Showing papers in "Journal of Business Finance & Accounting in 1982"
TL;DR: In this paper, the relationship between accounting numbers and economic values and yields is investigated in a common analytical framework and a number of results concerning the relationship are reported. But none of the results are new.
Abstract: This paper reports a number of results concerning the relationship between accounting numbers and economic values and yields. Some of the results have appeared previously in the literature and some are new. They have been collected together in a common analytical framework in order to demonstrate their formal, mathematical character. It is shown that present value can be obtained by discounting almost any profit numbers; that accounting rates of return define a discount function directly analagous to the term structure and the internal rate of return; and that the internal rate of return can be expressed as a linear weighted sum of accounting rates of return.
484 citations
TL;DR: In this article, it is argued that in such circumstances comparison of a fmancial ratio with some norm (e.g. industry average) is likely to misinform and a method of transformation into a normal distribution is provided whereby original interrelationships are preserved.
Abstract: Empirical studies have shown distributions of financial ratios are skewed. An explanation for this is given and it is argued that in such circumstances comparison of a fmancial ratio with some norm (e.g. industry average) is likely to misinform. It is also shown that where financial ratios are used as inputs to statistical models normality is irrelevant but a method of transformation into a normal distribution is provided whereby original interrelationships are preserved. Finally, because of the inadequacies of financial ratios, it is shown how regression analysis may be used in financial statement analysis.
162 citations
TL;DR: In this paper, the authors investigate the applicability of political methodologies to understand and analyse ASC behaviour and suggest that an understanding of the nature of power is a necessary prerequisite to rigorous analysis of the political process.
Abstract: This paper addresses the question of policy-making by such bodies as the UK Accounting Standards Committee (ASC) and suggests that an understanding of the nature of power is a necessary prerequisite to rigorous analysis of the political process. Using the example of SSAP 13, the paper investigates the applicability of political methodologies to attempt to understand and analyse ASC behaviour. The paper attempts to provide: (a) a deeper understanding of the issues which determined the outcome of the R & D standard; (b) support for the importance of the political science experience in this field; and (c) suggestions on how future research may be formulated and developed.
104 citations
TL;DR: In this article, the authors considered whether or not gold has been an effective hedge against inflation for investors in six major indusrial countries over the period 1975 to 1980, and found that only US investors could hedge themselves against inflation using gold.
Abstract: This study considers whether or not gold has been an effective hedge against inflation for investors in six major indusrial countries over the period 1975 to 1980, Gold is considered a hedge against inflation if changes in the returns on gold investments systematically offset changes in the general price level of a particular country. The results indicate that gold has only been an effective hedge against US inflation, and only over one and six month investment holding periods. When the actual inflation rate was decomposed into an expected and unexpected component, it was again found that only US investors could hedge themselves against inflation using gold.
66 citations
TL;DR: In this paper, the authors extended the theory of management lobbying on accounting standards and found that the capital structure of a firm would affect its management's lobbying position on an accounting standard.
Abstract: This paper extends the theory of management lobbying on accounting standards. Specifically, it is hypothesized that, in addition to the variables previously identified in literature, the capital structure of the firm would affect its management's lobbying position on an accounting standard. The results of an empirical investigation of the lobbying position of firms on the accounting for interest costs issue, reported in the paper, confirm the extended theory.
62 citations
TL;DR: In this article, the authors present the duration measure in a capital budgeting framework and show how it is related to the payback period, and the relationship is shown analytically and empirically.
Abstract: The payback period has been a widely used capital budgeting tool in the analysis of capital projects. It has come under criticism for its inablility to consider all the project's flows in a present valued context. The purpose of this article is to present the duration measure in a capital budgeting framework and show how it is related to the payback period. The relationship is shown analytically and empirically. As a result, the payback period assumes a new identity which goes far to overcome the objections historically levied against it.
44 citations
TL;DR: In this paper, the authors present an objective and systematic analysis of the performance of corporate mergers in Japan and compare the financial performances of merging and non-merging firms before and after the merger in the same industry.
Abstract: This paper presents an objective and systematic analysis of the performance of corporate mergers in Japan. Two types of tests are provided. One is to compare fmancial ratios of merging firms before and after the merger. Negative effects of mergers are verified. The other is to compare the financial performances of merging and nonmerging firms before and after the merger in the same industry. No clear distinction is obtained between them. General comparisons between merging and nonmerging fms indicate negative effects of mergers.
40 citations
TL;DR: The authors found that later than expected earnings announcements are likely to contain worse news than early announcements and that stock returns of late reporting firms appear to be lower than that of early reporting firms in the days surrounding the earnings announcement date.
