Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature

Financial reporting fraud and other forms of financial reporting misconduct are a significant threat to the existence and efficiency of capital markets. This study reviews the literature on financial reporting misconduct from the perspectives of law, accounting, and finance. Our goals are to establish a common language for researchers interested in this line of research, describe the main findings and challenges in these literatures, and provide directions for future research. Although research on financial reporting misconduct faces challenges, those challenges provide significant opportunities to advance the literature, as the answers to many questions on financial reporting misconduct remain unsettled.     

WHEN ELECTIONS FAIL TO RESOLVE UNCERTAINTY: THE CASE OF THE 2016 U.S. PRESIDENTIAL ELECTION

In this article, we examine whether certain political election outcomes create, rather than resolve, uncertainty in financial markets. We posit that the market uncertainty associated with unanticipated election outcomes is not resolved before or on the election dates. To test this claim, we use the surprise outcome of the 2016 U.S. presidential election and two previous U.S. presidential elections as benchmarks. In contrast to prior elections, we find that the 2016 U.S. presidential election outcome did not resolve market uncertainty. Specifically, we show significant increases in transactions costs, adverse selection costs, and volatility in the days following the election date. We contribute to the literature by suggesting that unexpected elections can engender, rather than resolve, market uncertainty.     

Increasing the Tick: Examining the Impact of the Tick Size Change on Maker‐Taker and Taker‐Maker Market Models

We investigate the effects of an increase in tick size on order and trading flow across market fee models. Using the pilot firms in the U.S. Securities and Exchange Commission's Tick Size Pilot Program, we document that trade and order volume declines on maker‐taker fee models after the tick size implementation. We find that the inverted fee models (taker‐maker) experience an increase in both trade and order volume. Additionally, we find that a tick size adjustment has a substantial influence on market participation in maker‐taker fee models. We also find that measures of both hidden and algorithmic trading decline with an increasing tick size, which is strongly moderated by the differences in the maker‐taker and taker‐maker fee models.     

Risk preferences and the marketing of financial services: Segmentation by birth order

Traditional investment questionnaires may yield an incomplete measure of clients’ risk tolerance. Birth order has the potential to provide additional insight into the true nature of customers’ risk aversion, thereby assisting financial advisors to formulate the optimal investment portfolio for each client. We summarize research findings on birth order-related personality traits that have potential impact on the financial services industry. Marketing implications for investment firms are discussed in a framework that considers customers’ birth order differences in risk tolerance, patience, financial goals and conformity.     

An investigation of the parameters of a simple mean-field model

In a recent work Gallo et al. (Math Models Methods Appl. Sci. 19:1427–1439, 2009) examined the parameters for a simple mean-field model of social interactions. Their work presented the model, raw data and parameter estimates with associated confidence intervals for a 4-year period. Here the problem is re-examined in greater mathematical detail and associated estimates evaluated. In particular exact results are obtained for a selection of any 3 years and parameters estimated for a 7-year period, the full extent of the data.     

Institutional Interest in Corporate Responsibility: Portfolio Evidence and Ethical Explanation

This study examines the extent to which corporate responsibility influences the demand for shares by institutions. The study follows Bushee (Account Rev 73(3):305–333, 1998) in categorising institutions as dedicated or transient. The demand for shares is organised according to three factors: a long-term factor, corporate responsibility; a short-term factor, market liquidity; and a time-independent factor, portfolio theory. The rank and importance of the factors for the different types of institutional investor are analysed. For one of two types of dedicated institution, corporate responsibility is as important as portfolio theory in influencing the demand for shares. For all dedicated institutions, corporate responsibility influences the demand for shares more than market liquidity. For two of the three types of transient institution, market liquidity is the most important factor in share selection. For all transient institutions, the least important factor is corporate responsibility. Findings suggest that corporate responsibility positively and significantly influences the demand for shares by dedicated institutions. The discussion considers the extent to which these trends are constitutive of significant shifts in ethicality within the context of institutional investment. Looking at this from within a highly institutionalised Anglo market model, dedicated institutions’ commitment to broader and longer-term concerns could be interpreted as a small but significant step towards a more axiologically informed ethical business practice. Such a form of engagement calls for sensitive attention to a fuller range of features deemed to be relevant to investment decisions, as opposed to more narrow reliance on legislation, codes of practice and fiduciary principles.     

The preference reversal phenomenon: Response mode,markets and incentives

Summary This paper addresses the apparent conflict between the results of experiments on individual choice and judgement and the results of market experiments. Data are reported for experiments designed to analyze the effects of (a) economic incentives, repetition, feedback and information and (b) choice and valuation response modes on (c) subjects' decisions in paired market and nonmarket environments. Causes of divergent market and nonmarket behavior are identified in the context of the preference reversal phenomenon (PRP). Study of the PRP is extended to two types of market environments. The PRP is observed on the first repetition in a market setting (second price auction) with immediate feedback, both with and without financial incentives. However, after five repetitions of the auction, the subjects' bids are generally consistent with their choices and the asymmetry between the rates of predicted and unpredicted reversals disappears. An individual pricing task using the BDM mechanism yields similar results on the first repetition but results which differ from the second price auction on the fifth repetition. Choice tasks produce lower rates of reversals than do pricing tasks in both market and individual decision making settings.We are grateful for financial support from the National Science Foundation (grant no. SES-8820552) and the California Institute of Technology. Research facilities were provided by the Economic Science Laboratory at the University of Arizona. Valuable computer programming was provided by Sean Coates and Shawn LaMaster. We thank Professor Jeffrey Dubin for his help in setting up the software for the generalized Tobit model, and Professors Joyce Berg, Graham Loomes, and Charles R. Plott for helpful comments.     

Nonparametric measures of the impact of public research expenditures on Australian broadacre agriculture

Nonparametric methods are used to measure the impact of public research expenditures on Australian broadacre agriculture over the 1953–94 period. Results using both unrestricted and 30-year lagged specifications of the research impacts on productivity suggest that while certain aspects of the nonparametric multi-input/output technologies are quite robust to alternative specifications (in particular, the associated Malmquist total factor productivity indexes), other aspects are less stable (in particular, the indexes on input and, to a lesser extent, output biased technical change). Internal rates of return to research expenditures on Australian broadacre agriculture are estimated to be in the 12 per cent to 20 per cent range.     

On Some Principles of Statistical Inference

Statistical theory aims to provide a foundation for studying the collection and interpretation of data, a foundation that does not depend on the particular details of the substantive field in which the data are being considered. This gives a systematic way to approach new problems, and a common language for summarising results; ideally, the foundations and common language ensure that statistical aspects of one study, or of several studies on closely related phenomena, can be broadly accessible. We discuss some principles of statistical inference, to outline how these are, or could be, used to inform the interpretation of results, and to provide a greater degree of coherence for the foundations of statistics.     

Some Evidence on the Early Price Effects of Attorney Advertising in the USA

When the US Supreme Court gave attorneys in the US the right to advertise their fees for routine legal services, the Court assumed that such fees would fall as a result of attorney advertising. According to economic theory, however, it is not clear what impact seller advertising will have on market prices. A major research effort designed to measure the price effects of attorney advertising in the USA began one year after the Bates decision. Some of the major findings of that study are presented in this paper. While none of the study's results so far indicates that the price effects of attorney advertising in the short run are likely to be substantial, the results suggest that the level of routine legal service fees may fall slightly or remain unchanged in constant dollar terms as a result of attorneys' use of advertising to promote their services and prices.