Do bond credit ratings lead to excess comovement?

We investigate whether non-fundamental comovement results from investors using credit ratings to group assets into different “styles”. We find that bonds that join a new rating class start comoving more with the bonds in this class, even when fundamental factors suggest otherwise. We show that this comovement effect varies according to the nature of the bond considered, and the modalities of the rating action. Downgrades have a larger impact than upgrades, and rating reviews matter as much as actual movements. Finally, rating changes between grades BBB and BB, which lead bonds to be reclassified as either “high-yield” or “investment grade” assets, seem to be of particular importance.     

Does firm visibility matter to debtholders? Evidence from credit ratings

This paper investigates the role of a firm's information visibility in the assessment of its default risk. We use press coverage to proxy for firm visibility and find that highly visible firms generally have better credit ratings. The positive association between firm visibility and credit ratings arises because (1) press coverage facilitates the generation and dissemination of firm-specific information to market participants and (2) it disciplines the activities of managers and large shareholders. This positive association becomes stronger for firms with more severe information asymmetry or weaker alternative monitoring systems. Our findings contribute to the accounting literature by providing new evidence on the influence of firm visibility in the debt market.     

From compromise to concept? – a review of ‘other comprehensive income’

This paper reviews how ‘other comprehensive income’ (OCI) entered financial reporting by tracing major Financial Accounting Standard Board (FASB) and International Accounting Standards Board (IASB) projects that required direct entries to equity and describing recent efforts to make sense of the practice. It was the fixation on net income that brought about departures from all-inclusive income, which were repeatedly made over the years without decidedly devoting attention to developing a conceptual basis. OCI was used as a compromise to incorporate current values in the balance sheet, while retaining historical cost principles in the income statement. When the practice was labeled as OCI, it became institutionalized without a clear meaning. A sense-making of the practice then replaced the debates on the adequacy of using OCI and standard setters have realized that additional layers of theory became necessary to explain, for example, reclassification adjustments. Yet, the IASB has made clear in its recent Exposure Draft of a revised conceptual framework that it does not intend to pursue a fresh start in performance reporting that appears to be needed conceptually. Instead, practical considerations, primarily on International Financial Reporting Standards adoption in Japan, seem to lead to another ex-post rationalization of OCI, this time around a conceptually vacuous use of the relevance characteristic.     

Does good governance matter to debtholders? Evidence from the credit ratings of Japanese firms

Consistent with existing evidence based on US firms, we show that good governance is associated with higher credit ratings. The most significant variables are institutional ownership and disclosure quality. This finding suggests that active monitoring (by large shareholders) and lower information asymmetry (through better disclosures) mitigate agency conflicts and reduce the risk to debtholders. Credit ratings are also found to increase with board size, consistent with a moderation effect in large decision-making groups. As a rule, firms are expected to benefit from better governance by being able to access funding at a lower cost and in larger amounts.     

The effect of information sharing between lenders on access to credit,cost of credit,and loan performance – Evidence from a credit registry introduction

Using a rich dataset from a commercial bank in Albania, we utilize the introduction of a public credit registry by the Albanian central bank in January 2008 as a natural experiment to analyze the effect of information sharing between lenders on (1) access to credit, (2) cost of credit, and (3) loan performance. Our results suggest that information sharing by means of a credit registry does not affect access to or cost of credit, but improves loan performance. Specifically, loans granted after the introduction of the credit registry are 3% points less likely of turning problematic, representing a 35% reduction of the overall sample average arrear probability. We further find that the effect is more pronounced for repeat borrowers and in areas, where competition is weak. This indicates that information sharing among lenders improves loan performance mainly by disciplining borrowers to repay in their concern about future access to credit.     

Pricing and hedging of credit derivatives via?the?innovations approach to nonlinear filtering

In this paper, we propose a new, information-based approach for modelling the dynamic evolution of a portfolio of credit risky securities. In our setup, market prices of traded credit derivatives are given by the solution of a nonlinear filtering problem. The innovations approach to nonlinear filtering is used to solve this problem and to derive the dynamics of market prices. Moreover, the practical application of the model is discussed: we analyse calibration, the pricing of exotic credit derivatives and the computation of risk-minimizing hedging strategies. The paper closes with a few numerical case studies.     

A Black–Litterman approach to correlation stress testing

Correlation stress testing is motivated by a well-known phenomenon: correlations change under financial crises. The adjustment of correlation matrices may be required to evaluate the potential impact of these changes. Very often, some correlations are explicitly adjusted (core correlations), with the remainder left unspecified (peripheral correlations), although it would be more natural for both core correlations and peripheral correlations to vary. However, most existing methods ignore the potential change in peripheral correlations. In this paper, we propose a Black–Litterman approach to correlation stress testing in which the stress impact on the core correlations is transmitted to the peripheral correlations through the dependence structure of the empirical correlations.     