Abstract: This research addresses (1) whether firms with lower (hgher) than expected earnings fgures released those figures to the public later (earlier) than expected and (2) whether there is a reaction by the capital market to the timing of the earnings announcement. The results indicate that later than expected earnings announcements are likely to contain worse news than early announcements. Also the stock returns of late reporting firms appear to be lower than that of early reporting firms in the days surrounding the earnings announcement date.
33 citations
TL;DR: This paper developed a theoretical relationship between systematic risk and business risk and derived a model that allows for prices, variable costs and demand to be simultaneously stochastic, utilizing the covariance of the product of random variables.
Abstract: This article develops a theoretical relationship between systematic risk and business risk. It is an area that has not been substantially developed in the literature. Rubinstein (1973) and Lev (1974) both developed theoretical models of systematic risk allowing for stochastic demand. A model is derived that allows for prices, variable costs and demand to be simultaneously stochastic, utilizing the covariance of the product of random variables. The temporal stationarity of unlevered systematic risk is dependent upon the temporal stationarity of the theoretical structure derived. Insight is gained as to a potential source of the empirically observed temporal instability of levered systematic risk.
22 citations
TL;DR: In this article, it is argued that most allocations can be avoided in CFA systems, and this paper is an attempt to present this argument and strengthen the case for CFA in practice.
Abstract: Cash flow accounting (CFA) proposals typically have included firm statements that CFA data are allocation-free. This is not entirely true if the term allocation is interpreted in a wide sense. However, it can be argued that most allocations can be avoided in CFA systems, and this paper is an attempt to present this argument. In particular, it aims to strengthen the case for CFA in practice.
17 citations
TL;DR: The authors examined the weak form efficiency of a number of international money markets using a rum test and found that most of the markets examined were found to be efficient in weak form, but they were not able to confirm the weak-form efficiency of markets for three-month German DM bank deposits, Swiss Ffr. bank deposits and six-month Eurodollar CDs.
Abstract: In markets which are efficient in the weak form, investors are not able to use the information contained in historical yields to earn excess returns. Using a rum test, this paper examines the weak form efficiency of a number of international money markets. While most of the markets examined were found to be efficient in the weak form, the study was not able to confirm the weak form efficiency of the markets for three-month German DM bank deposits, Swiss Ffr. bank deposits, French Ffr. bank deposits, and six-month Eurodollar CDs.
TL;DR: The authors analytically explores certain conceptual issues of materiality within the framework of decision theory and concludes that even in a highly simplified situation where there is only one financial information user who has given tastes and beliefs, materiality judgment consistent with the judgment by information producers, and homogenous decision problems, the derivation of a unique, fvred materiality standard for an accounting information item is, in general, infeasible if the standard is set at the item's particular magnitude.
Abstract: Despite its importance for financial information disclosures, accounting materiality remains relatively unexplored within an analytical framework. The present study analytically explores certain conceptual issues of materiality within the framework of decision theory. Based on the analysis, it is concluded here that even in a highly simplified situation where there is only one financial information user who has given tastes and beliefs, materiality judgment consistent with the judgment by information producers, and homogenous decision problems, the derivation of a unique, fvred materiality standard for an accounting information item is, in general, infeasible if the standard is set at the item's particular magnitude.
TL;DR: In this article, an empirical study of multinational transfer pricing based on the information provided by 47 British multinational companies was conducted, and the results indicated that company profit after tax was the key consideration for those companies in formulating their international transfer pricing policies.
Abstract: This paper reports the findings from an empirical study of multinational transfer pricing based on the information provided by 47 British multinational companies. The results indicate that company profit after tax was the key consideration for those companies in formulating their international transfer pricing policies. In addition, they also considered other important variables including the competitive position of their foreign subsidiaries, divisional performance evaluation, and foreign restrictions on repatriation of profits. Six dimensions of environment variables of multinational transfer pricing were also extracted using factor analysis technique.
TL;DR: In this article, a valuation method based on an arbitrage pricing approach to the occupancy of a property is presented, and the application of the model to conventional commercial leaseholds is demonstrated.
Abstract: Leases in commercial property in the UK usually allow for the rent to be revised at fixed intervals throughout the contract. This feature complicates the valuation of financial investment in commercial property because the income has contractual fixed compments as well as an equity-type variability. This paper presents a valuation method based on an arbitrage pricing approach to the occupancy of a property. The limitations of this method can be found in the inapplicability to observed rental contracts which limit rent revision to ‘upwards-only’ changes. From this characteristic, the method based on option pricing is proposed and the application of the model to conventional commercial leaseholds is demonstrated.
TL;DR: In this paper, the authors used Monte Carlo simulation to study the long term effects of borrowing policy on the rate of growth of capital and the risk (probability) of ruin of hypothetical firms, operating in explicitly described, realistic capital budgeting environments.
