Financial Forecasting,Risk and Valuation: Accounting for the Future

Valuation involves forecasting payoffs and discounting expected payoffs for risk. Forecasting is often seen as the province of the statistician, risk determination the province of asset pricing. This paper elaborates on the idea that financial forecasting, risk determination and valuation are a matter of accounting. Accounting not only provides information to forecast payoffs but also specifies the payoffs to be forecasted. Further, accounting determines the transition from the present to the future and thus implicitly the evolutionary parameters that a statistician might estimate for forecasting. Accounting also bears on risk determination in the way it handles uncertainty. Accordingly, accounting is involved in both the numerator and the denominator of a valuation model. Indeed, a valuation model is a model of accounting for the future, and the effectiveness of a valuation model rides on the accounting principles employed.     

CAPABILITIES,TECHNOLOGICAL DIVERSIFICATION AND DIVISIONALIZATION

This paper develops and tests the hypothesis that greater R&D diversification is associated with less divisionalization in multidivisional firms. It argues, from transaction cost theory, that the extent of divisionalization of a large firm is indicative of its emphasis on interdivisional coordination, since fewer divisional boundaries reduce interdivisional bargaining costs. Also, greater interdivisional coordination is required to pursue strategies which exploit R&D undertaken in diverse but complementary fields, that is, strategies aimed at broadening technological capabilities. Conversely, less interdivisional coordination is required for more specialized R&D, that is, for strategies aimed at deepening existing capabilities. The hypothesis finds support in patent and organizational data.     

Accounting for Intangible Assets: There is Also an Income Statement

Accounting is often criticized for omitting intangible assets from the balance sheet. This paper points out that the omission is not necessarily a deficiency. There is also an income statement, and the value of intangible (and other) assets can be ascertained from the income statement. Thus, calls for the recognition of 'intangible assets' on the balance sheet may be misconceived. The paper lays out the property whereby the income statement corrects for deficiencies in the balance sheet. It then explores the case where the income statement perfectly corrects for a deficient balance sheet and the case where it does so imperfectly. In the latter case, the paper then asks whether accounting in the balance sheet—by capitalization and amortization of intangible assets or carrying them at fair value—could remedy the deficiency in the income statement (or makes it worse). The investigation involves an analysis and valuation of Microsoft Corporation and Dell Inc., two companies presumed to posses a good deal of 'intangibles assets'. The paper is instructive, not only to those concerned with accounting issues but also to analysts attempting to value firms, like Microsoft and Dell, with assets missing from the balance sheet.     

What Drives the Disposition Effect? An Analysis of a Long‐Standing Preference‐Based Explanation

We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over annual gains and losses; in the other, they are defined over realized gains and losses. Surprisingly, the annual gain/loss model often fails to predict a disposition effect. The realized gain/loss model, however, predicts a disposition effect more reliably. Utility from realized gains and losses may therefore be a useful way of thinking about certain aspects of individual investor trading.     

Options,Short Sales,and Market Completeness

This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.     

Food legislation in Britain: general principles and the evolution of the system

This paper reviews the development of food legislation in Britain. Two case studies relating to the legislation applying to bread and margarine are included. Five different sets of interest groups are identified as contributors to the establishment or amendment of compositional regulations.     

The Price Impact and Survival of Irrational Traders

Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.