Artificial Neural Networks Applied to Ratio Analysis in the Analytical Review Process

Experts claim that artificial neural network (ANN) technology can outperform standard statistical methods when applied to examine actual financial data. Researchers have used ANNs to analyze bankruptcy prediction, bond rating and the going-concern problem. Financial firms have employed ANNs commercially to predict commercial bank failures, detect credit card fraud and verify signatures. For accounting and auditing problems, however, application of ANN technology has been limited. Preliminary experiments tested whether an ANN offered improved performance in recognizing material misstatements during the analytical review process of auditing. Four years of audited financial data from a medium-sized distributor were input as data streams to calibrate the ANN across fifteen financial accounts. Researchers compared a presumed lack of actual errors and certain seeded material errors with signals from the ANN analytical review process to evaluate performance. Results were compared to analyses where financial ratios and regression methods were employed as analytical review techniques. Results tentatively suggest that the ANN method recognized patterns within financial accounts more effectively than did financial ratio and regression methods. ANNs applied as a forecasting tool seem useful for identifying patterns that can indicate potential investigations of a firm's unaudited financial data in the current year.     

Responding to ‘Skill Shortages’: Recruitment and Retention In A High Technology Labour Market

Gordon Causer, who is a Lecturer in Sociology in the Department of Sociology and Social Policy at the University of Southampton, and Carol Jones, who is Senior Lecturer in Employee Relations in the Lancashire Business School, University of Central Lancashire, explore the responses of twenty electronics companies in central Southern England to problems of recruitment and retention of professional engineers employed in research, design and development functions. They argue that organisations might be expected to treat such staff as a long-term resource, subject to processes of careful selection, extensive training and flexible utilisation. In practice these tendencies are modified to a greater or lesser degree by a variety of structural constraints, including the volatile nature of the electronics industry, the disciplinary heterogeneity of its labour force, the funding of research and development activities and the labour market conditions faced by organisations.     

Evaluating Expert Systems in a Financial Domain: A Study Demonstrating Issues in Case Selection,Validation Standards and Evaluator Bias

This article describes and generalizes a validation study of four commercially available personal financial planning expert systems and the rationale for the research methodology used. Our evaluation of these systems adds to the understanding of verification and validation issues related to case selection, validation standards and evaluator bias. The article describes the systems, their domain and the empirical method—field tests using hypothetical cases—and relates that method to the literature. Comparing same-task systems combines multiple system perspectives and multiple models. Our methodology did efficiently and effectively identify conflicting terminology, omissions and system weaknesses but was inadequate for comparing the complex plan recommendations. The results re-emphasize the importance of continual knowledge base updating, formal system testing and the need for external evaluation. The results also show the value of comparing multiple, same-task systems.     

Regime‐dependent smile‐adjusted delta hedging

We introduce several regime‐dependent smile‐adjusted deltas and compare their efficiency with the smile‐adjusted deltas that are popular with option traders. Using years of daily option prices, out‐of‐sample hedging performance tests for options of all moneyness and maturities and daily, weekly, or fortnightly rebalancing show that even the simplest regime‐dependent smile‐adjustment consistently outperforms implied BSM delta hedging and local volatility and minimum variance smile‐adjustments. Markov‐switching deltas offer the best performance, with delta‐hedging errors often half the size of implied BSM hedging errors. During volatile markets risk reduction from regime‐dependent delta hedging is much greater than during tranquil periods.     

Characteristics and Information Value of Credit Watches

We analyze credit watch and rating actions to better understand the role of credit watches in the credit rating process. We find that watch actions are more frequently prompted by specific, publicly known events than are rating actions. The likelihood that a watch action precedes a rating action varies systematically with proxies for investor demand for credit quality information and the adverse consequences of issuing a rating change prematurely. Credit watches occur more often in response to deterioration in credit quality, and issuers make concerted efforts to address the concerns that prompted down watches. Down watches are less likely than up watches to indicate the direction of the subsequent rating change. Watch announcements are associated with abnormal stock returns, indicating that credit watch actions are significant information events. Our results suggest that credit watches are informative and facilitate the stability of ratings by allowing firms to correct deficiencies and prevent downgrades.     

The Role of Banks in Dividend Policy

We use loan‐specific data to document a significant inverse relation between a firm's dividend payouts and the intensity of a firm's reliance on bank loan financing. Banks limit dividend payouts to protect the integrity of their senior claims on the firm's assets. Moreover, dividend payouts decline in the presence of monitoring by relationship banks, which acts as an effective governance mechanism, thereby reducing the gains from precommitting to costly dividend payouts. Bank monitoring and corporate governance (insider stake and institutional block holdings) are complementary mechanisms to resolve firm agency problems, both reducing the firm's reliance on dividend policy.