A model for valuation of the branch offices of a savings bank based on rough sets

This work proposes a model for the valuation of branch of?ces of banks based on the rough set theory, which could be used as the basis for a decision‐making system for dimensioning strategies of a ?nancial entity. It compares the rough set approach with the competitive discriminant analysis methodology using a common set of data from 421 branches. We pay special attention to data reduction and the creation of decision rules that will allow future branches to be classi?ed. These rules could constitute the basis for the evaluation of the viability of dimensioning strategies for a ?nancial entity. In order to evaluate the predictive capabilities of the decision rules, we present the results of cross‐validation tests to evaluate the ability of the model to classify new branches. It appears that the rough sets approach provides a favourable tool for the valuation of branch of?ces. Copyright © 2004 John Wiley & Sons, Ltd.     

Split Ratings and Differences in Corporate Credit Rating Policy between Moody's and Standard & Poor's

This paper investigates split credit ratings awarded by Moody's and Standard & Poor's (S&P) to U.S. corporations. Bivariate probit model estimates, analyzing 5,238 firm‐year observations from dual‐rated S&P 500/400/600 index‐constituent corporations, indicate firm‐specific financial and governance characteristics predict split ratings. Large, profitable companies with enhanced interest coverage, a greater percentage of independent directors, and more institutional investment are less likely to receive splits. Moody's appears more conservative in its evaluations, assigning lower ratings to smaller, less profitable companies with low interest coverage. Moody's also associates external, independent constraints on managerial autonomy with a higher corporate credit standing relative to S&P.     

Is Polaris a HOG? A Case Study*

The main usefulness of a general purpose financial statement centers on its comparability to the financials produced by an entity's competition. This case works for both undergraduate and graduate students because it offers comparisons between two well known recreation industry companies. Financial statement analysis is a lesson which serves as an appropriate capstone to financial accounting education. Analyzing the financial statements of competing entities explains “why” accountants must implement the intricate “how” which produces the statements and the resulting decision models such as ratios and common‐sized statements. Compared to previous generations, current students will be more responsible for managing their own retirement funds. This case can help students start to appreciate investment analysis by providing enough detail for any level student to conduct financial statement evaluations that make comparisons to find successful fundamental business strategies.     

Financing firms with restricted access to financial markets: the use of trade credit and factoring in Belgium

Many authors emphasize the implications of restricted access to financial markets for both small and new firms. The paper reports investigations into the use of alternative means of financing. More specifically, the use of trade credit and factoring are examined. Indeed, following the trade credit management literature both institutional and macro economic restrictions on small business finance can be overcome by ‘larger suppliers’ extending trade credit to their smaller customers. However, the DSO-rate cannot be used to measure the supplier's willingness to invest in trade credit as it depends on both suppliers' and customers' characteristics. The decision to extend trade credit is therefore approximated by the will to control its management and operationalized by the decision to factor or not to factor. The results of our study are twofold. First, factoring is mainly used by small and medium-sized companies. Moreover, when looking at the characteristics of the factor's customers, new companies facing huge capital expenditure programmes and seasonal sales decide to factor. The prejudice about factoring being a last resort means of finance is, however, not supported: companies that decide to use factoring are indeed less profitable, but this is simply due to their high growth and/or capital intensive investment programmes.     

