Corporate governance and earnings management at large U.S. bank holding companies

This paper examines whether corporate governance mechanisms affect earnings and earnings management at the largest publicly traded bank holding companies in the United States. We first find that performance, earnings management, and corporate governance are endogenously determined. Thus, OLS estimation can lead to biased coefficients and a simultaneous equations approach is used. We find that CEO pay-for-performance sensitivity (PPS), board independence, and capital are positively related to earnings and that earnings, board independence, and capital are negatively related to earnings management. We also find that PPS is positively related to earnings management. Finally, PPS and board independence are positively related and the relationship is bidirectional. While both PPS and board independence are associated with higher earnings, our results indicate that more independent boards appear to constrain the earnings management that greater PPS compels.     

Modeling volatility in sector index returns with GARCH models using an iterated algorithm

Financial market participants are interested in knowing what events can alter the volatility pattern of financial assets and how unanticipated shocks determine the persistence of volatility over time. The present paper studies these issues by detecting time periods of sudden changes in volatility by using the iterated cumulated sums of squares (ICSS) algorithm. Examining five major sectors from January 1992 to August 2003, we found that accounting for volatility shifts in the standard GARCH model considerably reduces the estimated volatility persistence. Our results have important implications regarding asset pricing, risk management, and portfolio selection. (JEL G110, G120)     

An Exploration of Ethical Decision-making Processes in the United States and Egypt

In this comparative survey of 191 Egyptian and 92 U.S. executives, we explore the relationship between national culture and ethical decision-making within the context of business. Using Reidenbach and Robin’s (1988) multi-criteria ethics instrument, we examine how differences on two of Hofstede’s national culture dimensions, individualism/collectivism, and power distance, are related to the manner in which business practitioners make ethical decisions. Egypt and the U.S. provide an interesting comparison because of the extreme differences in their economies and related business development. Our results indicate that respondents from the U.S, individualistic and low in power distance, were likely to view the decision making outcome in ethics scenarios as more unethical than the more collectivistic and high power distance Egyptians, when applying ethical criteria based on justice, utilitarianism, relativism, and (contrary to our predictions) egoism. However, we also found that both Egyptians and Americans rely on justice, utilitarianism, and relativism in predicting their intentions to behave ethically, and that Americans substitute egoism for justice, when the behavioral intentions of peers are examined.     

Economic sanctions and trade diversions in Sudan

The latest episode of the armed conflict between Northern and Southern Sudan erupted in 1983 and ended with the signing of the ＂Comprehensive Peace Agreement （CPA）＂ in 2005. The CPA allows for a referendum on independence for South Sudan in 2011. A similar scenario is possible for Darfur, where an armed conflict broke out in 2003 over demands for greater decentralization and development in the region. The peace agreement between the central government and the Eastern Sudan region continues to be fragile, and the risk of escalation of across the border spillovers of conflicts with Uganda and Chad persists. The U.S., EU, among other global players, is putting pressure on the Khartoum government to change its policies. Economic sanctions are among the tools used by the U.S. government while encouraging others follow suit. This paper investigates the response of the Sudanese economy to eliminating trade flows with the EU in the first phase and with East-Asian countries in the second. It discusses the changes in the macro-indicators, trade variables and welfare measures that would result. Moreover, it assesses the potential trade diversion and resource reallocation due to sanctions in each phase. To simulate these scenarios, detailed economic databases for Sudan, EU, East-Asian region, MENA, COMESA and the rest of the world are needed. For this purpose, GTAP Africa database and the standard GTAP model are employed. The 57 sectors of Africa database are aggregated to ten sectors including： grains and crops, livestock and meat products, mining and extraction, processed food, textiles and clothing, light manufacturing, heavy manufacturing, utilities and construction, transport and communication and other services. Moreover, the database regions are aggregated to six including Sudan, the EU, East Asia, MENA, COMESA and the Rest of the world. Results show that Sudanese trade reallocates to Asia in the first phase and to COMESA and MENA regions in the second. Sanctions exact a devastating toll on the Sudanese economy： GDP declines, trade shrinks and welfare deteriorates. The deterioration in the country＇s trade is mainly in the imports side, which justifies an improvement of the country＇s balance of trade, while welfare losses are derived by a deteriorated terms of trade and allocative efficiency.     

The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle

We examine how the banking sector could ignite the formation of asset price bubbles when there is access to abundant liquidity. Inside banks, to induce effort, loan officers are compensated based on the volume of loans. Volume-based compensation also induces greater risk taking; however, due to lack of commitment, loan officers are penalized ex post only if banks suffer a high enough liquidity shortfall. Outside banks, when there is heightened macroeconomic risk, investors reduce direct investment and hold more bank deposits. This ‘flight to quality’ leaves banks flush with liquidity, lowering the sensitivity of bankers’ payoffs to downside risks and inducing excessive credit volume and asset price bubbles. The seeds of a crisis are thus sown.     

The Development of Accounting Regulation in Iraq and the IFRS Adoption Decision: An Institutional Perspective

This paper reviews the historical development of accounting regulation in Iraq and analyzes, from an institutional perspective, both the decision to adopt International Financial Reporting Standards (IFRS), and the factors likely to impact the expansion of IFRS application beyond listed companies. We find that all three forms of institutional isomorphism (coercive, mimetic, and normative) explain the initial decision to adopt IFRS. The most significant force in the decision to adopt IFRS is coercive pressure, from western forces following the fall of the Ba'ath regime, and from international aid organizations. Further, we find that the accounting system in Iraq is likely to be further advanced due to mimetic and normative pressures from Iraq's trade partners, multinational corporations, and the accounting profession. The paper concludes with a discussion of lessons that can assist other developing nations, and in particular countries in the Middle East in their decision to adopt IFRS. It is important that IFRS adoption is accompanied by reform to governance and investor protection regimes, together with investment in education and training to support ongoing implementation. Otherwise, IFRS adoption may be perceived as merely symbolic.     

Discretionary loan loss provision behavior in the US banking industry

Review of Quantitative Finance and Accounting - Earnings management can be opportunistic and add noise to earnings, or informative about a firm’s underlying economic performance and add...