We offer ex ante estimates of the equity risk premium based on forecasted accounting numbers. Although our approach is isomorphic to dividend growth models, it generates various diagnostics that help to narrow the range of reasonable assumed growth rates. Our results, based on IBES consensus earnings forecasts over the 1985-1998 period, contrast sharply with those of prior research. Our estimates of risk premium are considerably lower than (about 3 percent) the estimates commonly cited (about 8 percent), and are also more stationary over time. This result has important implications both for academe (e.g., the equity premium puzzle) as well as practice (e.g., discount rates for valuation and over-valued stock markets).
{"title":"The Equity Risk Premium is Lower than You Think it is: Empirical Estimates from a New Approach","authors":"James J. Claus, Jacob K. Thomas","doi":"10.2139/ssrn.165335","DOIUrl":"https://doi.org/10.2139/ssrn.165335","url":null,"abstract":"We offer ex ante estimates of the equity risk premium based on forecasted accounting numbers. Although our approach is isomorphic to dividend growth models, it generates various diagnostics that help to narrow the range of reasonable assumed growth rates. Our results, based on IBES consensus earnings forecasts over the 1985-1998 period, contrast sharply with those of prior research. Our estimates of risk premium are considerably lower than (about 3 percent) the estimates commonly cited (about 8 percent), and are also more stationary over time. This result has important implications both for academe (e.g., the equity premium puzzle) as well as practice (e.g., discount rates for valuation and over-valued stock markets).","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124071499","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Creative accounting is a growing issue of interest in Spain. In this article we argue that the concept true and fair view can limit or promote the use of creative accounting depending upon its interpretation. We review the range of meanings that true and fair view can take at an international level and compare the experience of the United Kingdom with the Australian one by analysing the use of true and fair view to limit creative accounting. Finally, we suggest lines of action to be considered by the Spanish accounting standards-setting institutions.
{"title":"The Struggle Against Creative Accounting: Is 'True and Fair View' Part of the Problem or Part of the Solution?","authors":"Oriol Amat, J. Blake, Ester Oliveras","doi":"10.2139/ssrn.159235","DOIUrl":"https://doi.org/10.2139/ssrn.159235","url":null,"abstract":"Creative accounting is a growing issue of interest in Spain. In this article we argue that the concept true and fair view can limit or promote the use of creative accounting depending upon its interpretation. We review the range of meanings that true and fair view can take at an international level and compare the experience of the United Kingdom with the Australian one by analysing the use of true and fair view to limit creative accounting. Finally, we suggest lines of action to be considered by the Spanish accounting standards-setting institutions.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-04-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123175520","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study provides an empirical examination of whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be useful in stock valuation. The study is motivated by the market-based value relevance literature in the U.S. and by the recent development of accounting and stock markets in China. Using a sample of all listed firms in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1997 with available data, we obtain evidence of value relevance of accounting information in China based on a return and a price model. Specifically, we address three research questions in this study. First, we document that accounting information is value relevant in the Chinese market according to either the pooled cross-section and time-series regressions or the year-by-year regressions. Secondly, we further examine whether value relevance changes in a predictable manner with respect to four factors including positive vs. negative earnings, firm size, earnings persistence, and percentage of public holding. Finally, this study finds that the Chinese stock market perceives accounting information to be more value relevant for firms issuing both A- and B-shares than for firms issuing only A-share. Collectively, in this study, we report fairly convincing evidence that accounting information is value relevant to investors in the Chinese market despite the young age of the market and the perception of inadequate accounting and financial reporting in China. The implications of our results are discussed in the paper.
