EDITORIAL: TAX REFORM AND SIMPLIFICATION

Major tax reform to simplify the UK tax system is possible. Merging income taxes, social security taxes and corporation tax into only a single flat-rate of tax on all incomes would be a radical start. Avoiding taxes on income and expenditure which are 'too high' requires major reductions in government spending, mainly on the welfare state. Given the political will, over a period of years we really can hugely improve the UK tax system.     

Role transitions in older adults: A marketing opportunity

Consumers act out roles throughout their lives. Marketers assist in this role playing by providing the wardrobes, props, and sets in the form of products and services. They also help people understand acceptable role behavior by portraying roles in their communication programs. Consumers assume new roles as they age. This article is designed to enhance understanding of the often-ignored roles that accompany aging and provides examples of and suggestions for effective marketing for these role transitions.     

Hedging,Financing and Investment Decisions: A Simultaneous Equations Framework

We empirically investigate the interactions among hedging, financing, and investment decisions. We argue that the way in which hedging affects a firm's financing and investing decisions differs for firms with different growth opportunities. We find that high growth firms increase their investment, but not leverage, by hedging. However, we also find that firms with few investment opportunities use derivatives to increase their leverage.     

Risk Arbitrage in Takeovers

This article studies the role of risk arbitrageurs in takeoversand the source of their advantage. We show how the presenceof arbitrageurs affects the value of the target shares, sincearbitrageurs are more likely to tender. Therefore an arbitrageurhas the informational advantage of knowing he bought shares.In equilibrium, the number of arbitrageurs buying shares andthe price they pay are determined endogenously. We also presentseveral empirical implications, including the relationship amongtrading volume, takeover premium, liquidity of the shares, andthe number of risk arbitrageurs investing in one particulardeal.     

Managerial Ownership, Information Content of Earnings, and Discretionary Accruals in a Non–US Setting

This study employs Danish data to examine the empirical relationship between the proportion of managerial ownership and two characteristics of accounting earnings: the information content of earnings and the magnitude of discretionary accruals. In previous research concerning American firms, Warfield et al. (1995) document a positive relationship between managerial ownership and the information content of earnings, and a negative relationship between managerial ownership and discretionary accruals. We question the generality of the Warfield et al. result, as the ownership structure found in most other countries, including Denmark, deviates from the US ownership configuration. In fact, Danish data indicate that the information content of earnings is inversely related to managerial ownership.     

EFFECT OF FED POLICY ACTIONS ON THE DEFAULT LIKELIHOOD OF COMMERCIAL BANKS

Using a measure of default likelihood based on an option pricing method, we provide evidence that Fed policy actions affect the financial distress of commercial banks. When the Fed increases (decreases) interest rates, the measure of default likelihood increases (decreases). We show that when the Fed uses a tight money policy, the increase in default likelihood is more pronounced for banks that have less capital, have greater financial leverage, are smaller, have fewer growth opportunities, and have lower asset quality. Additionally, the effects on bank default likelihood are more pronounced when the Fed's policy signals less concern about economic growth, as indicated by its bias toward further tightening, and when there is a market expectation of higher short‐term market rates in the future.     

Competition and Information Production in Market Maker Models

Abstract:   The microstructure literature models the mechanisms through which fundamental information is incorporated into market prices. This paper extends previous models by endogenising information production and analysing incentives for costly information production. In contrast to the existing literature, increasing the number of informed traders can result in reduced price informativeness. When prices have an allocative role this has welfare consequences: the regulatory implications of a dichotomy between private and public incentives for information gathering are discussed.     

A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy*

Abstract. This research re-examines whether there are differences in the forecast accuracy of financial analysts through a comparison of their annual earnings per share forecasts. The comparison of analyst forecast accuracy is made on both an ex post (within sample) and an ex ante (out of sample) basis. Early examinations of this issue by Richards (1976), Brown and Rozeff (1980), O'Brien (1987), Coggin and Hunter (1989), O'Brien (1990), and Butler and Lang (1991) were ex post and suggest the absence of analysts who can provide relatively more accurate forecasts over multiple years. Contrary to the results of prior research and consistent with the belief in the popular press, we document that differences do exist in financial analysts' ex post forecast accuracy. We show that the previous studies failed to find differences in forecast accuracy due to inadequate (or no) control for differences in the recency of forecasts issued by the analysts. It has been well documented in the literature that forecast recency is positively related to forecast accuracy (Crichfield, Dyckman, and Lakonishok 1978; O'Brien 1988; Brown 1991). Thus, failure to control for forecast recency may reduce the power of tests, making it difficult to reject the null hypothesis of no differences in forecast accuracy even if they do exist. In our analysis, we control for the differences in recency of analysts' forecasts using two different approaches. First, we use an estimated generalized least squares estimation procedure that captures the recency-induced effects in the residuals of the model. Second, we use a matched-pair design whereby we measure the relative forecast accuracy of an analyst by comparing his/her forecast error to the forecast error of another randomly selected analyst making forecasts for the same firm in the same year on or around the same date. Using both approaches, we find that differential forecast accuracy does exist amongst analysts, especially in samples with minimum forecast horizons of five and 60 trading days. We show that these differences are not attributable to differences in the forecast issuance frequency of the financial analysts. In sum, after controlling for firm, year, forecast recency, and forecast issuance frequency of individual analysts, the analyst effect persists. To validate our findings, we examine whether the differences in the forecast accuracy of financial analysts persist in holdout periods. Analysts were assigned a “superior” (“inferior”) status for a firm-year in the estimation sample using percentile rankings on the distribution of absolute forecast errors for that firm-year. We use estimation samples of one- to four-year duration, and consider two different definitions of analyst forecast superiority. Analysts were classified as firm-specific “superior” if they maintained a “superior” status in every year of the estimation sample. Furthermore, they were classified as industry-specific “superior” if they were deemed firm-specific “superior” with respect to at least two firms and firm-specific “inferior” with respect to no firm in that industry. Using either definition, we find that analysts classified as “superior” in estimation samples generally remain superior in holdout periods. In contrast, we find that analysts identified as “inferior” in estimation samples do not remain inferior in holdout periods. Our results suggest that some analysts' earnings forecasts should be weighted higher than others when formulating composite earnings expectations. This suggestion is predicated on the assumption that capital markets distinguish between analysts who are ex ante superior, and that they utilize this information when formulating stock prices. Our study provides an ex ante framework for identifying those analysts who appear to be superior. When constructing weighted forecasts, a one-year estimation period should be used because we obtain the strongest results of persistence in this case.