From joint to single audits – audit quality differences and auditor pairings

This study analyses audit quality differences between audits by a single big audit firm and joint audits with either one or two big audit firms. We exploit the unique situation in Denmark beginning on 1 January 2005, at which time a long-standing mandatory joint audit system for listed companies was replaced by a voluntary joint audit system. First, we report the results of a survey of Danish CFOs’ views on and their experiences with the choice of single or joint audits and their perceptions of audit quality. Second, based on data from the mandatory joint audit abolition year and the following two years, we test the audit quality differences using abnormal accruals. Most CFOs perceive that audit quality by a single big four audit firm is the same as it is in joint audits with either one or two big four audit firms. The results of our empirical analysis are in line with the perceptions. We find no evidence of audit quality differences between audits made by a single big four firm and those conducted by either of the two combinations of joint audits.     

Trade credit research before and after the global financial crisis of 2008 – A bibliometric overview

This study presents an overview of the state-of-the-art in trade credit research by examining 1191 publications between 1955 and 2019. Applying bibliometrics and econometrics, the study compares the extant research across the three sub-domains of banking and finance, production and operations, and accounting. Findings suggest that the financial emergency in the global market had resulted in a watershed moment in trade credit research. About 69 % of the literature was found to have emerged after the global economic crisis of 2008. A network analysis grouped the trade credit articles into four major and four minor clusters. The banking and financing cluster exhibited the highest growth followed by the production and operation cluster while the perspectives of accounting are yet to gain traction. Conversely, reputation of the publishing hub, empirical studies, and the production and operational dimensions of the research positively and significantly influence citations. Alongside a thorough introspection, the study also provides new areas to direct the course of future research.     

Do sovereign credit default swaps represent a clean measure of sovereign default risk? A factor model approach

In this study, we use a factor model in order to decompose sovereign Credit Default Swaps (CDS) spreads into default, liquidity, systematic liquidity and correlation components. By calibrating the model to sovereign CDSs and bonds we are able to present a better decomposition and a more accurate measure of spread components. Our analysis reveals that sovereign CDS spreads are highly driven by liquidity (55.6% of default risk and 44.32% of liquidity) and that sovereign bond spreads are less subject to liquidity frictions and therefore could represent a better proxy for sovereign default risk (73% of default risk and 26.86% of liquidity). Furthermore, our model enables us to directly study the effect of systematic liquidity and flight-to-liquidity risks on bond and CDS spreads through the factor sensitivity matrix. We find that these risks do have an influence on the default intensity and they contribute significantly to spread movements. Finally, our empirical results advance the idea that the increase in the CDS spreads observed during the crisis period was mainly due to a surge in liquidity rather than to an increase in the default intensity.     

How to improve IFRS for intangible assets? A milestone approach

This study focuses on the decreasing relevance of financial information associated with current financial reporting standards for intangible assets. We summarize and compare three approaches to improving financial reporting standards for internally generated intangibles—the recognition approach, the fair value approach and the disclosure approach, among which we focus on the recognition approach. We investigate the impact of current International Accounting Standard 38 on the R&D capitalization policies of the high-tech industry, particularly among medical device firms in China. We conclude that the current recognition criteria are so stringent that they disincentivize firms from capitalizing their R&D investments. A large variation exists in capitalization timing within the medical device industry. Accordingly, we propose the milestone approach to revising financial reporting standards for intangible assets. We suggest that determining the capitalization criteria for intangibles based on the R&D cycle and capitalization timing should be moved forward.     

A multi-dimensional Bühlmann credibility approach to modeling multi-population mortality rates

In this paper, we first propose a multi-dimensional Bühlmann credibility approach to forecasting mortality rates for multiple populations, and then compare forecasting performances among the proposed approach, the CBD model, the Lee-Carter model (LC), the joint-k (JoK-LC), the co-integrated (CoI-LC), and the augmented common factor (ACF-LC) Lee-Carter models for multiple populations. Mortality data from the Human Mortality Database are fitted to the underlying mortality models for both genders of three well-developed countries (the US, the UK, and Japan) and both genders of a developed country (France) and a developing country (Poland) with an age span 25–84 and a wide range of fitting year spans. Empirical illustrations show that the proposed multi-dimensional Bühlmann credibility approach contributes to more accurate forecast results, measured by AMAPE (average of mean absolute percentage errors over all fitting year spans), than the CBD, LC, JoK-LC, CoI-LC and ACF-LC models for three forecasting year spans 2004–2013 (10-year wide), 1994–2013 (20-year wide) and 1984–2013 (30-year wide).     

Pricing Hang Seng Index options around the Asian financial crisis – A GARCH approach

This paper investigates how well the Hang Seng Index options, the most important class of option contracts traded in Hong Kong, are priced using the GARCH approach. We calibrated the GARCH parameters using the call and put option data and used them to price options in the subsequent weeks. We found the GARCH model performs very well in comparison with the Black–Scholes model even after allowing for a smile/smirk adjustment. Its superior performance was also evident both before and during the recent Asian financial turmoil.     

