Formal Participation in the EFRAG’s Consultation Processes: The Role of European National Standard-Setters

While the European Financial Reporting Advisory Group (EFRAG) considers European national standard-setters (NSSs) as close partners that play a vital role in its legitimacy, empirical evidence on EFRAG’s consultation processes and the involvement of NSSs therein remains scarce. We use a multi-issue/multi-period approach to investigate the formal participation in EFRAG’s consultation processes. By examining 2,102 comment letters submitted to EFRAG in the 2002–2015 period, we find that NSSs typically outweigh other stakeholder groups in terms of level of participation across stages of the consultation process and project topics. Although NSSs’ level of participation is rather stable over time, it significantly varies across European countries. We also provide a recent classification of European NSSs and show that NSSs’ level of participation varies by their institutional status and is the highest for private NSSs. Our findings have implications for aspects of the legitimacy of both EFRAG and NSSs and shed light on the role of intermediaries in international accounting standard-setting.     

The Government’s Role in Government-owned Banks

In this study, we reinvestigate the question of whether government banks are inferior to private banks. We use cross country data from 1993 to 2007 to trace the different types of government banks. These types comprise banks that acquire distressed banks, normal banks, or no banks at all. Contrary to common belief, the evidence shows that unless government banks are required to purchase a distressed bank because of political factors (the government’s role), their performances are at par with that of private banks. This fact particularly holds true in countries with poor records on political rights and governance.     

The Actuary’s Role in Managed Care

Abstract

Financial risk is moving to center stage in the $1-trillion U.S. health-care market. The growth of managed care has created new forms of risk and has shifted this risk from insurance companies, which have long dealt with it successfully, to health-care providers and other organizations that have not traditionally accepted the same type and amount of risk. Health-care actuaries have the expertise to help these institutions, and the nation, protect their financial well-being.

Actuaries specialize in the evaluation, quantification, and management of risk. Actuarial models of health-care costs, which help evaluate risk, offer management a window to the managed care world. With these models and other tools, health-care actuaries help organizations succeed in today’s health-care environment by showing how the financial and functional elements of an organization relate to risk.

This report discusses the evolution of the health-care industry and the role that the healthcare actuary has played in that evolution. Eight case studies outline actuarial approaches to assessing risk in the era of managed care by discussing situations affecting five groups: providers, employers, regulators, public policy organizations, and HMOs. Built on experience gained in hundreds of cases, these studies show the range of tasks encountered by managed care actuaries and outline approaches that can help balance risks in today’s health-care system.     

The Role of People’s Expectation in the Recent US Housing Boom and Bust

This paper investigates how an important driver of the recent housing boom and bust, people’s expectation, influences housing asset returns. Specifically, it extends the volatility feedback model to study the relationship between housing volatility and asset returns during 19632007. The analysis considers two alternative breakpoints, 1984Q1 and 1999Q1, in order to distinguish the permanent structural break from temporary Markov-switching volatility. The novelty of this study lies in its insightful investigations into the recent U.S. housing boom and bust in the post-1999 period in four dimensions. First, the significantly negative volatility feedback effect in the housing market suggests a positive relationship between housing volatility and expected asset returns, and highly supports the important role of people’s expectations in the recent housing boom and bust. Second, the high-volatility regimes of the housing market delivered by this study indicate a strong association between housing cycles and business cycles, as well as a remarkable uncertainty in the U.S. housing market after the recession 2001. Third, the violated fundamental which refers to the broken negative relationship between housing volatility and realized asset returns during 2001–2004 implies the possible presence of a housing bubble during this period. Finally, volatility feedback anticipates the recent bubble-like housing market dynamics because high volatility during 2002–2003 implies low realized returns in the early housing-boom stage (2002–2003), as well as high expected returns in the second stage of the housing boom (2004–2005).     

The economics of the welfare state in today’s world

This article is concerned both with the substantive policy issue of the implications of the European welfare state in a global setting and with the way in which economists analyse the welfare state. Economics has made a major contribution to our understanding of the welfare state through the provision of formal models. These have allowed us to see the implications of social protection for countries increasingly open to international competition. These models, however, leave out essential elements, and the standard Heckscher–Ohlin 2-good, 2-factor, 2-country assumptions impose too tight a straitjacket. We do not observe full factor price equalisation. The paper considers how we might relax this straitjacket to incorporate elements that are important in the public debate, while preserving tractability. The resulting 3×3×3 model is used to investigate the impact of globalisation on the welfare state, contrasting Europe and the US. The first version of this paper was written while I was visiting the Economic Research Department of the Bank of Italy. I am most grateful to the Research Department for their hospitality, but make clear that the contents of the paper are solely my responsibility. The paper was presented at the April 2006 Netspar Conference in the Hague. I thank the discussants, André de Jong and Cees Oudshoorn, and the conference participants, for their helpful comments. The revision has benefited from the valuable suggestions of the referees and editors, and the final version has been greatly improved as a result of a conversation with Peter Neary. None of the above are to be held responsible for the remaining shortcomings of the paper.     

