IAS 39 reclassification choice and analyst earnings forecast properties

In October 2008, the International Accounting Standards Board amended IAS 39 to allow banks to retroactively reclassify financial assets that previously were measured at fair value to amortized cost. By reclassifying financial assets, a bank can potentially avoid recognizing the unrealized fair value losses and thereby increase its income and regulatory capital during a market downturn. We examine the implications of the reclassification decision by banks for the properties of financial analyst earnings forecasts during 2008–2009, when economic conditions were highly volatile. We find that the reclassification choice during the financial crisis reduced analyst forecast accuracy and increased forecast dispersion. We also find that the observed decline in analyst forecasting ability is limited to the year of adoption when the economic environment was highly volatile.     

Preconceptions and reconceptions in the administration of science

Abstract . Despite the rise in the importance of science as a daily concern of modern man, until recently factors affecting the conduct of scientific research have not been objectively studied. We found that over 80% of the publications from 1950 to 1961 dealing with the administration of research were based on speculation rather than on objective evidence. These speculative publications, for the most part, tended to reinforce, rather than to critically examine, prevalent conceptions of science and its administration.
One of the most entrenched of these conceptions is the importance ascribed to the differences between basic and applied research. It is my contention that the dichotomy, basic and applied (and such related dichotomies as limited and fundamental, theoretical and action, etc.), hinders rather than advances our knowledge of the relationship between organizational structure and scientific accomplishment. The distinction between basic and applied research is not directly related to the research process and therefore can only be of limited value in research administration. Further, the mystique around the terms 'basic' and 'applied' appears to have led to patterns of research administration based on misconceptions rather than on knowledge. Two other distinctions, urgency and predictability of the research, are suggested as more viable distinctions than the basic-applied dichotomy. Using recent research findings from small group research and the sociology of science, we have attempted to show how these distinctions can serve as guidelines in the administration of science.     

Does SEC FRR No. 48 disclosure communicate risk management effectiveness?

We hypothesize that the quality of market risk disclosure mandated by the U.S. Securities and Exchange Commission Financial Reporting Release No. 48 (FRR No. 48) provides useful information for assessing risk management effectiveness. Measuring risk disclosure quality as the degree of modification, we find that higher-than-expected disclosure modification is associated with lower future cash flow volatility. On average, an increase in risk disclosure modification from the lowest to the highest decile is associated with a 5.34 percent decrease in cash flow volatility. Given the significant impact of cash flow volatility on firm value and capital investment, our results highlight the importance of market risk disclosures and should be of interest to investors and analysts.     

NOTE ON “EQUIVALENCE OF CASH FLOWS WHEN COMPOUNDING OCCURS LESS FREQUENTLY THAN THE CASH FLOWS”

The present worth (PW) and future worth (FW) decision criteria are to be found in virtually all current engineering economy textbooks. Although the relationships between the internal rate of return (IRR) criterion and PW has been widely discussed in the literature, there remains some misunderstanding as to similar relationships between PW and FW. Of particular importance is the interest rates at which PW and FW are maximized. It is shown here that the maximizing rates are not necessarily equal. This leads to the seemingly peculiar result that a change in the discount rate may decrease the PW while at the same time increasing the FW, or vice versa. Numerical, mathematical and intuitive arguments are presented.     

Discretion in bank loan loss allowance,risk taking and earnings management

We study whether banks use the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We find that banks that had higher abnormal ALL during the period prior to the 2007–2009 crisis engaged in less risk taking during the pre‐crisis period and had a lower probability of failure during the crisis period. In testing earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period's loss avoidance and just meeting or beating the prior year's earnings. Our results suggest that banks use ALL for efficiency and not for opportunistic purposes.