{"title":"Is Accounting Information Value Relevant in the Emerging Chinese Stock Market?","authors":"Charles Chen, Shimin Chen, X. Su","doi":"10.2139/ssrn.167353","DOIUrl":"https://doi.org/10.2139/ssrn.167353","url":null,"abstract":"This study provides an empirical examination of whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be useful in stock valuation. The study is motivated by the market-based value relevance literature in the U.S. and by the recent development of accounting and stock markets in China. Using a sample of all listed firms in the Shanghai and Shenzhen Stock Exchanges from 1991 to 1997 with available data, we obtain evidence of value relevance of accounting information in China based on a return and a price model. Specifically, we address three research questions in this study. First, we document that accounting information is value relevant in the Chinese market according to either the pooled cross-section and time-series regressions or the year-by-year regressions. Secondly, we further examine whether value relevance changes in a predictable manner with respect to four factors including positive vs. negative earnings, firm size, earnings persistence, and percentage of public holding. Finally, this study finds that the Chinese stock market perceives accounting information to be more value relevant for firms issuing both A- and B-shares than for firms issuing only A-share. Collectively, in this study, we report fairly convincing evidence that accounting information is value relevant to investors in the Chinese market despite the young age of the market and the perception of inadequate accounting and financial reporting in China. The implications of our results are discussed in the paper.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115643527","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This book is an attempt to construct a classification (or division) of intangibles, consisting of a diversity of approaches that deals with this concept. It includes eleven papers which have been divided into three sections based on their approach and what we can learn from them: (1) regulation of intangibles for financial reporting, (2) the state of the art in literature and business practice, and (3) different approaches in classifying intangibles.
{"title":"Classification of Intangibles","authors":"Anne Jeny, Hervé Stolowy","doi":"10.2139/ssrn.263291","DOIUrl":"https://doi.org/10.2139/ssrn.263291","url":null,"abstract":"This book is an attempt to construct a classification (or division) of intangibles, consisting of a diversity of approaches that deals with this concept. It includes eleven papers which have been divided into three sections based on their approach and what we can learn from them: (1) regulation of intangibles for financial reporting, (2) the state of the art in literature and business practice, and (3) different approaches in classifying intangibles.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-03-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132275947","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates factors that determined the position of senior managers of UK-listed companies in the heated debate surrounding proposals for a new standard on goodwill accounting, i.e. whether managers preferred the immediate write-off of goodwill to reserves or capitalisation and amortisation. Our results provide support for factors derived from contracting cost theory, including those associated with debt covenants and management compensation schemes, and transaction costs. However, we also find that perceived information effect factors, i.e. those based on managements' beliefs about the impact goodwill accounting would have on market perceptions of their companies, may constitute a stronger influence on their preferences.
{"title":"Accounting for Goodwill: What Factors Influence Management Preferences?","authors":"Pelham Gore, F. Taib, P. Taylor","doi":"10.2139/ssrn.144608","DOIUrl":"https://doi.org/10.2139/ssrn.144608","url":null,"abstract":"This paper investigates factors that determined the position of senior managers of UK-listed companies in the heated debate surrounding proposals for a new standard on goodwill accounting, i.e. whether managers preferred the immediate write-off of goodwill to reserves or capitalisation and amortisation. Our results provide support for factors derived from contracting cost theory, including those associated with debt covenants and management compensation schemes, and transaction costs. However, we also find that perceived information effect factors, i.e. those based on managements' beliefs about the impact goodwill accounting would have on market perceptions of their companies, may constitute a stronger influence on their preferences.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-01-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124847228","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper compares the performance of transfer pricing and tidy cost allocations in a multiproduct firm in presence of output market competition and production externalities. In absence of competition, tidy cost allocations are creating inefficient allocations within the firm while transfer prices can always be adjusted to replicate the first best solution of the centralized firm. While the second result is well known, the first result draws a parallel to the impossibility of solving the free rider problem in team production by a profit sharing scheme. Under duopolistic competition, transfer prices are still the best accounting rule but the solution depends on the nature of competition on the final product market. When firms compete in prices, the strategic rationale requires to allocate more than the total cost of the congested service to the duopolistic departments. While transfer prices can still be adjusted accordingly, the tidiness requirement prevents the cost allocation scheme from providing the desired strategic incentives to the firms' managers. Under quantity competition, the strategic motive requires to allocate less than the cost of the service to the duopolistic departments. Although a tidy cost allocation scheme does not contradict the required direction of the strategic effect, the optimal allocation is at best found incidentally while the transfer prices can again always be adjusted in an optimal way.