The Role of Analysts’ Forecasts in Accounting-Based Valuation: A Critical Evaluation

This paper critically evaluates the use of analysts forecasts in accounting-based valuation. Specifically, I assess the usefulness and the limitation of analysts forecasts in predicting future earnings and in explaining the market-to-book ratio, in light of a comprehensive set of 22 explicit information items, including: economic rent proxies, conservative accounting proxies, earnings quality signals, transitory earnings proxies, industry characteristics, and risk and growth proxies. While analysts forecasts capture 45–83% of the information from these sources depending on model specifications, they do not appear to fully incorporate certain information items. In particular, proxies for conservative accounting and transitory earnings are incrementally useful in predicting future earnings; proxies for economic rents, conservative accounting, and risk are incrementally useful in explaining the market-to-book ratio. Collectively, these results validate the use of analysts forecasts as a parsimonious proxy for forward-looking information in accounting-based valuation and suggest how to improve on their use.JEL Classification: D4, G12, M4     

The role of the swiss franc in Switzerland’s European stance

The case of Switzerland appears to be unique with regards to the European economic and monetary integration process, which began in 1957: although the country has had close and growing links with the European Union (EU) over time, it does not want to access full membership. Even though this situation of high integration without full membership entails certain constraints, it is also interesting for Switzerland in many respects. In particular, it allows the country to preserve the sovereignty of its money, which is the backbone of Switzerland’s modern existence. That is why I consider that the Swiss Franc is at the core of Switzerland’s European stance.     

The measurement of harmonization in the form and content of the auditor’s report in the European Union

This study attempts to determine the degree of harmonization in the form and content of the auditor’s report in the European Union. To accomplish this goal, audit reports from 1995 annual reports of the largest industrial companies in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, Spain, Sweden and the United Kingdom are analyzed. The analysis uses the basic elements of the auditor’s report listed in the International Standard on Auditing, “The Auditor’s Report on Financial Statements” as the control. Comparability is tested using the chi-square statistic which tests for equality of the proportions of the various elements in the auditor’s report across the Member States. The results reveal that harmonization exists in three of the five elements in the auditor report relating to form (appropriate title, the dating of the report and the listing of the location of the auditor’s office). Harmonization does not exist for the remaining two elements related to form, nor does it exist for any of elements related to content.     

Murphy’s Laws: A Key Explanatory Tool for Public Sector Disputes in the UK

This article reports on the use that the public makes of the budgetary and financial reporting produced by Spanish local authorities. The authors show financial reporting influences voting behaviour. Although citizens cannot decide how much tax they have to pay or the volume or quality of the services, they can control public management when it comes to election time. Accounting information can reflect the results of public policies and consequently serve as a vehicle for communicating the economic effects of political management. The authors make a strong case for more ‘popular’ financial reporting so that government accounts can be understood and properly used by non-specialists.     

What’s in the news? The ambiguity of the information content of index reconstitutions in Germany

We analyze stock price behavior around reconstitutions of the German DAX index family from 1990 to 2013. The strong price run-up of added stocks in the 2 months preceding the announcement date remains robust until 2 months after the effective date (ED), and is fully reversed 5 months later. Conversely, stock prices of deleted firms are under pressure until 10 months after the ED. Unlike most previous studies, we find that outright entries and exits have temporary price effects, as do additions to and deletions from better-known indices; however, promotions and demotions related to lesser-known indices command permanent stock price responses. Rather surprisingly, deleted stocks consistently earn higher abnormal returns than added stocks in the 5-year post-event period. Specifically, the return differential levels out at 77.3%. We establish that this differential in permanent stock prices is attributable to differences in operating performance and media coverage. In practice, index reconstitutions do not appear to give unambiguous signals about the long-run investment appeal of affected firms. However, index fund managers not constrained by tracking error minimization would be better off holding deleted stocks for 5 years after the ED.     

The Role of Resource Accounting in the UK Government's Quest for ‘Better Accounting’

The UK government intends to introduce resource accounting to central government departments under the banner of ‘Better Accounting for the Taxpayer's Money’. Under the proposed system of resource accounting, as outlined in a White Paper, an annual depreciation charge is to be incorporated in the cost statement and fixed assets included in a balance sheet at their depreciated replacement cost. This paper locates the proposed changes in accounting method for government departments in the general spread of accruals accounting through the public sector, and explores the relevance of accruals as a basis for measuring the results of activity undertaken by government departments. It goes on to examine the impact of the specific accounting change envisaged in the White Paper from both theoretical and practical aspects. The benefits envisaged in the White Paper are considered along with the extent to which they are likely to be realised, together with any consequences not explicitly foreseen. The conclusion is that, while the revised accounting techniques may be different, the proposition implicit in the White Paper's title that they re better is not proven by the evidence presented.     

