Showing papers in "Managerial Finance in 2001"
TL;DR: In this article, the authors compare three definitions of earnings management used by accounting researchers and three methods of estimating it: aggregate accruals, specific accrual and discontinuities in earnings distribution.
Abstract: Compares three definitions of earnings management used by accounting researchers and three methods of estimating it: aggregate accruals, specific accruals and discontinuities in earnings distribution. Discusses evidence relating to the reasons for income‐increasing earnings management, income‐decreasing earnings management and specific contexts, e.g. financial institutions with regulatory constraints. Concludes that, although the evidence is limited, managers are more likely to manipulate income up rather than down; and identifies some opportunities for further research.
269 citations
TL;DR: In this article, the authors discuss the four faces of e-commerce, the benefits and legal/regulatory issues which require review in this context, identify three critical success factors for e-business, show some international growth forecasts and compare three financing models for e‐services.
Abstract: Cites survey evidence that many firms undertaking e‐commerce projects do not appraise or evaluate them in traditional ways and discusses how businesses can deal with the many perspectives involved. Illustrates the “four faces of e‐business”, lists its benefits and considers seven legal/regulatory issues which require review in this context. Identifies three critical success factors for e‐business, shows some international growth forecasts and compares three financing models for e‐services. Briefly describes how some companies deal with security on the internet, sees e‐business as “imperative” for business success and warns that, although no single strategic model fits all companies, a strategy must be developed to avoid reducing returns on investment.
187 citations
TL;DR: In this article, the authors reviewed previous research on the factors affecting the proportions of debt and equity used to finance firms, described the Saudi Arabian tax system (based on net worth) and stock market, and examined the capital structure 1993•1997 of a sample of 35 publicly traded Saudi companies.
Abstract: Reviews previous research on the factors affecting the proportions of debt and equity used to finance firms, describes the Saudi Arabian tax system (based on net worth) and stock market; and examines the capital structure 1993‐1997 of a sample of 35 publicly traded Saudi companies. Uses multi‐linear regression models to investigate the relationships between capital structure and other variables in 5 sectors and illustrates their varied leverage ratios. Discusses and analyses the positive links between leverage ratios, firm size and share of government ownership; and negative links with growth, return on assets and profitability margin.
122 citations
TL;DR: In this paper, the authors discuss the theoretical relationship between IOS and optimal contracting resulting from shareholder/debtholder conflict, agency costs and performance measurement problems; and empirical research on its links with company policy on financing, dividends and compensation.
Abstract: Explains the concept of the investment set (IOS: i.e. chances to invest for expansion, new products, cost reduction etc.) and its effects on firm value. Reviews previous research on the theoretical relationships between IOS and optimal contracting resulting from shareholder/debtholder conflict, agency costs and performance measurement problems; and empirical research on its links with company policy on financing, dividends and compensation. Goes on to discuss research on measuring IOS by using various proxies; and summarizes the main findings.
108 citations
TL;DR: A comprehensive review of failure prediction with cash flow information since Beaver (1966) can be found in this paper, where the authors discuss possible reasons why, e.g., the measurement and diversity of cash flows, lack of model validation, multicollinearity etc.
Abstract: Provides a comprehensive, critical review of failure prediction with cash flow information since Beaver (1966); and tabulates the methods and cash flow variables used, and the results produced. Describes the literature as “inconsistent and inconclusive” and discusses possible reasons why, e.g. the measurement and diversity of cash flows, lack of model validation, multicollinearity etc. Points out the importance of cash to solvency and dividend payouts; and the limitations it places on creative accounting. Summarizes the reasons for previous inconsistencies and considers possibilities for further research.
85 citations
TL;DR: The authors describes a number of models used in bankruptcy studies to date, which arise from two basic model designs used in studies of financial distress: cross-sectional studies that compare healthy and distressed firms and time-series formulations that study the path to failure of (usually) distressed firms only.
Abstract: This paper describes a number of models used in bankruptcy studies to date. They arise from two basic model designs used in studies of financial distress: cross-sectional studies that compare healthy and distressed firms, and time-series formulations that study the path to failure of (usually) distressed firms only. These two designs inherently foster different research objectives. Different instances of the most recent work taken from each of the above research groups, broadly categorized by design, are described here including new work by this author. It is argued that those that investigate the distress continuum with predominantly explanatory objectives are superior on a number of criteria to the studies that follow what is essentially a case-control structure and espouse prediction as their objective.
83 citations
TL;DR: In this article, the authors compare the performance of the new economy and the old economy in terms of earnings management, and show that the former does engage in significant earnings management which is positively associated with leverage and free cash flow levels, but this is far less evident in the new economic sector.
Abstract: Outlines the rapid growth of “new economy” companies in Australia and compares their levels of earnings management with “old economy” firms, using data on all Australian listed companies. Reviews the relevant research, explains the methodology and presents the results. Shows that the old economy firms do engage in significant earnings management which is positively associated with leverage and free cash flow levels but, surprisingly, that this is far less evident in the new economic sector. Considers consistency with other research, the underlying reasons for the findings (including regulatory constraints) and opportunities for further research.
73 citations
TL;DR: In this article, the effects of deregulation on both private and state-controlled banks were assessed and showed that the state banks were less efficient than the private and that the gap widened during the period for both noninterest and labour expenses as a proportion of operating income.