Analysts' Roundtable on Integrating ESG into Investment Decision‐Making

In this third of the three discussions that took place at the SASB 2016 Symposium, practitioners of a broad range of investment approaches—active as well as passive in both equities and fixed‐income—explain how and why they use ESG information when evaluating companies and making their investment decisions. There was general agreement that successful ESG investing depends on integrating ESG factors with the methods and data of traditional “fundamental” financial statement analysis. And in support of this claim, a number of the panelists noted that some of the world's best “business value investors,” including Warren Buffett, have long incorporated environmental, social, and governance considerations into their investment decision‐making. In the analysis of such active fundamental investors, ESG concerns tend to show up as risk factors that can translate into higher costs of capital and lower values. And companies' effectiveness in managing such factors, as ref lected in high ESG scores and rankings, is viewed by many fundamental investors as an indicator of management “quality,” a reliable demonstration of the corporate commitment to investing in the company's future. Moreover, some fixed‐income investors are equally if not more concerned than equity investors about ESG exposures. ESG factors can have pronounced effects on performance by generating “tail risks” that can materialize in both going‐concern and default scenarios. And the rating agencies have long attempted to reflect some of these risks in their analysis, though with mixed success. What is relatively new, however, is the frequency with which fixed income investors are engaging companies on ESG topics. And even large institutional investors with heavily indexed portfolios have become more aggressive in engaging their portfolio companies on ESG issues. Although the traditional ESG filters used by such investors were designed mainly just to screen out tobacco, firearms, and other “sin” shares from equity portfolios, investors' interest in “tilting” their portfolios toward positive sustainability factors, in the form of lowcarbon and gender‐balanced ETFs and other kinds of “smart beta” portfolios, has gained considerable momentum.     

Commentary: Has Australia (or Any Other Jurisdiction) ‘Adopted’ IFRS?1

This paper replies to a statement made in this journal that ‘Australia definitely adopts IFRSs’. We analyse and compare the several methods that jurisdictions can use to implement International Financial Reporting Standards (IFRS). These include adopting the International Accounting Standards Board's (IASB) process of setting standards, as well as various forms of standard‐by‐standard implementation. We conclude that the Australian method of implementation is different in major ways from those used in such countries as Israel and South Africa, which involve adopting the IASB's process. By contrast, Australia follows a multi‐step process of enrolling each new standard into a category still entitled ‘Australian Accounting Standards’. To refer to the Australian method as ‘adoption’ of IFRS might therefore mislead, even though Australian companies eventually comply with IFRS.     

Value‐Added Per Share (VAPS): A Value‐Relevant Corporate Performance Metric

The authors introduce Value Added Per Share (VAPS) as a value‐relevant metric that is intended to complement earnings per share (EPS) in helping corporate managers and analysts understand and overcome the limitations of GAAP‐based reporting. VAPS discounts a firm's past and projected cash flows at its “cost of capital,” allowing companies to avoid the subjective accounting accrual process and other practices that often make EPS misleading. A company's VAPS is calculated in three main steps: (1) estimate the change in the capitalized value of after‐tax operating cash flow by taking the net change (plus or minus) of the firm's operating cash flow after taxes and dividing that number by the firm's cost of capital; (2) subtract total investment expenditures; and (3) divide by the number of shares outstanding. By capitalizing the change in after‐tax operating cash flow, one finds the net change in a firm's current operations value. By subtracting investment expenditures from that change in current operations value, the analyst gets a clearer picture of the benefit to shareholders net of the funds used to create that benefit. Consistent with basic theory, VAPS is positive when a company earns a return at least equal to its cost of capital and negative otherwise. Because of their fundamental differences, EPS and VAPS are likely to send different signals, and VAPS is expected to provide greater insight into stock price changes. The authors provide the findings of statistical tests showing the superior explanatory power of VAPS and recommend that companies publish statements of VAPS along with standard GAAP results, especially since the former can be readily calculated using the available income statement, balance sheet, and cash flow statement data.     

Discount Rates in Disarray: Evidence on Flawed Goodwill Impairment Testing

Discount rate selection represents a centrally material factor impacting valuation models. Given the strong reliance on discounted cash flow modelling as a basis for determining an asset's recoverable amount, the judgement exercised by reporting entities regarding rate selection is of paramount importance in influencing the outcomes of the impairment testing process conducted under International Financial Reporting Standards (IFRS). The discretion surrounding rate selection could be used opportunistically to avoid or manage the timing of impairment losses to the detriment of transparency, comparability and decision usefulness. This study provides evidence consistent with the opportunism on the part of financial statement preparers, by demonstrating the existence of variances between independently generated risk‐adjusted discount rates and those disclosed as having been used by a sample of large listed Australian companies.     