Abstract: The research reported in this paper used Monte Carlo simulation to study the long term effects of borrowing policy on the rate of growth of capital and the risk (probability) of ruin of hypothetical firms, operating in explicitly described, realistic capital budgeting environments. The capital rationing environment is described explicitly. The debt policies modeled were based on the results of interviews with senior financial executives in eight major firms. The results indicate that three intuitively appealing ranking procedures performed equally well and all out-performed a random selection decision procedure: yielding higher rates of capital growth with lower risks of ruin. In general, an aggressive borrowing policy resulted in a higher average capital growth rate for a firm but a conservative borrowing policy resulted in a lower risk of ruin. It is believed that the results provide some interesting insights which indicate that a computer simulation model could be used to aid management in the evaluation of their capital budgeting procedures and borrowing policies.
Abstract: This paper presents a new approach to estimating the longrun internal rate of return (IRR) for the firm from the accountant's rate of profit based on published financial statements. The model developed for estimating the IRR includes both capital and net working asset investments. Modelling and estimating the growth of the firm is an integral part of the approach. Furthermore, estimating the parameters describing the long-run financing behavior of the firm is presented based on discounted average funds flow statements. Finally, the approach is applied on the financial data of a large Finnish business enterprise.
TL;DR: This article argued that Thomas's paper is deficient in three respects: Firstly, it accepts unquestioningly the myopic view that scientific knowledge is the only valid form of knowledge, and secondly, its demarcation between science and technology is of doubtful validity and usefulness.
Abstract: It is argued that Thomas's paper is deficient in three respects. Firstly, it accepts unquestioningly the myopic view that scientific knowledge is the only valid form of knowledge. Secondly, its demarcation between science and technology is of doubtful validity and usefulness. Thirdly, the “science of accounting” which resulted from its prescriptions can only be trivial by virtue of the very tenets of science which it relies upon.
TL;DR: In this paper, the authors re-examine the methods of stochastic dominance and mean-variance analysis for the selection of risky investments and argue that in the presence of reasonably sized capital markets rules based on mean-varying analysis still remain a more practical tool.
Abstract: This paper reexamines the methods of stochastic dominance and mean-variance analysis for the selection of risky investments It takes as its starting point the paper by Gandhi and Saunders in the Spring 1981 issue of this journal in which they argued for the superiority of stochastic dominance analysis In this paper the countercase is put forward for the use of mean-variance analysis It is argued that while naive application of mean-variance criteria to the ranking of projects in isolation might lead to erroneous decisions, in the presence of reasonably sized capital markets rules based on mean-variance analysis still remain a more practical tool
TL;DR: In this article, the causal relationship between fiscal and monetary policies and stock prices using Canadian data and bivariate and multivariate autoregressive models was tested using time series methods, and the results using different procedures contradict themselves and are in conflict with theoretical reasons.
Abstract: Investigations into business cycles have found money supply to be a lead variable to stock prices. However, some would argue that the stock market, being efficient, anticipates money supply changes and therefore, stock prices are lead variables to money supply changes. Recent developments in time series methods have facilitated the testing of these relationships through identifying bivariate and multivariate autoregressive models. However, in many cases, the results using different procedures contradict themselves and are in conflict with theoretical reasonings. In this paper the causal relationship is tested between fiscal and monetary policies and stock prices using Canadian data and bivariate andmultivariate autoregressive models.
TL;DR: In this article, the authors investigated the effect of a firm's lease commitment disclosure under Accounting Series Release 147 on its systematic risk, and the results indicated that the null hypothesis is to be rejected in favor of the third hypothesis.
Abstract: This paper investigates the effect of a firm's lease commitment disclosure under Accounting Series Release 147 on its systematic risk. The three hypotheses are: (1) there will be no change in the lessee's systematic risk; (2) the lessee's systematic risk will increase because the disclosure increases the debt ratio; and (3) the lessee's systematic risk decreases because the disclosure reduces the uncertainty related to risk-assessment. A hedge portfolio approach is used to test these hypotheses. The results indicate that the null hypothesis is to be rejected in favor of the third hypothesis.
TL;DR: In this paper, it is shown that even if inter-country correlation coefficients are stationary, ex-ante correlations cannot be estimated directly from ex-post data unless the underlying stochastic process is known.
Abstract: This comment discusses two previous papers in this journal by J. Watson. It is shown that a confusion between necessary and sufficient conditions for the stability of the inter-country correlation structure, and inconclusive empirical results led Watson to some misleading conclusions. It is also demonstrated that even if inter-country correlation coefficients are stationary, ex-ante correlations cannot be estimated directly from ex-post data unless the underlying stochastic process is known. Alternative methods of examining the stability of the correlation structure indirectly are suggested. Furthermore it is argued that the choice of the base currency further limits Watson's findings.
