Spoilage with a Production Function

The traditional accounting for spoilage has been somewhat ad hoc since there has been no general theory of how spoilage occurs or can be controlled. This paper uses an economic analysis to model the determinants of spoilage in the production process and to show how normal spoilage can be chosen in a cost minimisation program. The model also generates an expanded variance analysis of spoilage which provides guidance in the investigation and interpretation of abnormal spoilage. It is argued that this approach results in both optimal and flexible product decisions.     

The Predictive Value of Expenses Excluded from Pro Forma Earnings

We investigate the informational properties of pro forma earnings. This increasingly popular measure of earnings excludes certain expenses that the company deems non-recurring, non-cash, or otherwise unimportant for understanding the future value of the firm. We find, however, that these expenses are far from unimportant. Higher levels of exclusions lead to predictably lower future cash flows. We also find that investors do not fully appreciate the lower cash flow implications at the time of the earnings announcement. A trading strategy based on the excluded expenses yields a large positive abnormal return in the years following the announcement, and persists after controlling for various risk factors and other anomalies.     

The sharpest tool in the shed: IPO financial statement management of STEM vs. non-STEM firms

The valuation of STEM (science, technology, engineering, and math) firms has recently gained attention in the literature. Research has shown that, for valuation of STEM firms, accounting items such as sales growth and R&D expenditures matter more than bottom-line earnings. We examine whether, around the time of the IPO, STEM managers apply discretion over the accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in valuing STEM firms and that managers respond by managing those items rather than bottom-line earnings as in prior research. We find that future stock returns of STEM firms are negatively associated with sales management and not with abnormal accruals as for non-STEM firms. Our results illuminate the differential behavior of STEM managers and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.     

ECONOMETRIC MODEL OF THE TURKEY INDUSTRY IN THE UNITED STATES

This paper is an empirical investigation of the several major relationships that explain the behavior of the U.S. turkey industry in the 1946-66 period. A model is constructed that consists of four structural equations: (1) consumer demand, (2) farm supply, (3) cold storage accumulation, and (4) cold storage liquidation, and an identity equation. Four different estimation techniques are used to derive values for the structural parameters. These procedures are: (1) ordinary least squares (OLS), (2) limited information single equation (USE). (3) two stage least squares (TSLS). and (4) three stage squares (3SLS). The estimation techniques are evaluated by assessing their forecasting ability against observed data in the post 1966 period. So one method proved superior to another. An index of dispersion indicated that 3SLS is superior in forecasting consumer demand and farm supply. The 3SLS and OLS are about equal in forecasting cold storage accumulation, and TSLS, LISE. and OLS are about equal forecasters for cold storage liquidation. Cel article répresente une étude empirique des facleurs imporlanls qui servenl à expliquer ?induslrie américaine ?élevage de dindes. au cours de la période 1945-66. Un modèle est construit qui comporte qualre équations structurelles: la demande finale. (2) ?off re au niveau de ?exploitation agricole. (3) ?accumulation de slocks de viande congelée. et (4) le liquidation des stocks, plus une équation ?identité. Quaire différentes techniques ?estimalion sont utilisées pour déterminer la valeur des parametres: (1) simples moindres carrés, (2) équation unique avec information limitée, (3)doubles moindres carrés. et (4) triples moindres carrés. En se hasant sur la qualité des previsions par rapport aux observations de la période postérieure à 1966. on a pu évaluer les différentes techniques ?estimalion, pour se rendre compte qu'aucune méthode ne s'est avérée supérieure aux autres. Un indice de dispersion démontre que les triples moindres carrés fournissenl une meilleure prévision de la demande finale et de ?offre au niveau de ?entreprise. Les triples moindres carrés et les simples moindres carrés sont équivalents lorsqu'il s'agit de prévoir ?accumulalion des slocks. ?équation simple avec information limitée peut prédire ?écoulement des stocks avec une précision sensihlemenl égale à celle obtenue avec les simples et triples moindres carrés.     

Institutional quality,economic freedom and stock market volatility in the MENA region

How can a government help secure low-cost equity financing? This study offers an answer that a government can secure sustainable economic progress when policies of economic freedom are well institutionalized in a way that results in low equity volatility, thus low-cost equity financing. This study examines the quantitative and empirical associations between elements of Economic Freedom Index (being treated in this study as a proxy for institutional quality) and stock market volatility. The authors classify the institutional quality into three levels: high, medium and low. The data cover the years 1996–2014 for the MENA countries. The statistical tests include fixed and random effects, linearity versus non-linearity. The results show that stock market volatility can be mitigated and reduced when economic freedom is associated with an effective enforcement of law and efficient regulations. Nevertheless, the high freedom from corruption results in active equity trading which is associated with high volatility that leads in turn to high cost of equity financing. The study contributes to the literature in terms of offering practical insights on the pillars of economic freedom that policymakers must improve in order to mitigate or reduce equity volatility, therefore cost of equity financing.     

Non-GAAP earnings and board independence

We examine the association between board independence and the characteristics of non-GAAP earnings. Our results suggest that companies with less independent boards are more likely to opportunistically exclude recurring items from non-GAAP earnings. Specifically, we find that exclusions from non-GAAP earnings have a greater association with future GAAP earnings and operating earnings when boards contain proportionally fewer independent directors. Consistent with the association between board independence and the permanence of non-GAAP exclusions reflecting opportunism rather than the economics of the firm, we find that the association declines following Regulation G and that managers appear to use exclusions to meet earnings targets prior to selling their shares more often in firms with fewer independent board members. Overall, our results suggest that board independence is positively associated with the quality of non-GAAP earnings.