Audit committee characteristics and investment in internal auditing

Regulators and others recently highlighted the increasingly important role of internal auditing in supporting and interacting with the audit committee to ensure the integrity and quality of financial reporting. Likewise, one of the roles of the audit committee is to oversee the quality of monitoring mechanisms implemented by the firm, which includes the internal audit function. However, our understanding of the relationship between the audit committee and internal auditing is limited. We fill this void by providing the first empirical evidence of the association between audit committee characteristics and the investment in internal auditing. Our analyses, from a sample of 181 SEC registrants, suggest that the investment in internal auditing (internal audit budget) is negatively related to the presence of auditing experts on the committee and the average tenure of audit committee members, but positively related to the number of audit committee meetings (a proxy for audit committee diligence). These observations suggest potential complementary and substitution effects between the audit committee and internal auditing, and thus raise important implications for future research.     

EQUITY CORRELATIONS IMPLIED BY INDEX OPTIONS: ESTIMATION AND MODEL UNCERTAINTY ANALYSIS

We propose a method for constructing an arbitrage‐free multiasset pricing model which is consistent with a set of observed single‐ and multiasset derivative prices. The pricing model is constructed as a random mixture of N reference models, where the distribution of mixture weights is obtained by solving a well‐posed convex optimization problem. Application of this method to equity and index options shows that, whereas multivariate diffusion models with constant correlation fail to match the prices of index and component options simultaneously, a jump‐diffusion model with a common jump component affecting all stocks enables to do so. Furthermore, we show that even within a parametric model class, there is a wide range of correlation patterns compatible with observed prices of index options. Our method allows, as a by product, to quantify this model uncertainty with no further computational effort and propose static hedging strategies for reducing the exposure of multiasset derivatives to model uncertainty.     

In memoriam: Marco Avellaneda (1955–2022)

Marco Avellaneda (1955–2022) was a leading figure in the development of mathematical modeling in finance and its dissemination among market practitioners. We provide a sketch of his trajectory and outline some of his main research contributions to mathematical finance.     

Skillful hiding: evaluating hedge fund managers’ performance based on what they hide

Mandatory disclosure of hedge fund portfolios has been a hotly debated topic. This article studies asset returns of ‘confidential holdings’ (confidentiality treatment [CT]) or those assets that were not voluntarily disclosed by US-based hedge funds in their original 13F filings to the Securities and Exchange Commission. After analysing returns from 1999 to 2013, we find that in aggregate, the CT position size, ownership share and returns are statistically different to non-CT positions. We provide a mechanism for regulators and investors to rank fund managers based on what they hide in positions.     

Exploring the animosity domain and the role of affect in a cross-national context

PurposeThe purpose of this paper is to contribute to the development of animosity theory in three areas; construct domain, the mediating role of affect and model testing.Design/methodology/approachExploratory and empirical research is carried out in two countries in order to explore the domain and to test the factor structure and the hypotheses through confirmatory analysis.FindingsWe find animosity is a four-dimensional construct which impacts buying behavior through affect.Originality/valueThe research extends the domain of the animosity construct to a four-dimensional structure rather than the two-dimensional structure used in most previous studies. It is the first study to empirically test an extended animosity domain and investigate the mediating role of affective emotional responses between animosity and buying intentions.     

MULTICOLLINEARITY AND CONSUMER DEMAND ELASTICITIES*

Multicollinearity is a common problem in the estimation of consumer demand models and the elasticities. While straight forward application of classical least squares often yields models with good predictive power, this apparently occurs for reasons other than the accuracy of the estimates of the parameters. The implications of multicollinearty in two-stage and three-stage least squares are discussed, with examples from Brookings Quarterly Agricultural Submodel of the United States. A comparison is made of alternative estimators of the parameters of consumer demand functions. The article points to difficulties raised by using a priori coefficients for one variable (eg. income elasticity) as a means of developing an accurate estimate of another coefficient (eg. price elasticity), and indicates evidence of multicollinearity depressing estimated consumer price elasticities. LA COLLINEARITE ET DES ELASTICITES DE LA DEMANDS DE CONSUMMATION - La collinéarité est un problème common de l'estimation des modèles de demande en consummation et des élasticités. Quoique l'application directe de la méthode classique de “moindre carré”, permet souvent d‘êlaborer des modèles ayant beaucoup de prediction, ceci semble-t-il être en function de d'autres facteurs que de l'exactitude des évaluations des paramètres. Les effets de la cottinéarité dans les estimations moindre carré de deux et trois étapes sont évahtés avec des exemples tires du “Brookings Quarterly Agricultural Submodel” des Etats-Unis. Différentes méthodes d'estimation de la fonction de la demande en consummation sont comparées. L'article fait état des difficultés que soulève l'emploi de coefficient a priori pour une variable (ex. l’êlasticité du revenue) comme moyen de développer un estimé précis d'un autre coefficient (ex. l‘élasticité de prix), et apporte de l'evidence sur l'effet attendant de la collinéarité sur les estimés d’élasticité de prix.     

What brand extensions need to fully benefit from their parental heritage

It is well established that consumer acceptance of a brand extension depends on how strongly it fits with its parental origins. Less appreciated is how this acceptance also depends on the mental association created in consumers’ minds between the extension and its parent brand. Our investigation considers the gateway role played by this association’s mental accessibility in allowing extensions to fully benefit from their parental heritage. Six studies examine the effect of reinstating an extension’s association with its parent brand on extension evaluations. When reinstatement enhances the parental association’s accessibility, it strengthens the parent brand’s influence, leading to more or less favorable extension evaluations contingent upon the extension’s fit with its parental origins. These reinstatement effects carry important implications for brand-extension managers and researchers.