{"title":"A Performance Comparison of Strategic Transfer Pricing and Tidy Cost Allocations in Presence of Product Market Competition and Congestion Costs","authors":"R. Göx","doi":"10.2139/ssrn.150598","DOIUrl":"https://doi.org/10.2139/ssrn.150598","url":null,"abstract":"This paper compares the performance of transfer pricing and tidy cost allocations in a multiproduct firm in presence of output market competition and production externalities. In absence of competition, tidy cost allocations are creating inefficient allocations within the firm while transfer prices can always be adjusted to replicate the first best solution of the centralized firm. While the second result is well known, the first result draws a parallel to the impossibility of solving the free rider problem in team production by a profit sharing scheme. Under duopolistic competition, transfer prices are still the best accounting rule but the solution depends on the nature of competition on the final product market. When firms compete in prices, the strategic rationale requires to allocate more than the total cost of the congested service to the duopolistic departments. While transfer prices can still be adjusted accordingly, the tidiness requirement prevents the cost allocation scheme from providing the desired strategic incentives to the firms' managers. Under quantity competition, the strategic motive requires to allocate less than the cost of the service to the duopolistic departments. Although a tidy cost allocation scheme does not contradict the required direction of the strategic effect, the optimal allocation is at best found incidentally while the transfer prices can again always be adjusted in an optimal way.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134213480","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the choice of asset valuation rules from a managerial control perspective. A manager creates value for a firm through his effort choice each period. To support its operating activities, the firm also engages in financing transactions such as credit sales to its customers. These financing transactions merely change the pattern of cash flows across periods but have no effect on the value of the firm. An optimal compensation scheme must therefore shield the manager from the risk associated with such transactions. If the firm operates an accrual accounting system in which receivables are capitalized at their fair values, we show that residual income eliminates this risk and provides an optimal performance measure. On the other hand, compensation schemes based only on realized cash flows can be optimal only under exceptional circumstances. The paper also considers a setting in which the principal can observe not only the aggregate cash flow, but also the amount of realized bad debt losses each period. In this setting, an optimal compensation scheme must also shield the manager from the default risk associated with credit transactions. We demonstrate that this can be achieved if receivables are valued according to the allowance method that leads to a proper matching of sales revenues and bad debt expenses each period.
{"title":"Accrual Accounting in a Dynamic Agency Setting","authors":"S. Dutta, S. Reichelstein","doi":"10.2139/ssrn.149769","DOIUrl":"https://doi.org/10.2139/ssrn.149769","url":null,"abstract":"This paper examines the choice of asset valuation rules from a managerial control perspective. A manager creates value for a firm through his effort choice each period. To support its operating activities, the firm also engages in financing transactions such as credit sales to its customers. These financing transactions merely change the pattern of cash flows across periods but have no effect on the value of the firm. An optimal compensation scheme must therefore shield the manager from the risk associated with such transactions. If the firm operates an accrual accounting system in which receivables are capitalized at their fair values, we show that residual income eliminates this risk and provides an optimal performance measure. On the other hand, compensation schemes based only on realized cash flows can be optimal only under exceptional circumstances. The paper also considers a setting in which the principal can observe not only the aggregate cash flow, but also the amount of realized bad debt losses each period. In this setting, an optimal compensation scheme must also shield the manager from the default risk associated with credit transactions. We demonstrate that this can be achieved if receivables are valued according to the allowance method that leads to a proper matching of sales revenues and bad debt expenses each period.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126331691","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Between 1986 and 1990, the Small Business Administration made approximately $800 million in hurricane and flood disaster loans. The President's 1999 budget submission proposes that these loans be sold to private investors. Using data on over 130,000 disaster loans, and employing a stochastic interest rate model, we estimate the probability of a loan prepaying or being written off. We find that interest rate subsidy costs are significant components of the overall subsidy rate - for every dollar in loans granted, the government recovers between seventy and seventy-four cents, in present value terms. The valuation approach used in this paper can be applied to other government programs that repackage and sell loans to private investors.
