Prospect theory and trading patterns

Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves to underpin negative-feedback trading propensities, but cannot manifest itself in behavior directly or holistically at the individual-choice level. We then propose and demonstrate that the market interaction between prospect-theory investors and regular CRRA investors allows this preference component to dominate in equilibrium behavior and hence helps to reestablish the intuitive link between prospect-theory preferences and negative-feedback trading patterns. In the model, the interaction also reconciles the contrarian behavior of prospect-theory investors with asymmetric volatility and short-term return reversal. The results suggest that prospect-theory preferences can lead investors to behave endogenously as contrarian noise traders in the market interaction process.     

Private information and incentives: Implications for mortgage contract terms and pricing

We examine the linkage in equilibrium among (1) contract design; (2) expected prepayment and default likelihoods; and (3) the pricing of mortgage contracts by focusing upon the effects of the borrower's private information at the time of contracting. We examine the implications of these perspectives upon the empirical analysis of prepayment behavior and use the framework to examine the predominance of long-term mortgage contracts in the United States. We consider examples that explore the trade-offs between fixed and adjustable rate instruments, assumable and due-on-sale loans, and contract interest rates and initial discounts (points).     

Prospect theory and the risk-return paradox: some recent evidence

There is extensive evidence indicating a negative risk–return relation when a firm’s performance is measured based on accounting measures such as return on asset (ROA) and return on equity (ROE). Previous studies show that the risk-return paradox can be explained by the prospect theory, which predicts that managers’ risk attitudes are different for firms of different performances. However, those studies mostly use earlier data from the COMPUSTAT database, which suffers from a survivorship bias. Failure to account for delisting firms may understate the risk–return relation. We reexamine the mixture of risk-seeking and risk-averse behaviors based on an updated 20-year sample period that is free from the survivorship problem. Interestingly, our results show stronger and robust evidence supporting the prospect theory during the period from 1984 to 2003.     

The sociology of enterprise, accounting and budget rules: Implications for organizational theory

The sociology of organizations has ignored the evolution of and variation in enterprise rules, budget systems and accounting rules. This paper takes a broad approach to accounting rules, arguing that they are related to large variations in enterprise forms and in industry problems. The rule making and enforcement apparatus of modern society is described. Both external and internal aspects of accounting rules and budget systems are explored.     

The impact of tagging qualitative financial information on investor decision making: Implications for XBRL

This study extends prior research by investigating whether investors benefit from tagging complex narrative disclosures. We examine how tagging facilitates professional and nonprofessional investors' acquisition and assimilation of narrative disclosures in assessing company risk and predicting future performance. Participants were randomly assigned to a standard or tagged presentation of Management's Discussion and Analysis (MD&A), the U.S. equivalent to Management's Commentary. The two versions contain identical overall information. The standard version works similar to a PDF file where the user can access sections of the MD&A by selecting titled sections. The tagged version uses an extended hierarchical structure proposed for the MD&A and as a conceptual foundation for developing a related XBRL taxonomy. As theorized, results indicate that nonprofessional investors use a more directive search strategy under the tagged condition while professional investors' search strategies are unaffected by the tagged condition. Saliency of risk information increases for both investor groups in the tagged condition (i.e., risk assessments and stock price predictions are more associated). Our findings have important implications in light of the U.S. SEC's decision to preclude inclusion of XBRL-tagged MD&A information in mandatory filings due to taxonomy limitations.     

Prospect theory and the effectiveness of price limits

Assuming that traders are risk-neutral, Brennan (1986) shows that price limits are effective in improving the efficiency of futures contracts with limited accessibility to information because they obscure the exact loss when they are triggered. However, Brennan's (1986) model fails to explain why price limits also exist in contracts with abundant information like those of financial futures. We show that when traders are loss-averse, the effectiveness of price limits is strengthened even in the presence of precise information. Thus, our analysis provides a theoretical foundation explaining why price limits can be useful when market participants are not fully rational.     

Prospect theory,mental accounting,and momentum

The tendency of some investors to hold on to their losing stocks, driven by prospect theory and mental accounting, creates a spread between a stock's fundamental value and its equilibrium price, as well as price underreaction to information. Spread convergence, arising from the random evolution of fundamental values and the updating of reference prices, generates predictable equilibrium prices interpretable as possessing momentum. Empirically, a variable proxying for aggregate unrealized capital gains appears to be the key variable that generates the profitability of a momentum strategy. Controlling for this variable, past returns have no predictability for the cross-section of returns.     

Prospect theory,mitigation and adaptation to climate change

Prospect theory (PT) is a widely accepted theory for decisions under uncertainty. However, so far a systematic application to climate policy (CP) does not exist. One important postulation of PT is that outcomes are perceived as gains or losses, relative to the reference point. When it comes to CP, different decision-makers may have different reference points. For example, one decision-maker perceives the current climate as the reference point whereas another decision-maker may have another one, say climate in 100 years. For the former, climate damages are losses and the benefits of CP are reductions of losses. For the latter, benefits of CP are gains. PT suggests that the former places a higher value in CP than the latter. After a critical review whether and how PT may be applied to CP, the paper systematically presents this and other cases where PT offers new insights into climate-related analyses, notwithstanding the importance of well-known aspects such as discounting, altruism, political and economic costs. It is shown that accounting for PT may contribute to a better understanding of some well-known puzzles in the climate debate, including different preferences for CP amongst individuals and nations, the role of technical vs. financial adaptation, and the apparent preference for hard protection measures in coastal adaptation. Finally, concrete possibilities for empirical research on these effects are proposed.     

