THE NATURE AND ACTION OF FABRIC SOFTENERS

Although the market for fabric softeners has grown in recent years very little is known of how they function in practice. In this review the properties and uses of cationic fabric softeners in relation to their chemical structure is discussed.     

Standard-setting in Australia: Implications of Recent Radical Reform Proposals

We examine the implications of the Howard government's Corporate Law Economic Reform Program as they relate to accounting standard-setting in Australia. A luck of systematic and compelling evidence for wholesale changes to the existing standard-setting process is identified, as is a fundamental shift in the rationale for standard-setting which underlies the proposed changes. We disagree with the main plank of the proposals, that is, that international accounting standards should be adopted in Australia.     

THE VALUE-RELEVANCE OF UK DIRTY SURPLUS ACCOUNTING FLOWS

Misgivings about dirty surplus accounting practices derive, in part, from two related concerns. Firstly, it has been argued that dirty surplus accounting might result in value-relevant items being reported within ‘dirty surplus flows’ rather than within earnings. Secondly, it has been suggested that the low transparency of dirty surplus flows might reduce investors' ability to recognize value-relevant items in a timely fashion. In this study, we address the first of these concerns. We examine UK stock returns and accounting flows accumulated over intervals of up to 20 years. We report evidence on the value-relevance of accounting flows which were excluded from ‘ordinary profit’ (i.e. accounting profit exclusive of extraordinary items) in the UK over the period from 1972 to 1992. Our tests provide strong evidence that UK ordinary profit is value-relevant and provide some evidence, on the basis of long-interval tests, that extraordinary items are value-relevant. There is little evidence that other flows excluded from ordinary profit are value-relevant, however. These finding may allay concerns that, by allowing value-relevant flows to bypass reported earnings, dirty surplus accounting practices have promoted undesirable ‘creative accounting’ activity by UK firms.     

Real Options Models of the Firm,Capacity Overhang,and the Cross Section of Stock Returns

We use a stochastic frontier model to obtain a stock‐level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this “capacity overhang” estimate relates significantly negatively to the cross section of stock returns, even when controlling for popular pricing factors. The negative relation persists among small and large stocks, stocks with more or less reversible investments, and in good and bad economic states. Capacity overhang helps explain momentum and profitability anomalies, but not value and investment anomalies. Our evidence supports real options models of the firm featuring valuable divestment options.     

Tests for Price Effects of New Issues of Seasoned Securities

Do new issues of seasoned securities cause significant price movements in the neighborhood of the issue day? This paper presents an empirical comparison of three competing hypotheses: the SEC view that a new issue causes a permanent price decline; the underwriter view that there is only a temporary price decline during the distribution period; and the efficient market hypothesis (EMH) that implies the absence of any price effects. Several empirical tests of the competing hypotheses using data on new issues of utility stocks traded on the NYSE reject the SEC and underwriter views in favor of the EMH.     

The Monitoring Incentive of Transactional and Relationship Lenders: Evidence from the Syndicated Loan Market

We identify a group of lenders specializing in syndicating tradable loans (referred to as transactional lenders [TLs]). We show that borrowers borrowing from TLs experience worse operating performance and more severe credit quality deterioration after loan origination compared to those borrowing from relationship lenders. This difference in the postloan issue performance remains robust after controlling for the potential self‐selection of the lender type, or using percentage of traded loans out of all syndicated loans to capture lenders’ propensity for syndicating tradable loans. Our results also remains qualitatively the same after we drop various types of risky loans.     

The Valuation of Sequential Exchange Opportunities

Sequential exchange opportunities are valued using the techniques of modern option-pricing theory. The vehicle for analysis is the concept of a compound exchange option. This security is shown to exist implicitly in several contractual settings. A valuation formula for this option is derived. The formula is shown to generalize much previous work in option pricing. Several applications of the formula are presented.     

The Value of Corporate Risk Management

We model and estimate the value of corporate risk management. We show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices. For a sample of 34 oil refiners, we find that hedging concave revenues and leaving concave costs exposed each represent between 2% and 3% of firm value. We validate our approach by regressing Tobin's q on the estimated value and level of risk management and find results consistent with the model.     

Effect of Analysts' Optimism on Estimates of the Expected Rate of Return Implied by Earnings Forecasts

Recent literature has used analysts' earnings forecasts, which are known to be optimistic, to estimate implied expected rates of return, yielding upwardly biased estimates. We estimate that the bias, computed as the difference between the estimates of the implied expected rate of return based on analysts' earnings forecasts and estimates based on current earnings realizations, is 2.84%. The importance of this bias is illustrated by the fact that several extant studies estimate an equity premium in the vicinity of 3%, which would be eliminated by the removal of the bias. We illustrate the point that cross‐sample differences in the bias may lead to the erroneous conclusion that cost of capital differs across these samples by showing that analysts' optimism, and hence, bias in the implied estimates of the expected rate of return, differs with firm size and with analysts' recommendation. As an important aside, we show that the bias in a value‐weighted estimate of the implied equity premium is 1.60% and that the unbiased value‐weighted estimate of this premium is 4.43%.