Audit Fee Differential,Audit Effort,and Litigation Risk: An Examination of ADR Firms

Prior studies find that audit fees are higher for cross‐listed firms, and these studies primarily attribute the incremental fees to added litigation costs. In this study, we investigate whether the higher audit fees that foreign firms cross‐listed in the United States pay are also attributable to incremental audit effort associated with U.S. disclosure requirements and a more stringent U.S. auditing environment. By comparing audit fees of foreign cross‐listed firms to U.S. domiciled firms and to non‐cross‐listed foreign firms, we are able to decompose incremental audit fees into portions attributable to added audit effort and to added litigation costs. We find that, on average, foreign firms cross‐listed in the United States pay significantly higher fees than domestic U.S. firms and foreign firms that do not cross‐list. Furthermore, we find that audit effort is almost as important as litigation costs in explaining the higher fees associated with foreign cross‐listed firms; our estimates suggest that between 29 percent and 48 percent of the incremental fees are attributable to incremental audit effort. In addition, the total cross‐listing premium is increasing in the difference between the U.S. auditing regulatory environment and that of the home country of the cross‐listed firm. Our study improves our understanding of the role of audit effort in explaining the added fees charged by auditors when foreign firms cross‐list in the United States.     

Volatility spillovers to the emerging financial markets during taper talk and actual tapering

On 22 May 2013, Fed chairman, Ben Bernanke surprised markets by indicating to the media that the US Fed may taper its quantitative easing programme. This set out financial volatility across the globe over the next several months that spilled over to the financial markets of emerging market economies (EMEs). It prompted many EME central banks to take varied policy actions. Looking into this widely known event, this article presents formal empirical evidence establishing that (i) conditional volatility during taper talk exceeded that during actual tapering and (ii) volatility spillovers took place ‘contemporaneously’ from the US markets to the key EMEs during this period. The results suggest importance of careful communications by advanced economy central banks and the possibility of establishing ‘rules of the monetary game’. They also suggest that in the absence of international policy coordination to contain spillovers, EME central banks should build adequate buffers and reinforce financial stability ahead of the reversal of the global interest rate cycle.     

Financial deregulation and profit efficiency: A nonparametric analysis of Indian banks

The paper examines the impact of financial deregulation on cost and profit efficiency of Indian commercial banks during the post-reform period 1992–2004 using the nonparametric data envelopment analysis (DEA). The results indicate high levels of cost efficiency and lower levels of profit efficiency, reflecting the importance of inefficiencies on the revenue side of banking activity. The decomposition of profit efficiency suggests that a large portion of outlay lost is due to allocative inefficiency. A multivariate regression of the proximate causes of profit efficiencies highlights the importance of bank size, ownership, product diversity and prudential indicators as important variables driving these efficiency differences.     

Profit Multiplier in Covered Currency Trading with Leverage

Currency trading, fully hedged with forward contracts and propelled by leverage, is enunciated within a microstructure of trade in foreign exchange with real-time data from Reuters data banks, and verified with banks and exchange dealers, first without and then with transactions costs. It is shown that iterative trading operations compound net profits significantly, and the existing academic maxim on arbitrage is thus raised to a new height—both in terms of theory and practice.     

Optimum Capital Structure Redefined

Within a dynamic framework of capital growth and income generation, optimum capital structure of a firm is redefined under two alternative hypotheses. By the optimum control theory, it is shown that under conditions of perfect competition optimum equity/debt ratio of a firm can be uniquely determined in intertemporal maximization models of investor behavior. The result is new, but it is juxtaposed in the vast body of existing literature and finally compared with the Lintner-Sau and Modigliani-Miller models.     

On the Capital Structure of Real Estate Investment Trusts (REITs)

Much of the literature on capital structure excludes Real Estate Investment Trusts (REITs) due mainly to the unique regulatory environment of these firms. As such, the issue of how REITs choose among different financing options when they raise external capital is largely unexplored. In this paper, we explore two issues on the capital structure of REITs: is there a relationship between market-to-book and leverage ratios, and, is the relationship between market-to-book and leverage ratio temporary or persistent. Our results suggest that REITs with historically high market-to-book ratio tend to have persistently high leverage ratio. In essence, REITs with high growth opportunity and high market valuation raise funds through debt issues. This finding, which is robust to various specifications and econometric tests, is contrary to the financing decisions of non-regulated firms. We attribute it to the special regulatory environment of REITs where, despite no apparent benefits to debt financing, management issues debt. Comments from Robert Edelstein and others at the Maastricht–Cambridge 2005 Symposium, and an anonymous referee are gratefully acknowledged. Any remaining errors are our own.     

Volatility spillover in the foreign exchange market: the Indian experience

We find evidence of significant volatility co-movements and/or spillover from different financial markets to the forex market in India. Among a large number of variables examined, volatility spillovers from domestic stock, government securities, overnight index swap, Ted spread and international crude oil markets to the foreign exchange market are found to be significant. There is evidence of asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis volatility indicate that the reform measures and changes in financial markets microstructure during the crisis period had significant impact on volatility spillover. During the post-crisis period, the lagged volatility component that represents persistent or fundamental changes had significant spillover effect on forex volatility, rather than the temporary shocks component. There is evidence of a decline in the asymmetric response in the forex volatility during the post-crisis period in India.