{"title":"Valuing Federal Disaster Loans: A Stochastic Model Approach","authors":"Nelson J. Lacey, A. Kelly, Mark E. Potter","doi":"10.2139/ssrn.141033","DOIUrl":"https://doi.org/10.2139/ssrn.141033","url":null,"abstract":"Between 1986 and 1990, the Small Business Administration made approximately $800 million in hurricane and flood disaster loans. The President's 1999 budget submission proposes that these loans be sold to private investors. Using data on over 130,000 disaster loans, and employing a stochastic interest rate model, we estimate the probability of a loan prepaying or being written off. We find that interest rate subsidy costs are significant components of the overall subsidy rate - for every dollar in loans granted, the government recovers between seventy and seventy-four cents, in present value terms. The valuation approach used in this paper can be applied to other government programs that repackage and sell loans to private investors.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1998-12-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130591310","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper shows that unfavourable audit reports cause significant falls in executive compensation. Economically, the effects are larger than accounting and market performance measures, and are particularly strong when: reports are modified for issues other than going-concern uncertainties; or, reports are newly modified. The first finding is consistent with the view that managers control the quality of financial reporting whereas going-concern uncertainties can arise due to exogenous changes in operating conditions. The second finding is consistent with prior evidence that newly modified reports signal more serious problems than repeated modified reports. Finally, there is a weak positive association between modified reports and CEO turnover. Overall, the results indicate that modified reports are costly to company executives.
{"title":"Modified Audit Reports, Executive Compensation and CEO Turnover","authors":"C. Lennox","doi":"10.2139/ssrn.141012","DOIUrl":"https://doi.org/10.2139/ssrn.141012","url":null,"abstract":"This paper shows that unfavourable audit reports cause significant falls in executive compensation. Economically, the effects are larger than accounting and market performance measures, and are particularly strong when: reports are modified for issues other than going-concern uncertainties; or, reports are newly modified. The first finding is consistent with the view that managers control the quality of financial reporting whereas going-concern uncertainties can arise due to exogenous changes in operating conditions. The second finding is consistent with prior evidence that newly modified reports signal more serious problems than repeated modified reports. Finally, there is a weak positive association between modified reports and CEO turnover. Overall, the results indicate that modified reports are costly to company executives.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1998-12-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126851308","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the effect of experience on both the quality (importance) and quantity of recalls made and inferences drawn in evaluating the effects of nonroutine transactions in the auditor's planning process. Consistent with expectations drawn from previous research, our results indicate that experienced subjects recalled a greater proportion of critical idea units and drew a larger proportion of critical inferences than inexperienced subjects. Ancillary analysis suggests that transaction-specific experience results in a further improvement in the ability to recall critical idea units beyond general accounting/auditing experience; no such improvement was noted for the ability to draw critical inferences. The results did not support the contention that experienced subjects' performance would not be affected by the complexity of the environment (amount of information provided). The ability of experienced auditors to discriminate between more- and less-important information has important implications on their ability to conduct more efficient and effective audit examinations.
{"title":"Comprehension of Nonroutine Transactions During Audit Planning: Evidence from Free Recalls and Inferences","authors":"W. Shafer, R. Morris, Jerry R. Strawser","doi":"10.2139/ssrn.139398","DOIUrl":"https://doi.org/10.2139/ssrn.139398","url":null,"abstract":"This study examines the effect of experience on both the quality (importance) and quantity of recalls made and inferences drawn in evaluating the effects of nonroutine transactions in the auditor's planning process. Consistent with expectations drawn from previous research, our results indicate that experienced subjects recalled a greater proportion of critical idea units and drew a larger proportion of critical inferences than inexperienced subjects. Ancillary analysis suggests that transaction-specific experience results in a further improvement in the ability to recall critical idea units beyond general accounting/auditing experience; no such improvement was noted for the ability to draw critical inferences. The results did not support the contention that experienced subjects' performance would not be affected by the complexity of the environment (amount of information provided). The ability of experienced auditors to discriminate between more- and less-important information has important implications on their ability to conduct more efficient and effective audit examinations.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1998-12-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126182710","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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