A nonparametric approach to measuring the sensitivity of an asset’s return to the market

In the market model the return on an asset is modeled as a linear function of the return on a market index with slope parameter beta. The coefficient beta is often used as a measure of the sensitivity of the asset’s return to the market and to measure the component of the variance of the return that is explained by the market. However, both of these interpretations require the additional assumption that the error term in the market model has mean 0 conditional on the return on the market index, an assumption that is often difficult to verify in practice. In this paper, a nonparametric version of the market model is proposed that does not require such an assumption. This nonparametric model replaces the beta coefficient of the market model with a “beta curve” describing the relationship between the asset’s return and that of the market locally near a given value of the market return. The proposed model is applied to stock returns, as well as to returns on mutual funds. Corresponding tests of the market model are given and it is shown that the nonparametric model often provides an improvement over the standard parametric market model.     

Repo market – A tool to manage liquidity in financial institutions

Central Bank Repo (Repurchase Agreement) is widely used as an indirect instrument of monetary policy and the same is implemented in India by institutionalizing a mechanism called Liquidity Adjustment Facility (LAF) which allows banks and primary dealers to manage their liquidity requirement on day to day basis. Liquidity stress in the market has an impact on the short-term interest rate. Entities not having adequate securities balances borrow funds from inter-bank uncollateralized call market and the call rates are prone to liquidity shocks in the system. The spread between call and repo rates is likely to widen when there is liquidity stress in the market. The study tried to find the determinant of the spread. It found that LAF window activity as well as total money market activity has an impact on the spread. In order to understand if the spread behaves in a different manner when the system has excess liquidity vis-à-vis shortage of liquidity, a regime switching model using Goldfeld and Quandt’s D-method for switching regression was used. The tests found that the monetary policy is stable in both the regimes and the effectiveness of monetary policy in both the regimes is not statistically different.     

Sanac Inc.: From ABC to time-driven ABC (TDABC) – An instructional case

This case deals with the decision of Sanac Inc., a Belgian wholesale company, on whether to proceed with the implementation of an activity-based costing (ABC) system or switch to time-driven activity-based costing (TDABC). As a business consultant, you are hired to decide about the appropriate costing method. Your task is to decide which system the company should implement, given the desire of the president of the company to calculate profitability at the order and the customer level.     

A scientific approach to politics? On the trail of the Audit Commission

This article explores the ways in which the Audit Commission has become a key player in the governance of welfare provisioning and democratic communities in England and Wales. It draws primarily upon an analysis of Audit Commission texts, supplemented by conversations with Commissioners and observations of Audit Commission staff at work. The argument is that a new audit-accountability nexus has been forged which crosses the divide between New Right and New Labour politics. On the one hand, there has been a revolution in the nature of accountability—the locally-based accountability associated with local government has been eclipsed by a new centralized accountability, albeit one which attempts to synthesize upward and downward accountability within itself. On the other hand, there has been a revolution in the nature of audit, culminating in the rise of audit-inspection partnerships. In the process, the Audit Commission has been cast as the scientific advisor to central government, the reforming regulator of local government, and the impartial champion of the people.     

McGrath v Riddell: A flexible approach to the insolvency distribution rules?

The rules relating to the division of the insolvent estate assume considerable importance in the field of international insolvencies, where different legal systems interact. International instruments including the European insolvency regulation and the UNCITRAL Model Law on Cross‐Border Insolvency have provided a framework which governs the relationship between local and foreign distribution schemes. For English lawyers, questions remain however regarding the future role of the courts' statutory power to cooperate with the courts of ‘relevant’ countries or territories, and of the common law principle of universalism. An important issue connected to the determination of such questions is the established judicial approach to the pari passu rule, in the application of domestic law. This paper examines the manifestation of this tension in the litigation arising from the collapse of the HIH Casualty & General Insurance group of companies. It notes the scope which remains for continued resort to the statutory power of cooperation, and the potential for the Cross‐Border Insolvency Regulations 2006 to encourage a more flexible approach to resolving differences between distribution schemes. Copyright © 2010 John Wiley & Sons, Ltd.     

Which are the SIFIs? A Component Expected Shortfall approach to systemic risk

This paper proposes a component approach to systemic risk which allows to decompose the risk of the aggregate financial system (measured by Expected Shortfall) while accounting for the firm characteristics. Developed by analogy with the Component Value-at-Risk concept, our new systemic risk measure, called Component ES, presents several advantages. It is a hybrid measure, which combines the Too Interconnected To Fail and the Too Big To Fail logics. CES relies only on publicly available daily data and encompasses the popular Marginal ES measure. CES can be used to assess the contribution of a firm to systemic risk at a precise date but also to forecast its contribution over a certain period. The empirical application verifies the ability of CES to identify the most systemically risky firms during the 2007–2009 financial crisis. We show that our measure identifies the institutions labeled as SIFIs by the Financial Stability Board.