Information disclosure quality: correlation versus precision

We investigate how a multidimensional disclosure quality (i.e., correlation and precision) determines an optimal information disclosure strategy. We find that, for an infinitely lived, unlevered firm with market perfection, a truth‐telling disclosure is optimal at increasing the expected firm value. However, for a finitely lived, levered firm in the presence of market imperfections (e.g., bankruptcy cost), the optimal disclosure quality depends negatively on the level of imperfections. Once we consider the agency problem, such dependence can become positive, thereby highlighting the importance of a proper managerial‐incentive scheme to align the information disclosure interests of managers and shareholders.     

Risk‐taking channel of monetary policy

One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. We propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries and the “risk‐taking channel of monetary policy.” Monetary tightening leads to the flattening of the term spread, reducing net interest margin and credit supply. We provide empirical support for the risk‐taking channel.     

Does increased hedging lead to decreased price efficiency? The case of VIX ETPs and VIX futures

We examine the impact of the introduction of VIX exchange‐traded products (ETPs) on the information content and pricing efficiency of VIX futures. We document that trades in VIX futures have become less informative and that pricing errors exhibit more persistence after the introduction of VIX ETPs. In addition, we observe that the price process of the VIX futures has become noisier over time. These findings suggest that the introduction of the VIX ETPs had a prominent effect on the properties and dynamics of the VIX futures.     

Net share issues and the cross‐section of equity returns under a dividend imputation tax system

Despite considerable empirical evidence reporting a negative relationship between net share issuance and subsequent returns, it remains unresolved whether this anomaly is explained by risk or investor irrationality. This study examines the net share issuance anomaly using seasoned equity offerings before and after the introduction of an imputation tax system. We report robust evidence of a negative relationship between net share issuance and returns post‐imputation, but no relationship pre‐imputation. Our results provide evidence to support the international pervasiveness of the net share issuance anomaly, but more importantly suggest that this anomaly may be explained by risk.     

Benchmarking benchmarks: measuring characteristic selectivity using portfolio holdings data

This study proposes methodological adjustments to the widely adopted performance benchmarking methodology of Daniel et al. (1997 ) as a means of improving the precision of alpha measurement for active equity fund managers. We achieve this by considering the monthly updating of characteristic benchmarks and to ensure neutrality to the Standard & Poor's/Australian Stock Exchange 300 index. Applying this benchmark to a representative sample of active Australian equity funds and simulated passive portfolios that mimic fund manager‐style characteristics, we find statistically different and lower tracking error compared with using the standard characteristic benchmark methodology. We also find evidence that the modified benchmark statistically infers an alpha closer to zero compared with the standard benchmark methodology. Our findings suggest that improved specifications of characteristic benchmarks represent better methods in quantifying fund manager skill.     

Contracts for dummies? The performance of investors in contracts for difference

Investors widely use contracts for difference (CFDs) to leverage and short sell underlying financial assets. We investigate the after cost performance of investors in Australian Securities Exchange listed share CFDs, and find that market order CFD trades earn small positive returns at the daily horizon, with negative returns reported for one month to one year horizons due to financing costs. Market orders also net sell positions, which suggests that investors use CFDs for shorting opportunities. Overall, we find that liquidity demanders in CFDs obtain favourable execution, which is inconsistent with the view that CFDs are used by naive individuals.     

Knowledge spillover from other assurance services

We argue that services which are complimentary and closer aligned to the annual report audit provide greater insight about risk and are more likely to exhibit the existence of economies of scope (knowledge spillover) through a positive association with audit fees. Specifically, we consider the potential for knowledge spillover from the auditing of triennial Long-Term Plans (LTP) to the annual report audit for a large sample of New Zealand municipals over the period 2005–2013. We find the LTP audit fees are positively related to municipal annual report audit fees and other fees (audit of for-profit subsidiaries, non-audit services) are not. This suggests that knowledge spillovers are dependent on the nature of the additional services. We also find evidence of higher fees for private sector auditors for both the annual report and the LTP audit. The LTP (forecast) audit fee is associated with municipal size, complexity, and political competition.     

Optimised asset replacement strategy in the presence of lead time uncertainty

This paper develops an optimal replacement strategy for capital intensive equipment with long delivery lead time. The strategy is based on an extended version of the real options approach to repeated replacement decisions, in which the goal is to determine the operating cost and delivery lead-time conditions upon which a replacement should be ordered.The real options approach to capital replacement problems is superior to traditional net present value (NPV) approaches, as it values of the option to adapt decisions based on current (rather than predicted) system conditions. However, previous applications of the real options approach to repeated replacement have not considered the impact of long and uncertain lead times, and have therefore focused on when to replace rather than when to order. Delivery lead times are an important consideration in an expanding mining sector in which demand for heavy mobile equipment (HME) exceeds the capacity of suppliers to provide the equipment in a timely manner.The inclusion of a lead time element results in a decision with an “option” period and an “option-less” period. Simulations are used to demonstrate the improved outcome of real options based replacement strategies compared with those derived using a traditional NPV approach, both with and without lead times. Further the performance of the order placement strategy with different boundary conditions, bounded and reflecting, is explored. No appreciable difference in performance of these strategies was identified. The optimal order placement strategy incorporating delivery lead times is displayed on a simple chart which is accessible to fleet management personnel.     

Utilization-focused performance reporting

How best to define performance measures is a much-debated issue. Mismatches between goals and indicators can lead to distortions that undermine impact-oriented steering. This article presents a model of goal and indicator development and explains its applicability, benefits and limitations.