An Honorable Harvest: Universal Owners Must Take Responsibility for Their Portfolios

Despite a maturing industry of ESG professionals and coordinated efforts by shareholders calling for more responsible corporate behavior, we continue to see unabated climate and water crises, growing political instability, and continuing abuses of human rights in supply chains. The founder of a movement called The Shareholder Commons argues that to help business to address these systemic challenges, corporate responsibility must move beyond the company‐by‐company decision‐making model. An economy based on market competition cannot rely on individual businesses to adopt basic sustainability rules that take priority over profit. Critical sustainability boundaries must be implemented collectively to be effective. The crux of the problem is that although shareholder returns derive mainly from efficiency and productivity gains, they can also result from careless exploitation of common resources or powerless workers. And the competition for margin and capital makes it difficult for companies to recognize, let alone forgo, profitable exploitation. A sustainable economy demands that we help companies to distinguish between honorable and dishonorable profits, and to find ways to eliminate or offset the latter. The author holds out a model of capitalism that limits the availability of choices that exploit negative externalities and inequality while preserving the principles and practices that create value and a reasonable sharing of gains among all stakeholders. Universal owners—long‐term diversified investors—appear to be in the best position to formulate and enforce such a model, given the current design and practices of our capital markets. Such global investors have the incentive and power to engage in the collective decision‐making necessary for a sustainable economy. The power exerted by institutional investors through their allocation and stewardship of equity capital can be used to insist on more sustainable business practices. Because they are diversified across thousands of companies, universal owners can bypass the competitive bottleneck for margin and capital that holds sustainability back at the company level. These large investors can work together to establish authentic sustainability boundaries for the companies they invest in; and by so doing, they can allow us to leverage all the good work done to date on disclosure and ESG integration, and so realize a world in which companies continue to compete for profits, but also for a truly honorable harvest.     

CHANGES IN MARKET PERCEPTION OF RISKINESS: THE CASE OF TOO-BIG-TO-FAIL

In 1984, the Comptroller of the Currency stated that the eleven largest banking firms were “too big to fail,” implying they would receive de facto 100 percent deposit insurance. The question is whether this announcement altered the market's perception of the riskiness of all banking organizations, not just those included in the Comptroller's statement. We address this question with two tests. First, through the examination of changes in institutional equity ownership from 1980 through 1988, we find that the announcement is associated with increases in institutional ownership at a time when a comparable set of nonfinancial firms saw reductions in institutional holdings. Second, through the examination of stock returns behavior of bank holding companies around announcements of dividend cuts and omissions from 1974 through 1991, we find that the Comptroller's 1984 announcement altered the market's reaction to dividend cuts and omissions by bank holding companies not specifically included in the Comptroller's statement.     

Agenda Entrance Complexity in International Accounting Standard Setting: The Case of IFRS for SMEs

Features of rational decision making (such as agenda entrance criteria and statement of jurisdiction) barely conceal the complexity of international accounting standard setting. In 2003, when the International Financial Reporting Standard for Small and Medium‐sized Entities (IFRS for SMEs) project achieved agenda entrance, the International Accounting Standards Board's (IASB) jurisdiction was to develop, ‘a single set of … accounting standards … to help participants in the world's capital markets’. Drawing on interviewees' recollections and other material, this study of how the project achieved agenda entrance finds within‐IASB opposition to the project, arguing it was outside the IASB's jurisdiction that dissolved with the realisation that the IASB's jurisdiction would be changed to encompass the project.     

PRIVATE SHAREHOLDER RESPONSE TO CORPORATE ANNUAL REPORTS*

Private shareholder response to annual reports of Australian public-listed companies was investigated via postal questionnaires in 1979 and 1980. Approximately 2000 usable replies indicate that although annual reports are ranked third to stockbroker advice and newspapers as sources of corporate information, two-thirds claim the report is of some importance and one-quarter would buy it and pay up to $2 per copy. Readership behaviour reveals that whereas the chairman's review is the most read item, traditional financial statements are more important in influencing equity decision-making. The auditor's report, statistical data and notes to accounts are least read and least important. Such evidence has implications for report preparers, auditors, accountancy professional bodies, financial journalists and educators.     

