Deregulation of the Electric Power Industry: The Earnings,Risk, and Return Effects

This study tests whether recent reforms of the electric power industry reverse the predicted effects of regulation on profits, risk, and return for electric utilities. The analysis also considers potential variation in the effects of the reforms across utility sizes. The empirical predictions are derived from theories of economic regulation which argue that regulation reduces earnings variability and risk, and enhances share value by buffering the regulated firms against the profit effects of cost and demand shocks and by shifting the burden of inefficiencies to consumers. These views motivate an opposite argument that reductions of regulation would reverse the predicted effects of regulation. The results reveal (1) a reversal of the buffering effects of regulation, (2) the existence of subsidies attributable to regulation, and (3) a redistribution of shareholder wealth during the reforms.     

2018 WTO Trade Policy Review of Malaysia

This paper presents an academic analysis and review of the recently completed WTO Trade Policy Review (TPR) of Malaysia, 2018. This includes suggesting policies that can help to promote Malaysia's international competitiveness. We show that the sharp decline in commodity prices that started in 2014 contributed in narrowing Malaysia's trade balance and current account balance as a share of GDP. The faster decline of exports as a share of GDP compared to imports accounted for most of the substantial reduction. Further, the collapse of commodity prices was accompanied by a sharp depreciation of Ringgit Malaysia. We also show that Malaysia is losing international attractiveness in terms of FDI inflows relative to its economic size. This is evidenced by the downward trend in Malaysia's FDI performance index since 1992. Further, international tourism has fallen on average since 2014, due largely to a drop in tourist arrivals from Singapore. Policymakers should introduce policies to enhance international competitiveness, such as reforming the education system to produce skilled workers and reducing reliance on low‐skilled foreign workers.     

Valuation Relevance of Allowance for Funds Used During Construction and Operating Income: The Effects of Regulatory Climates and Deregulation

This study considers the valuation relevance allowance for funds used during construction (AFUDC), operating income (OI), and their innovations across regulatory climates and regulatory reforms. Valuation relevance is assessed by examining the coefficients and R ²s from the regressions of returns on AFUDC, OI, and their innovations. Regulatory climate is predicted to affect valuation relevance of earnings components on the premise that different regulatory regimes enact and enforce policies that differently affect (1) the uncertainty of future earnings, (2) the recovery of deferred assets, and (3) the sustainability of earnings innovations. In an extended analysis, indicators of rate-base valuation method and leverage are added as control variables to isolate their mediating effects on returns for electric utilities. Additional analysis considers the effects of the Energy Policy Act (EPAct) of 1992 on the valuation of earnings components. The results reveal that AFUDC and OI are valued differently relative to each other and across regulatory climates. The results also show a significant decline in the explanatory power of earnings components after the passage of the EPAct in 1992. Rate-base valuation method has no discernible effects on returns for the utilities. On the other hand, the effect of leverage on returns for the utilities is reliably negative.     

Imported Intermediates,Absorptive Capacity and Productivity: Evidence from Ghanaian Manufacturing Firms

This paper analyses whether the use of imported intermediates improves productivity using firm‐level panel data of manufacturing firms in Ghana covering the period between 1991 and 2002. This includes examining the importance of absorptive capacity (ABC) in enhancing the productivity gains from imported intermediates. We propose lagged relative productivity as a new measure of ABC. For any given period, ABC is defined as the natural logarithm of a firm's total factor productivity (TFP) in the previous period relative to the firm's initial TFP. An alternative measure of ABC considers real value added per worker in lieu of TFP. Overall, we find that firms with high levels of ABC derive productivity gains from the contemporaneous and prior use of imported intermediates, particularly for firms operating in the input‐intensive industries. Our findings are robust to different specifications of the base model and different estimation techniques.     

Sarbanes–Oxley Act and the quality of earnings and accruals: Market-based evidence

In this paper we study the impact of the Sarbanes-Oxley Act (SOX) on the valuation weights of earnings and earnings components. The analysis seeks evidence that SOX is associated with changes in investors’ perception of earnings and accruals quality. Of particular interest in the analysis is the effect of SOX on the valuation weight of discretionary accruals that are perceived to be most vulnerable to manipulation prior to SOX. We find reliable increases in the valuation weights of earnings and earnings components after the passage of SOX. Nonetheless, we also find that the post-SOX shifts in the valuation weights of earnings and earnings components are indistinguishable from zero among firms in which the percentage equity shares held by institutional investors is 15% or greater.     

