their investment strategy, thereby revealing its correlation to the lender's existing risk exposure. Investors risk being “front-run” by their lender if they disclose, however. We show that in the presence of front-running, the “unraveling” result of full disclosure may not hold. In addition, disclosure regulation results in a loss of welfare since investors compelled to disclose will mitigate front-running by choosing a lender with sufficiently high correlation, thus exacerbating concentrations of risk.     

The use of on-line summative assessment in an undergraduate financial accounting course

According to the Quality Assurance Agency [QAA (2006). Section 6: Assessment of students, Code of practice for the assurance of academic quality and standards in higher education. <http://www.qaa.ac.uk/>. Accessed 14.03.2007] “Assessment describes any processes that appraise an individual’s knowledge, understanding, abilities or skills” and is inextricably linked to a course or programme’s intended learning outcomes. Assessment also has a fundamental effect on students’ learning where it serves a variety of purposes including evaluation, feedback and motivation. Assessment also provides a performance indicator for both students and staff. Computer-aided assessment (CAA) offers an option for “sustainable assessment” and provides opportunities for creating innovative assessment practices that help engage students and increase their motivation for learning. This paper reports the findings of a qualitative study where a series of on-line summative assessments were introduced into a first-year financial accounting course. Feedback from students obtained from an evaluative survey and focus group interviews indicates that assessment played a significant role in the teaching/learning process. That is, students perceived a beneficial impact on learning, motivation, and engagement.     

Financial instruments with sports betting components: Marketing gimmick or a domain for behavioral finance?

We examine theoretically and experimentally a certain class of new financial instruments which are designed as lotteries on the outcome of prominent sports events like the Soccer World Cup 2006. From a theoretical point of view, sports betting products may be superior to a fixed rate investment because of heterogeneous expectations, risk-loving behavior of investors or additional non-monetary utility components. In comparison to the direct placement of bets at bookmakers’, sports betting products may be preferable in cases of hedonic framing. Our experimental section, however, reveals the limited practical relevance of these theoretical arguments for “average” decision makers. Despite this, financial instruments with sports betting components offer a certain profit potential due to the diversity of preferences across individuals. Summarizing, the issuance of sports betting products may actually be mainly driven by marketing aspects, nevertheless sports betting products may be considered to be “viable” niche products with low cost of capital for banks.