Corporate Risks and Property Insurance: Evidence From the People's Republic of China

Using panel data (1997–1999) for 235 publicly listed companies in the People's Republic of China, this study empirically tests the linkage between corporate risks and the decision to purchase property insurance and its financial extent. To achieve these objectives, we first estimate a probit insurance participation decision model and then a fixed‐effects insurance volume decision model with Heckman's sample selection correction. Our results indicate that the managerial decision to purchase property insurance is positively related to company size and insolvency risks. By contrast, the amount of property insurance purchased is positively related to systematic risks but negatively related to insolvency and unsystematic risks and company size. We find that the amount of property insurance used by Chinese companies can also be affected by other factors (e.g., the cash flow constraints). In addition, the decision to purchase property insurance and the financial extent to which it is used varies among Chinese companies according to their geographical location. However, state ownership does not appear to be an important determinant of the purchase of property insurance by Chinese publicly listed companies.     

Combining data and text mining techniques for analysing financial reports

There is a vast amount of financial information on companies' financial performance available to investors in electronic form today. While automatic analysis of financial figures is common, it has been difficult to extract meaning from the textual parts of financial reports automatically. The textual part of an annual report contains richer information than the financial ratios. In this paper, we combine data and text mining methods for analysing quantitative and qualitative data from financial reports, in order to see if the textual part of the report contains some indications about future financial performance. The quantitative analysis has been performed using self‐organizing maps, and the qualitative analysis using prototype‐matching text clustering. The analysis is performed on the quarterly reports of three leading companies in the telecommunications sector. Copyright © 2004 John Wiley & Sons, Ltd.     

The role of attribute selection in Deep ANNs learning framework for high‐frequency financial trading

In financial trading, technical and quantitative analysis tools are used for the development of decision support systems. Although these traditional tools are useful, new techniques in the field of machine learning have been developed for time‐series forecasting. This paper analyses the role of attribute selection on the development of a simple deep‐learning ANN (D‐ANN) multi‐agent framework to accomplish a profitable trading strategy in the course of a series of trading simulations in the foreign exchange market. The paper evaluates the performance of the D‐ANN multi‐agent framework over different time spans of high‐frequency (HF) intraday asset time‐series data and determines how a set of the framework attributes produces effective forecasting for profitable trading. The paper shows the existence of predictable short‐term price trends in the market time series, and an understanding of the probability of price movements may be useful to HF traders. The results of this paper can be used to further develop financial decision‐support systems and autonomous trading strategies for the financial market.     

THE CHAIRMAN'S STATEMENT AND CORPORATE FINANCIAL PERFORMANCE

Agency theory and signalling theory both suggest that firms are motivated to disclose excellence of financial performance in an unambiguous manner. We might expect, therefore, that good financial performance is associated with a clear and readable Chairman's narrative and poor performance with an obscure or misleading message. Extant work linking corporate performance with clarity of executive narrative fails to distinguish sample cases by industry or financial status. This paper seeks to overcome the consequences of such deficiencies explicitly, by conducting a systematic analysis of the relationship between narrative complexity and alternative measures of financial performance, for a matched sample of failed/non-failed companies across common industries. This study employs separate measures of the readability and the understandability of the chairman's narrative and finds them to be significantly related to overall financial performance and individual measures of performance, most notably liquidity. Poor readability is strongly associated with poor financial performance and ease of readability with relative financial success. The implication is that firms actively signal good news while obscuring, perhaps deliberately, messages which convey bad news.     

Euro Membership as a Real Option Trigger: An Empirical Study of EU15 Manufacturing Firms

This article summarizes the authors' study of manufacturing firms in the 15 countries that made up the EU prior to its 2004 expansion. The study's main finding is that the introduction of the Euro has made companies based in one of the 12 countries that opted to adopt the Euro more inclined than firms based in one of the three non‐adopters (the U.K., Sweden, and Denmark) to exercise various forms of real options such as establishing alliances or partnerships, entering new markets, switching suppliers, or otherwise expanding within the Euro‐area. The study also shows that smaller, more profitable but financially constrained companies are particularly likely to exercise such real options triggered by the introduction of the Euro.