Accounting Information and CEO Compensation: The Role of Cash Flow from Operations in the Presence of Earnings*

We examine the role of cash flow from operations (CFO) in chief executive officer (CEO) cash compensation. We predict that CFO is contract‐relevant in the presence of earnings, and more so when (1) the quality of earnings relative to the quality of CFO as a measure of performance is low and (2) the need for CFO as a financing source is high. Our analysis is motivated principally by normative arguments and anecdotes from financial disclosures linking CFO to managerial effort and contracts, notwithstanding the traditional role of earnings in performance measurement. We find that the weight of CFO in the compensation model is positive and significant in the presence of earnings and stock returns. We also find that the relative quality of CFO compared with that of earnings has a positive (negative) impact on the weight of CFO (earnings). We further find that the relative weight of CFO is enhanced substantially when enterprise activities crucially depend on internally generated cash flow. These findings are unaltered when we include CEO age, firm size, and risk in the model and allow the coefficients to vary across industries.     

The implications of TARP: Evidence from bank performance and CEO pension benefits

This study examines the effect of compensation restrictions introduced by the Troubled Assets Relief Program (TARP) of 2008 on the performance of banks and their compensation structures. It documents significant performance improvement among TARP banks that experienced Chief Executive Officer (CEO) resignations after their banks accepted TARP funds. The improvement is most significant in the year following CEO resignation. In addition, TARP banks that kept their CEOs show a significant increase in CEO pensions post-TARP. TARP banks that did not experience CEO resignations, thus, appear to substitute pension increases for their CEOs to mitigate the TARP-induced decrease in conventional forms of compensation. Further analysis on all banks without CEO resignations shows that TARP banks have significantly higher increase in pension benefits post 2009 than banks that chose to decline TARP funds. The evidence shows that increased pension arrangements play a significant role in CEOs’ decisions to remain in their roles despite the constraints imposed by TARP.     

The Adjustment Process of Accruals: Empirical Evidence and Implication for Accrual Research

This study analyzes the intertemporal behavior of accruals and uses the results to offer some perspectives on models of accruals. Separate adjustment rates are estimated for total and managed accruals and further compared to assess the influence of managers on accrual adjustment. Analysis is further performed to test whether there is an industry-specific adjustment rate for either total or managed accruals. The results show that both the total and managed accruals follow a partial adjustment process rather than a pure-adjustment or random-walk process. Nonetheless, managed accruals exhibit longer adjustment length than total accruals in each industry sample. In addition, total and managed accruals appear to follow certain adjustment patterns that are industry-specific, consistent with the view that common industry practices and norms lead to benchmark adjustment rates to which industry firms conform. Based on the results showing that accruals exhibit lagged and industry-specific adjustments, an extension of the modified Jones model is proposed. The extended model incorporates lagged accruals and an industry accrual index in an attempt to exploit the lagged-adjustment and industry effects and, in that context, improve the temporal classification of accrual innovations. Simple tests show that the extended model achieves substantial improvements in specification over the modified Jones model.     

Social Investment through Community Enterprise: The Case of Multinational Corporations Involvement in the Development of Nigerian Water Resources

This paper examines the different mechanisms used by multinational corporations (MNCs) in Nigeria seeking to make long-term social investments by meeting the critical challenge of improving water provision. Community enterprise – an increasingly common form of social enterprise, which pursues charitable objectives through business activities – may be the most effective mechanism for building local capacity in a sustainable and accountable way. Traditionally, social investments by MNCs have involved either donations to a charity, which then assumes responsibility for delivering social outcomes, or direct management of social investment in-house. These approaches have been criticized, however, for their limited contribution to local capacity building, their focus on short-term outcomes, and the restricted role that they afford to communities. Partnering with community enterprise, provided there is sufficient local capacity to support it, is the most effective mode of governance through which MNCs can manage social investments in developing countries. Dr. Emeka Nwankwo is the Chairman and Chief Executive Officer of Aquada Development Corporation, an infrastructure and technology development firm based in Nigeria. Nelson Phillips is the Professor of Strategy and Organizational Behavior at the Tanaka Business School, Imperial College London. Paul Tracey is a Lecturer in Enterprise at the Centre for Small and Medium Sized Enterprises, Warwick Business School, University of Warwick.