Discussion of: The option market’s anticipation of information content in earnings announcements

Billings and Jennings (2011) develop a new measure of stock price sensitivity to earnings called anticipated information content (AIC). The main difference between an AIC and an earnings response coefficient (ERC) is that AICs measure expected rather than actual sensitivity. I evaluate the AIC’s potential usefulness in future research, and conclude that AICs have several disadvantages relative to ERCs but might be useful in rare circumstances. Estimates of AICs contain considerable measurement error and fail a primary test of construct validity when left uncorrected. I outline a method for correcting two of the three sources of measurement error, which can be used by researchers interested in pursuing work on AICs. The method may have uses beyond computing AICs because it yields a prediction of the unsigned change in stock price during a scheduled event window.     

The Post-Issue Performance of Initial Public Offering Firms in the People’s Republic of China

This study seeks to identify issues related to the process of corporatization of the State-owned enterprises (SEO) and to examine the post-issue performance of initial public offering (IPO) firms in the People’s Republic of China (PRC). We have discussed in this paper various incentives and potential opportunities for earnings management during the process of corporatization. These include compliance with listing requirements for profitability, right-issue offerings, issue price and the carving out of assets in financial packaging. Based on a sample of 582 A-share IPO firms, we reject the hypothesis that the performance of IPO firms does not decline subsequent to the IPO year. To see if our results depend on the choice of performance measure, we have conducted the tests using different performance measures. Overall, our findings indicate that performance of the IPO firms in the PRC is not sustainable even after controlling for macroeconomic conditions and that there is evidence leading to possible earnings management.     

The impact of FIFA’s official announcements on the stock market of Qatar: The case of the 2022 World Cup

This study examines the impact of the FIFA’s official announcements on Doha Stock Exchange (DSE) of Qatar with respect to the 2022 World Cup. Using the abnormal unsystematic volatility method of Hilliard and Savickas (2002), our empirical findings reveal that the DSE market is sensitive to FIFA’s announcements about the 2022 World Cup. We find that four out of six FIFA announcements act as primary drivers to the DSE market volatility. The significant reactions of the DSE market to these announcements unveil the investors’ sentiments about the fate of the governmental and private expenditures on medium- and long-term projects undertaken in anticipation of hosting the 2022 World Cup. The results have some implications to investors in this newly emerging market related to this global sporting event. Any future announcements, good or bad, are likely to impact share prices in DSE market and trigger portfolio reallocation by local and international investors, leading to increased volatility.     

Regional Energy Efficiency of China’s Commercial Sector: An Emerging Energy Consumer

This article applies a parametric metafrontier method and the Malmquist index to analyze the energy efficiency and its dynamic performance in China’s commercial sector from 1995 to 2013. The results indicate that the energy efficiency in China’s commercial sector is generally low, and there are significant regional differences and enormous energy-saving potentials. Relative to metafrontier, commercial sectors in eastern China have relatively higher energy efficiency; while those in central and western China have relatively low energy efficiency. Besides, the dynamic energy efficiency performance in China’s commercial sector has improved over the period. The technology improvement is a major driving factor to improve the energy efficiency in the commercial sectors of all the three regions.     

IFRS adoption in the United States: An analysis of the role of the SEC’s Chairs

In this paper, we study the role of the SEC’s Chairs in the possible adoption of IFRS in the United States between 2005 and 2017. We mobilize the theoretical framework of institutional entrepreneurship to analyze the multidimensional institutional process which involves the streams of problem recognition, policy development and politics. Our qualitative empirical study finds that the SEC Chairs attempted to couple the three streams to different extents to achieve policy breakthroughs on IFRS adoption. We show how the coupling endeavors of Chair Cox opened a temporal window of opportunity for IFRS adoption, while Chairs Schapiro and White were unsuccessful in coupling the streams due to limited recognition of IFRS adoption as a central problem for the SEC, the inability to develop a practicable policy solution and unfavorable conditions in the policy stream. Our paper offers insights into the reasons for the SEC’s substantial efforts to introduce IFRS to U.S. capital markets and why these efforts never resulted in a formal decision on adopting IFRS for U.S. issuers. Our findings contribute to literatures on IFRS adoption, the temporal dimension of institutional entrepreneurship and the U.S. debate on IFRS.     

The effect of TARP on lending: Evidence from the lead bank’s share in syndicated loans

Review of Quantitative Finance and Accounting - We investigate the effect of the Troubled Asset Relief Program (TARP) on the shares of lead banks in syndicated loans by using quarterly data for the...     

The Impact of Oil Price Shocks on the Returns in China’s Stock Market

The main goal of this paper is to study the relationship between oil price shocks and mainland China’s stock market. From empirical study, we have found that the impact of oil price shocks on stock prices in China has been mixed. In contrast to the conventional wisdom that higher oil prices may cause lower stock prices, positive shocks to oil-market-specific demand resulted in both higher real oil prices and higher stock prices, which helps explain the boom of the Chinese stock market as oil prices were increasing in 2007. However, global oil demand and supply shocks had no significant effects.