TL;DR: In this article, a lack of consensus about the utility and validity of information provided through firms participating in an Interfirm Comparison (IFC) is identified as a result of different notions about the purpose served by IFC schemes.
Abstract: There is a lack of consensus about the utility and validity of information provided through firms participating in an Interfirm Comparison (IFC). The disagreement is a result of different notions about the purpose served by IFC schemes. The unresolved question is how to use the same information for two purposes - the appraisal of operating efficiency and the guidance of longer-term planning decisions. The application of analysis of variance to the results of an IFC helps to clarify the nature, and improve the utility, of the comparative data by identifying factors accounting for variation in performance among firms grouped by multiple characteristics.
TL;DR: In this paper, the authors examined the lack of validity of performance evaluation in management accounting, namely the difficulty in the determination of the base rate advocated by the normative accounting control models, and the evidence on the judgment fallibility and its effect on performance evaluation.
Abstract: Performance evaluation of individuals, processes and activities in management accounting involves mostly a clinical judgment on whether or not to investigate a variance between actual performance and standard performance. Two judgment-related issues are examined in relation to the lack of validity of performance evaluation, namely: a) the difficulty in the determination of the base rate advocated by the normative accounting control models, and b) the evidence on the judgment fallibility and its effect on performance evaluation.
TL;DR: This paper examined some time series properties of earnings and returns on shareholders' equity for a sample of 110 New Zealand firms and found that successive changes in these time series are independent and that they can be modelled by a random walk process.
Abstract: This study examines some time series properties of earnings and returns on shareholders' equity for a sample of 110 New Zealand firms. The results show that successive changes in these time series are independent and that they can be modelled by a random walk process.
TL;DR: In this paper, the authors demonstrate that the "compounding the risk premium" approach is also flawed since it confuses the level of investment and the rate earned on investment, and they propose a different approach.
Abstract: The widely used risk-adjusted discount rate technique of investment evaluation has long been believed to be strictly appropriate only for projects whose risk increased with time. The “certainty equivalent proof” of that belief has recently been refuted. This paper attempts to demonstrate that the other proof of that belief, called the “compounding the risk premium” approach, is also flawed since it confuses the level of investment and the rate earned on investment.
TL;DR: In this paper, the authors consider the problem of managing a portfolio of cash and marketable securities in order to service a given debt schedule, where the amounts are known but the timing of the payments is uncertain.
Abstract: The cash management problem considered here is the management of a liquid assets portfolio, composed of cash and marketable securities. The policies of US corporations towards investing surplus cash as reported in published surveys are summarised and models for the management of cash and marketable securities as proposed in the literature are outlined. The optimal solution is then presented for a particular cash management problem, first introduced by Mao and Sarndal. The problem is how to manage a portfolio of cash and marketable securities in order to service a given debt schedule, where the amounts are known but the timing of the payments is uncertain.
TL;DR: The authors pointed out that Thomas (1981) has misrepresented the views of Lakatos and has misunderstood the role of empirical research in the development of science, and pointed out the need for empirical research for science.
Abstract: This comment points out that Thomas (1981) has misrepresented the views of Lakatos and has misunderstood the role of empirical research in the development of science.
TL;DR: In this paper, the authors empirically investigated the recent SFAS No. 33 requirements to determine if the inflation disclosures, or information similar to it, are impounded in security returns and determined which of the two diverse disclosures best represent the information impomded by the market.
Abstract: This study empirically investigates the recent SFAS No. 33 requirements to determine if the inflation disclosures, or information similar to it, are impounded in security returns. An attempt is also made to determine which of the two diverse disclosures best represent the information impomded by the market. The investigation utilizes a methodological framework arising out of currently accepted asset pricing theory. The results suggest that the current cost data parallels the information impounded in security returns and that it provides risk information not included in the commonly employed systematic risk factor, beta.
TL;DR: In this article, the authors examined the behaviour of UK investment trust discounts for a sample of funds over the ten-year period 1968 to 1977 and found that fundamental analysis using cross section data may not be useful in the analysis and forecasting of UK closed end fund discounts.
Abstract: This paper examines the behaviour of UK investment trust discounts for a sample of funds over the ten-year period 1968 to 1977. The cross section variability of fund discounts is considered using fundamental analysis and a large number of potentially important factors are isolated and measured. Using multiple regression analysis, the optimal set of explanatory factors is ascertained, and it is found that the best fitting linear model changes substantially from year to year. The results indicate that fundamental analysis using cross section data may not be useful in the analysis and forecasting of UK closed end fund discounts.