Employee Movements from Audit Firms to Audit Clients

Regulators have expressed concerns about the “revolving door” between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., “direct alumni hires”). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company's financial statements. In contrast, we examine accounting and finance executives who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company's financial statements (i.e., “indirect alumni hires”). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover and audit firm turnover. However, there is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment or that these hires are associated with lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms because they reduce the incidence of costly turnover.     

An Economist's Comment on Philosophico-Economic Relationships

In this journal, Welch and Mueller (WM) (2001) demonstrated a classificatory method for conceptualizing relationships between religion and economics. No judgement can be drawn from WM as to which of their four classifications might be a, or the, correct one. They conclude that the relationships are “both complex and controversial”, and that before any assessment can be apprehended adequately of how the two fields interact, “the permutations and subcategories implied by the system” used need to be identified and explored more thoroughly. This paper pursues that path, but argues that a more determinate verdict than WM's is possible. Here, an alternative interpretation of the relationship between religion and economics is investigated, in which WM's categories are assessed. In the alternative, WM's four classes are not taken to possess equal intellectual merit, as they appear to be. Using more current and comprehensive definitions of religion than WM's, a case is constructed that three of their four categories possess greater intellectual value than the remaining one. These three are here collapsed into one new mega-category regarded as that most validly describing the relationship between religion and economics.     

The investment value of the value premium

Value investment strategies are premised on research that value stocks outperform growth stocks. However, the research findings are dependent on the portfolio classification method that is used to sort stocks using the attributes of size and book-to-market ratios. Different stock markets contain different distributions of stocks, and in many markets, illiquidity concerns combined with a lack of investment scale, effectively create barriers to practical portfolio formations that align with the research. This study conducts a case study on one such market (Australia) and demonstrates that different methods of portfolio formation lead to different conclusions. For example, previous studies in Australia find evidence of the value premium only being present in the largest stocks, in contrast to the results from the US market. However, we find a value premium that is systematic across all size categories and generally increases inversely with size. Further, we find the well-documented size premium largely disappears once portfolios are formed that better represent feasible investment sets and once ‘penny dreadfuls’ are removed. Finally, asset pricing tests support the existence of a value premium in Australian stock returns when a more appropriate portfolio formation method is employed.     

Some Ethical Dilemmas in the Handling of Police Informers

Decision-making by police officers often involves complex problems and this is particularly so in the recruitment and management of informers—and area of policing generally shrouded in mystery and secrecy. Drawing on research conducted in two police force areas, this article identifies and discusses some of the concerns of officers involved in this activity and concludes they are ill-prepared to deal with the ethical dilemmas they are confronted with.     

A long memory property of stock market returns and a new model

A ‘long memory’ property of stock market returns is investigated in this paper. It is found that not only there is substantially more correlation between absolute returns than returns themselves, but the power transformation of the absolute return ¦r_t¦^d also has quite high autocorrelation for long lags. It is possible to characterize ¦r_t¦^d to be ‘long memory’ and this property is strongest when d is around 1. This result appears to argue against ARCH type specifications based upon squared returns. But our Monte-Carlo study shows that both ARCH type models based on squared returns and those based on absolute return can produce this property. A new general class of models is proposed which allows the power δ of the heteroskedasticity equation to be estimated from the data.