On the theory of market information efficiency

This paper discusses the concept of market information efficiency and demonstrates the following: As the number of traders who participate in the market becomes large, the variations in the price of a security caused by the variations in traders' beliefs make the market price vary as if traders all knew the ‘true’ distribution of returns on the security. The empirical implications of the analysis are also explored.     

Prospect theory,the disposition effect,and asset prices

We build a general equilibrium model to examine the implications of prospect theory for the disposition effect, asset prices, and trading volume. Diminishing sensitivity predicts a disposition effect, price momentum, a reduced return volatility, and a positive return-volume correlation. Loss aversion generally predicts the opposite. In calibrated economies, there is a nontrivial range of preference parameters for prospect theory to simultaneously explain the disposition effect, the momentum effect, and the equity premium puzzle. Our model is helpful for understanding a wide range of financial phenomena and it also suggests new testable predictions.     

Accounting information systems and learning theory: an integrated approach to teaching

A background to the adoption of computing in accounting education is discussed. There has been considerable pressure by the accounting profession for information technology to be taught in tertiary accounting courses. While accommodating these expectations, accounting academics have been concerned that such teaching should focus on conceptual understanding, rather than training. Research on effectiveness of computers and the learning of accounting concepts has been considered and found to be inconclusive and conflicting. It has been argued that an understanding of learning theory is necessary to enhance the effectiveness of teaching computerized accounting. An approach to teaching computerized accounting information systems and integrating learning theories is presented via a practical example: the objectives of teaching computerized accounting and reasons for adopting the SYBIZ Rev L software package are presented. The chosen approach in developing the teaching and learning material is outlined and linked to learning theory. It is argued that computers in accounting education should not merely be treated as a fait accompli, but be recognized as a part of a process which we should understand and influence. Research needs to continue on a number of methodological fronts. Suggestions are given for more specific empirical research, as well as suggestions on how to incorporate the findings of other related disciplines.     

Asymmetric information and a theory of compensating balances

This paper derives an economic justification for the existence of compensating balance requirements using an equilibrium model of asymmetric information. Because bank profitability depends upon the probability distribution of a borrower's future cash requirements, and assuming this distribution is known by the borrower but not by the bank, compensating balance requirements can be used by the bank as a screen to distinguish among borrowers. Compensating balances are shown to exist without invoking assumptions of monopoly banks or non-maximizing behavior, and these balances need not be explained as a method of indirect payment for bank services.     

面向风险的信息系统审计理论与方法

2008年9月，中国内部审计协会发布了《内部审计具体准则第28号——信息系统审计》（以下简称（（准则》），从2009年1月1日起施行。这是国内信息系统审计（IS Auditing，以下简称“IS审计”）领域的第一个专业性和规范性文件，对我们从事信息系统审计工作具有重要的指导意义。如何全面认识《准则》的概念和内涵、重点把握《准则》的要求是我们施行《准则》的前提。笔者通过认真研读《准则》，结合开展信息系统审计的实践，认为应该全面把握IS审计的涵义，突出面向风险的理念。     

Asymmetric information and the medium of exchange in takeovers: theory and tests

In a model of takeovers under asymmetric information, we identifya separating equilibrium in which the value of the bidder firmis revealed by the mix of cash and securities used as paymentfor the target. The model predicts that the revealed biddervalue is monotonically increasing and convex in the fractionof the total offer that consists of cash. We examine the modelrestrictions using data from Canada, where mixed offers areboth relatively frequent and free of the confounding tax-relatedoptions characterizing mixed offers in the United States. Wefind that the average announcement-month bidder abnormal returnin mixed offers is large and significant. However, maximum likelihoodestimates of parameters in both linear and nonlinear cross-sectionalregressions fail to support the model predictions.     

Accounting information and municipal bond net interest cost: An empirical evaluation

The objective of this study was to test the association between the surplus/deficit of selected Minnesota municipalities and the net interest cost of the general obligation bonds issued by these municipalities. This objective was accomplished by employing a pooled time-series design.A two-way analysis of variance was used to determine if there was a significant difference in the effect of net interest cost between positive and negative forecast errors. The ANOVA results of both tests indicate that the surplus/deficit is not correlated with increases/ decreases in the net interest cost of the bonds issued by a municipality. The results were unaffected by the exclusion of bond ratings as an independent variable.     

Labor Mobility: Implications for Asset Pricing

Labor mobility is the flexibility of workers to walk away from an industry in response to better opportunities. I develop a model in which labor flows make bad times worse for shareholders who are left with capital that is less productive. The model shows that firms face greater operating leverage by providing flexibility to mobile workers. I construct an empirical measure of labor mobility consistent with the model and document an economically significant cross‐sectional relation between mobility, operating leverage, and stock returns. I find that firms in mobile industries earn returns over 5% higher than those in less mobile industries.     

以企业价值最大化为导向的企业绩效评价体系——基于利益相关者理论

企业拥有众多的利益主体,企业管理目标应该与企业利益主体有关,各个利益主体的目标都可以折衷为企业长期稳定发展和企业总价值的不断增长。企业的经营绩效应以最大限度地实现各利益主体的目标为已任, 企业绩效评价以企业价值最大化为核心符合现代企业管理方向。