Impact of proximity to debt covenant violation on earnings management

We examine the impact of differential incentives arising from proximity to debt covenant violation on earnings management. We reason that firms with loans close to violation or in technical default of their debt covenants have a stronger incentive to engage in earnings management than firms that are far from violating their debt covenants. We find results consistent with this expectation. Firms close to violation or in technical default of their debt covenants engage in higher levels of accounting earnings management, real earnings management, and total earnings management than far-from-violation firms. In additional analysis, we find that firms with a stronger incentive to avoid covenant violation switched from using more accounting earnings management before the Sarbanes–Oxley Act to using more real earnings management and more total earnings management afterwards. We also document that the earnings management implications of debt covenant violation are observed primarily for firms with poor credit ratings and for firms that do not meet analyst forecasts.     

Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?

Although accurate bond prices are difficult to come by, many have advocated that bank supervisors use subordinated debt spreads in the surveillance of large banking organizations. Our findings indicate that subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e., those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results further support and provide additional guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.     

Does computer-based training impact maintenance costs and actions? An empirical analysis of the US Navy’s AN/SQQ-89(v) sonar system

The United States Navy decided in the early 2000s to replace traditional, instructor-led schoolhouse training with computer-based training (CBT). While employing CBT may produce gains in knowledge acquisition and lower costs for repetitive, low-skill work, there is a lack of empirical evidence whether these benefits exist for more highly skilled Navy operations. Anecdotal evidence suggests that CBT failed to sufficiently prepare new sailors for sophisticated systems’ maintenance and operation. To determine the validity of this evidence, we examine how CBT has affected the AN/SQQ-89(v) sonar. We empirically analyse whether the Navy’s introduction of CBT significantly altered fleet maintenance costs, actions and training requirements, by assembling a unique data set of ships, locations, personnel, maintenance costs and maintenance actions. Controlling for the Navy’s plan to man the system, the number of authorized billets and the number of personnel on board, we find that CBT adversely impacts costs, actions and maintenance hours for the sonar system.     

The Brazilian national quality award: sharing some best practices of the winner in 1993

The Brazilian National Quality Award, a local version of the Malcolm Baldrige Award, was created as part of Brazil's efforts to step up the competitiveness of its industry. When it was first launched, in 1992, there was only one winner: IBM Brasil, Sumaré Plant. Nevertheless, its positive impact is being increasingly felt by companies in Brazil, mainly as a stimulus for implementing total quality. The finalists have an important role to play in this respect. This paper discusses some of the most relevant best-practices of the sole winner of the 1993 Brazilian Quality Award, Xerox Brazil. By the same token, it hopes to provide fresh insights about successfully managing total quality strategies in Brazil.     

Agglomeration and social return to R&D: Evidence from French plant productivity changes

This paper investigates the effect of inter-firm and intra-firm spillovers on the productivity of firms, using French data. The Luenberger Productivity Indicator (LPI) is used to estimate the productivity and to break it down into several components (e.g. efficiency, biased technical progress, scales effects, etc.). Using this approach, negative productivity changes are found due to the unfavourable economic situation over 2000-2002. Diverse forms of intra- and inter-firm externalities are then investigated through a Maximum Likelihood Random Effect (MLRE) model. Spillover effects due to spatial agglomeration - influencing Total Factor Productivity (TFP) and its correspondent components, technological and efficiency changes, are found.     

Reevaluation of the structure-conduct-performance paradigm in banking

In the banking industry, the structure-performance relationship has frequently been evaluated with results suggesting that collusive profits occur. These studies have been criticized for inappropriately accounting for entry barriers,ad hoc assumptions concerning the appropriate structure measure, limited samples, and ignoring firm efficiency differences. We address these concerns and find categorical support for the efficient structure hypothesis, and limited support for the traditional structure-collusion hypothesis when markets are characterized by significant entry barriers. The findings suggest the competing hypotheses may actually be complementary theories, and the negative role of entry barriers may be more important than previously thought. Federal Reserve Bank of Chicago     

Smarter offshoring

During the past 15 years, companies have flocked to a handful of cities in India and Eastern Europe for offshore service functions. As a result, the most popular sites are now overheating: Demand for young professionals is outstripping supply, wages and turnover are soaring, and overburdened infrastructure systems are struggling to serve the explosive growth. The happy news is that the tight labor markets in the well-known hot spots are the exceptions, not the rule. Many attractive alternatives are emerging around the world. According to a McKinsey Global Institute study, more than 90% of the vast and rapidly growing pool of university-educated people suitable for work in multinationals are located outside the current hot spot cities. For instance, Morocco is now home to offshore centers for French and Spanish companies requiring fluent speakers of their home languages. Neighboring Tunisia has used its modern infrastructure, business-friendly regulations, and stable, low-cost workforce to attract companies such as Siemens and Wanadoo. Vietnam offers university graduates who have strong mathematics skills; speak French, English, German, or Russian; and do not demand high wages. The problems facing the hot spots, coupled with the emergence of many more countries able and willing to provide offshore services, mean that picking a site has become more complicated. In choosing a location, companies will have to focus less on low wages and much more on other ways that candidate cities can fulfill their business needs. They will have to be much more rigorous in articulating precisely what they require from an offshore location. That means evaluating their unique needs on a range of dimensions and understanding how alternative locations can meet those needs for the foreseeable future.     

Analysis of Participating Life Insurance Contracts: A Unification Approach

Fair pricing of embedded options in life insurance contracts is usually conducted by using risk‐neutral valuation. This pricing framework assumes a perfect hedging strategy, which insurance companies can hardly pursue in practice. In this article, we extend the risk‐neutral valuation concept with a risk measurement approach. We accomplish this by first calibrating contract parameters that lead to the same market value using risk‐neutral valuation. We then measure the resulting risk assuming that insurers do not follow perfect hedging strategies. As the relevant risk measure, we use lower partial moments, comparing shortfall probability, expected shortfall, and downside variance. We show that even when contracts have the same market value, the insurance company's risk can vary widely, a finding that allows us to identify key risk drivers for participating life insurance contracts.     

A discrete choice model of dividend reinvestment plans: classification and prediction

We use a discrete choice recursive model to classify companies with and without dividend reinvestment plans (DRIPs). Our model classifies 72.0% of companies correctly. We interpret misclassified companies as being likely to switch their plan status. For example, if financial data erroneously suggest that a company should have a DRIP then we expect that it would be more likely to institute a plan than other companies in the sample. Our results support this conjecture. Companies that add DRIPs tend to have more extreme levels of variables that control for management entrenchment, higher levels of variables that control for the ability to pay dividends and higher payout ratios. Copyright © 2011 John Wiley & Sons, Ltd.