Comparing Alternative Hedge Accounting Standards: Shareholders' Perspective

We study the economic consequences of alternative hedge accounting rules in terms of managerial hedging decisions and wealth effects for shareholders. The rules we consider include the fair-value and cash-flow hedge accounting methods prescribed by the recent SFAS No. 133. We illustrate that the accounting method used influences the manager's hedge decision. We show that under no-hedge accounting, the hedge choice is different from the optimal economic hedge the firm would make under symmetric and public information. However, under a certain definition of fair-value hedge accounting, the hedging decision preserves the optimal economic hedge. We then demonstrate that long-term and future shareholders prefer a certain definition of fair-value hedge accounting to no-hedge accounting, while short-term shareholders prefer either approach depending on risk preferences and the level of uncertainty. We speculate about circumstances in which a manager would choose not to adopt fair-value hedge accounting when he has the option not to do so.     

The impact of firm strategy on performance measures used in executive compensation

We investigate the relationship between firm strategy and the use of performance measures in executive compensation. Our analysis shows that there is an increased emphasis on sales in the determination of executive compensation for firms pursuing a cost leadership strategy, which seek to achieve their competitive advantage through low price and high volume. In contrast, there is a decreased emphasis on accounting measures in firms pursuing a differentiation strategy, which require investments in brand recognition and innovative products, investments that are subject to unfavorable accounting treatment. These results indicate that compensation committees link executive rewards to firm strategy.     

Loss Coverage as a Public Policy Objective for Risk Classification Schemes

This article suggests that from a public policy perspective, some degree of adverse selection may be desirable in some insurance markets. The article suggests that a public policymaker should consider the criterion of “loss coverage,” and that in some markets a policymaker may wish to regulate risk classification with a view to increasing loss coverage. Either too much or too little risk classification may reduce loss coverage. The concept is explored by means of examples and formulaic and graphical interpretations. An application to the UK life insurance market is considered.     

Who Uses Facts Up Front? A Baseline Examination of Who is Using Standardized Front‐of‐Package Nutrition Disclosures

The Facts Up Front front‐of‐package (FOP) nutrition system is currently displayed on packaged foods in the United States. This initiative is being implemented by more than 50 manufacturers, retailers, and wholesalers in the United States on their branded and private‐label packaged food products. The in‐store presence of Facts Up Front is supported by a recently launched consumer education campaign. This study employs a sample of 1,400 female primary household shoppers with children, with oversamples of Hispanic and African American ethnic subgroups, to examine initial awareness and evaluations of Facts Up Front. Results show that Hispanics are more aware of and engaged with Facts Up Front than Caucasians. African Americans report higher levels of engagement and understanding of Facts Up Front vs. Caucasians. Importantly, Hispanic and African American mothers also report using this FOP system to make decisions. Based on these findings, important implications are offered for consumer welfare and public policy.     

Financing constraints and US cross‐listing

This study investigates whether relaxation of firms' financial constraints is an important outcome of the US cross‐listing mechanism. We use the association between investment spending and cash flow to test for the presence and importance of firms' financing constraints. Consistent with the bonding hypothesis, the results suggest that US exchange and private placement cross‐listings significantly alleviate firms' financing constraints. In addition, the financial benefits associated with exchange listings are larger than those associated with private listings, while on the other hand, over‐the‐counter programs do not improve capital allocation. The study also shows that US exchange cross‐listing benefits have not been eroded by the enactment of the Sarbanes‐Oxley (SOX) Act in 2002. Copyright © 2014 ASAC. Published by John Wiley & Sons, Ltd.     

Backtesting Stochastic Mortality Models

Abstract

This study sets out a backtesting framework applicable to the multiperiod-ahead forecasts from stochastic mortality models and uses it to evaluate the forecasting performance of six different stochastic mortality models applied to English & Welsh male mortality data. The models considered are the following: Lee-Carter’s 1992 one-factor model; a version of Renshaw-Haberman’s 2006 extension of the Lee-Carter model to allow for a cohort effect; the age-period-cohort model, which is a simplified version of Renshaw-Haberman; Cairns, Blake, and Dowd’s 2006 two-factor model; and two generalized versions of the last named with an added cohort effect. For the data set used herein, the results from applying this methodology suggest that the models perform adequately by most backtests and that prediction intervals that incorporate parameter uncertainty are wider than those that do not. We also find little difference between the performances of five of the models, but the remaining model shows considerable forecast instability.