Robust Measures of Earnings Surprises

Event studies of market efficiency measure earnings surprises using the consensus error (CE), given as actual earnings minus the average professional forecast. If a subset of forecasts can be biased, the ideal but difficult to estimate parameter‐dependent alternative to CE is a nonlinear filter of individual errors that adjusts for bias. We show that CE is a poor parameter‐free approximation of this ideal measure. The fraction of misses on the same side (FOM), which discards the magnitude of misses, offers a far better approximation. FOM performs particularly well against CE in predicting the returns of U.S. stocks, where bias is potentially large.     

Portfolio Manager Compensation in the U.S. Mutual Fund Industry

We study compensation contracts of individual portfolio managers using hand‐collected data of over 4,500 U.S. mutual funds. Variations in the compensation structures are broadly consistent with an optimal contracting equilibrium. The likelihood of explicit performance‐based incentives is positively correlated with the intensity of agency conflicts, as proxied by the advisor's clientele dispersion, its affiliations in the financial industry, and its ownership structure. Investor sophistication and the threat of dismissal in outsourced funds serve as substitutes for explicit performance‐based incentives. Finally, we find little evidence of differences in future performance associated with any particular compensation arrangement.     

Inflation and Innovation in a Schumpeterian Economy with North–South Technology Transfer

This study analyzes how inflation affects innovation and international technology transfer via cash‐in‐advance constraints on R&D. We consider a North–South quality‐ladder model that features innovative Northern R&D and adaptive Southern R&D. We find that higher Southern inflation causes a permanent decrease in technology transfer, a permanent increase in the North–South wage gap, and a temporary decrease in the Northern innovation rate. Higher Northern inflation causes a temporary decrease in the Northern innovation rate, a permanent decrease in the North–South wage gap, and ambiguous effects on technology transfer. Finally, we calibrate the model to China–U.S. data to perform a quantitative analysis.     

Audit Committees and Managerial Influence on Audit Quality: ‘Voluntary’ versus ‘Mandatory’ Approach to Corporate Governance

This study provides empirical evidence on how managerial influence to reduce audit quality is moderated by a combination of the audit committee (AC) form and compliance with AC best practice guidelines. There is a negative association between managerial ownership and audit fees; however, the association becomes positive when a voluntary AC follows best practices. Furthermore, the results are robust to the exclusion of industries with large frequency in the sample, the consideration of Korean business groups and recessionary times. The results of this study imply that a voluntary approach to corporate governance, which encourages companies to follow best practice guidelines in the form and composition of the AC, is more effective in controlling management than a mandatory approach. This study contributes to policy making aimed at improving AC effectiveness.     

Audit Partner Disciplinary Actions and Financial Restatements

This study investigates the signalling role and rectification effectiveness of an audit partner disciplinary system. The signalling role refers to whether sanctions reflect the poor audit quality of disciplined audit partners, and rectification effectiveness addresses whether disciplinary actions enhance subsequent audit quality. The sample consists of Taiwanese listed companies, in the period 2000 to 2006, where the identities of audit partners who sign audit reports and who are sanctioned are accessible. Empirical results indicate that in the pre‐sanction period, the probability of financial restatements by clients of disciplined audit partners is significantly higher than that of non‐disciplined audit partners. The more severe or frequent the sanctions, the higher the likelihood of financial restatements in the pre‐sanction period. These findings imply that audit partner disciplinary actions can serve as a signal of lower audit quality provided by those partners. The rectification effectiveness of disciplinary actions is examined from two perspectives: (1) the effects on subsequent improvements of audit quality of disciplined audit partners; and (2) audit quality enhancement of successor non‐disciplined audit partners who accept clients from disciplined audit partners. Empirical results show a lower probability of restating financial statements audited by disciplined audit partners after sanctions. We also find a lower likelihood of restating financial statements audited by successor non‐disciplined audit partners in the post‐sanction period. Both findings support our conclusion that audit partner sanctions improve audit quality. Overall, audit partner disciplinary actions can signal lower quality audit partners and are effective in enhancing audit quality.     

Do investors misprice components of net periodic pension cost?

We examine whether and how investors misprice the components of net periodic pension cost under SFAS No. 87 and 158. We find that investors appear to have difficulty in understanding the transitory feature of other net periodic pension cost (PPOPCC) and thus overestimate its persistence, which in turn leads to the mispricing of PPOPCC in the pre‐158 period. We also find that SFAS No. 158 appears to reduce the mispricing of PPOPCC, suggesting a positive effect of SFAS No. 158 on investors' valuation of pension items in the income statement. Additional analysis suggests that investors also overestimate the persistence of, and thus misprice, pension‐related cash flows and accruals in the pre‐158 period and that SFAS No. 158 reduces the mispricing of pension‐related cash flows and accruals.     

The Effects of Executive,Firm, and Board Characteristics on Executive Exit

We estimate a hazard model of the probability of top corporate executives exiting their firms over the period 1996–2010. Our main findings are that: (1) female executives have greater likelihoods of exit than males, (2) the likelihood of exit increases with the independence of the board and decreases with the fraction of the board that is female and the average age of board members, and (3) a higher percentage of independent directors on the board lowers the probability of exit more for females than for males. Further, controlling for exit risk reduces the well‐documented compensation differential between men and women.     

Effects of time horizon and asset condition on the profitability of technical trading rules

In much of the literature, the debate over technical trading strategies has centered around the question of whether an actively managed portfolio, controlled by a technical indicator, can outperform a passively managed portfolio. Typically, the time horizon is considered to be years. Additionally, the trader is assumed to use a technical trading strategy that is independent of asset conditions. These assumptions may not correspond well with reality. Traders often have much shorter time horizons and may switch between rebalancing or trading strategies on the basis of perceived shifts in market condition. This paper presents a study of the profitability of technical trading rules as a function of asset state or condition. Several common technical trading strategies were run on 296 stocks over a 15 year period. Strategies were run with 1 month rolling time horizons, significantly shorter than those used in similar studies in the literature. Stocks were segmented based on volatility and volume, which allowed for the examination of a strategy’s performance in different asset conditions. Several strategies were demonstrated to have consistently better risk-to-reward ratios under specific asset conditions and short time horizons. This finding helps to explain why some practitioners implement technical trading strategies.