Disclosure of allegedly illegal corporate activities and information risk

We investigate how the disclosure of allegedly illegal corporate activities such as the backdating of stock option grants affects the “information risk” of accused companies. This research provides evidence about the consequences of this risk change on equity values. We compare the earnings' response coefficients (ERC) for companies charged with backdating before and after it was revealed that these companies allegedly engaged in these activities. Our results show a U-shape pattern in ERC across post-backdating periods, suggesting a temporary decline in information risk. We also estimate the amount of company valuation losses that are based on the changes in the ERC. We find, on average, that a firm suffered approximately $26.2 million in valuation losses for four quarterly earnings announcements in the post-backdating period. Our economic significance analysis suggests that valuation losses related to changes in “information risk” provide some explanations for the subsequent market valuation consequences.     

Determinants of information technology investments: The case of ATM in an emerging economy

This paper examines the determinants of automatic teller machine (ATM), a kind of information technology (IT), in the Taiwanese banking industry. The lessons learned from Taiwan's banking industry can be applied to China's banking industry to facilitate the understanding of the IT adoption strategies of Chinese financial institutions. Factors that are expected to have impact on IT investment in general and on ATM investment in particular are identified from three perspectives, namely operating scale perspective, deposit service perspective, and operating cost perspective. The results of this study indicate that operating scale, banking deposit service and operating cost are all significant determinants of ATM investment in the Taiwan banking industry. The results are useful for those banks and financial institutions outside of China in deciding their ATM investment strategies in China when trying to enter and penetrate the Chinese banking market.     

Are fully independent audit committees really necessary?

Accounting scandals and concerns about the quality of financial statements have led to many calls for improved audit committee effectiveness. Prior research indicates that audit committee independence is positively related to effective oversight of the financial reporting process. Unfortunately, prior research has not provided an answer as to how much independence on the audit committee is enough. This is an important unanswered question because while Section 301 of the Sarbanes-Oxley Act of 2002 (SOX) currently requires all listed companies to maintain an audit committee that is 100% independent there has been much debate regarding easing the SOX requirements for smaller and foreign companies. In this paper we examine whether the regulatory requirements of a completely independent audit committee are necessary to obtain the monitoring benefits related to audit committee independence that have been documented in prior literature. Our results suggest that the benefits of audit committee independence are consistently achieved only when the audit committee is completely independent. These results provide support for the SOX requirement of 100% independent audit committees.     

Accruals,cash flows,and aggregate stock returns

This paper examines whether the firm-level accrual and cash flow effects extend to the aggregate stock market. In sharp contrast to previous firm-level findings, aggregate accruals is a strong positive time series predictor of aggregate stock returns, and cash flows is a negative predictor. In addition, innovations in accruals are negatively contemporaneously correlated with aggregate returns, and innovations in cash flows are positively correlated with returns. These findings suggest that innovations in accruals and cash flows contain information about changes in discount rates, or that firms manage earnings in response to marketwide undervaluation.     

Predatory mortgage lending

Regulators express growing concern over predatory loans, which we take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, we identify the circumstances in which it arises both with and without competition. We find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. We use our model to analyze the effects of legislative interventions.     

Bridging the education–profession gap: The Accounting Student–Practitioner Day (ASPD) program

This paper provides a detailed discussion of an annual (and cost-effective) professional-development event we call the Accounting Student–Practitioner Day (ASPD). This program brings together, for a single day, students, accounting faculty, and accounting professionals in a conference-like setting. The conference format provides a unique, and formal, link between the classroom environment and the professional world students will be entering. The program is attended by accounting and non-accounting students from our university, senior students from area high schools, and undergraduate students from other universities in the area. Specific objectives of the program are to help students learn what it takes to become an accounting professional, to provide students with information that facilitates their career-choice decision, and to encourage networking and community-building activities. Assessment data indicate that the ASPD program is successful in terms of its stated objectives. The relatively low cost of operating the program makes it attractive for other accounting programs. The paper includes a set of recommendations for those faculty interested in implementing an ASPD program at their own institution.     

Why Capital Efficiency Measures Are Rarely Used in Incentive Plans, and How to Change That

Despite the wide acceptance of DCF valuation and its corollary that value is created only by earning more than the cost of capital, very few companies use performance measures that focus on corporate efficiency in using capital—measures such as return on capital (ROC) or economic value added (EVA)—as the main basis for their top management incentive programs. In this article, the authors begin by documenting the surprisingly limited use of such measures in management incentive plans. Next they analyze three often cited problems—difficulty in retaining managers, discouragement of growth investment, and complexity—that could account for the limited use of such measures. Third and last, they suggest a number of adjustments to standard capital efficiency measures that are designed to address these problems and, in so doing, to give corporate directors more confidence in using measures like EVA to reward and hold managers accountable for value-adding performance.
In illustrating the problems encountered when using such performance measures, the article uses case studies of three long-time "EVA companies"—Briggs & Stratton, Herman Miller, and Manitowoc—to highlight the difficulty of using a "bonus bank" (or "clawback") system to hold managers fully accountable for earning a minimum return on capital. After presenting empirical data that shows "delayed productivity" of invested capital, the authors suggest that conventional capital efficiency measures can discourage value-increasing growth.
The article concludes by recommending that although measures like EVA used in combination with negative bonus banks provide the right incentives, EVA capital charges should be phased in gradually to reflect the delayed productivity of capital. At the same time, corporate boards should consider providing bonus bank "relief" when market and industry factors have excessively large negative effects on the performance measures and bonus awards.     

The Value of Biodiversity in Pharmaceutical Research with Differentiated Products

Biologists and conservation advocates have expressed grave concern over perceived threats to biological diversity. ``Biodiversity prospecting' – the search among naturally occurring organisms for new products of agricultural, industrial, and, particularly, pharmaceutical value – has been advanced as both a mechanism and a motive for conserving biological diversity. Economists and others have attempted to estimate the value of biodiversity for use in new pharmaceutical project research. In this paper we apply a new approach to estimating values: we employ two models of competition among differentiated products. Each model confirms previous findings that the value to private researchers of the ``marginal species' is likely to be small. The models can have very different implications with respect to social values, however. These findings underscore the need for a better understanding of the true meaning of diversity.Resources for the Future     

JOINING THE NEW ECONOMY

The decline in the costs of communicating, coordinating, and collaborating across firms in the value chain has led to the emergence of new business models—virtually integrated companies, retail "bricks and clicks" organizations, and networks like AOL and eBay—that can be used by all kinds of companies to exploit new opportunities. With these new organizations comes a need for new governance practices—practices that permit swifter decisions, best practice sharing, and more focused operations.
The author argues that improvements in governance should focus on achieving the following:

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   Organization structures that leverage external alliances while improving internal collaboration. This involves gaining acceptance of and support for a common aspiration across the company—the goal of deploying financial and human resources, complemented by technology, to build shareholder wealth.