Abstract: Outlines the deregulation of banking in Greece and previous research on measuring banking efficiency. Uses 1993‐1998 data to assess the effects of deregulation on both private and state‐controlled banks. Shows that the state banks were less efficient than the private and that the gap widened during the period for both non‐interest and labour expenses as a proportion of operating income, as the private banks increased their efficiency. Finds the relative efficiency measured by data envelopment analysis supports the greater efficiency of private banks although the difference is only significant at the 5 per cent level for 1996. Compares the four most efficient banks and briefly considers the underlying reasons for the findings.
61 citations
TL;DR: In this paper, the authors describe the ability of modern computer-driven multivariate statistical analysis to deal with complex data and the development of statistical models for predicting financial distress, and apply multivariate techniques to 1986-1991 financial ratio data for Australian failed (29) and non-failed (42) companies; and explain the techniques used (principal components analysis, factor analysis, discriminant analysis and cluster analysis).
Abstract: Describes the ability of modern computer‐driven multivariate statistical analysis to deal with complex data and the development of statistical models for predicting financial distress. Applies multivariate techniques to 1986‐1991 financial ratio data for Australian failed (29) and nonfailed (42) companies; and explains the techniques used (principal components analysis, factor analysis, discriminant analysis and cluster analysis) and the different types of information they can provide to help identify the distress levels of companies. Predicts that multivariate methods will change the way researchers think about problems and design their research. An unusually clear exposition of the application of multivariate methods.
56 citations
TL;DR: Tan et al. as discussed by the authors used artificial neural networks (ANN) to predict financial distress in Australian credit unions by extending the forecast period of the models, presents the results and compares them with probit model results.
Abstract: Outlines previous research on company failure prediction and discusses some of the methodological issues involved. Extends an earlier study (Tan 1997) using artificial neural networks (ANN) to predict financial distress in Australian credit unions by extending the forecast period of the models, presents the results and compares them with probit model results. Finds the ANN models generally at least as good as the probit, although both types improved their accuracy rates (for Type I and Type II errors) when early warning signals were included. Believes ANN “is a promising technique” although more research is required, and suggests some avenues for this.
55 citations
TL;DR: In this paper, the authors present an overview of the stock markets in Bahrein, Kuwait and Saudi Arabia and assess their sutiability for the purpose of hedge against oil price risk.
Abstract: Refers to previous research on the advantages of international portfolio diversification, gives an overview of the stock markets in Bahrein, Kuwait and Saudi Arabia; and assesses their sutiability for the purpose, especially as a hedge against oil price risk. Compares their 1993‐1998 monthly index returns and standard deviations with the USA, shows low or negative correlations between them and illustrates the potential this offers for risk reduction. Uses the Markowitz mean‐variance paradigm to estimate the effecient frontiers. Finds the results consistent with evidence from other emerging markets and points out that the stability of Gulf exchange rates against the US dollar also removes currency risk.
TL;DR: In this article, the authors used previous research on firms' potential investment opportunities, profitability and political cost/risk to suggest that a high level of growth opportunities may encourage managers to use income reducing accruals.
Abstract: Uses previous research on firms’ potential investment (i.e. growth) opportunities, profitability and political cost/risk to suggest that a high level of growth opportunities may encourage managers to use income reducing accruals. Tests this on 1987‐1990 data from a sample of US multinationals classified into high or low growth groups. Explains the methods used to estimate discretionary accruals and to measure the investment opportunity set. Presents the results which suggest that discretionary accruals are higher in high growth firms; and support the political cost hypothesis of Watts and Zimmerman (1978) and the political risk hypothesis of Monti‐Belkaoui et al (1999)
TL;DR: In this article, the authors discuss the reasons why consumers use the internet, the issues of customer service and product delivery/return, what they buy online and how their concerns over privacy and security might be solved.
Abstract: Tabulates the numbers of internet users in various countries and assesses the size of the e‐commerce economy in the USA. Discusses the reasons why consumers use the internet, the issues of customer service and product delivery/return, what they buy online and how their concerns over privacy and security might be solved. Notes that business‐to‐business e‐commerce still accounts for most online transactions, predicts continued growth in this area and looks at the use of both intranets and extranets. Briefly considers various technical and other aspects of the internet’s future and sees it as impossible to ignore but warns that not all types of business can be successful online.
TL;DR: In this paper, the authors discuss the relationship between IOS, debt/equity ratios and dividend policies and develop hypotheses on the relationship among IOS and debt/Equity ratios, and test them on 1990-1998 data from listed Australian companies.
Abstract: Summarizes previous research on the investment opportunity set (IOS) using price‐based and investment‐based proxies and variance measures; and develops hypotheses on the relationship between IOS, debt/equity ratios and dividend policies. Tests them on 1990‐1998 data from listed Australian companies and explains the methodology, which builds on Gover and Gover (1993) by including more recent proxy variables. Finds no significant results from low growth firms, although some high growth firms show lower debt/equity ratios and dividends. Questions the robustness of existing IOS proxies in the Australian context and calls for further research.
TL;DR: In this paper, a mathematical model based on the idea that a firm's investment opportunity set is positively related to reputation, multinationality, size and profitability; and negatively related to leverage and systematic risk.
Abstract: Summarizes previous research on factors affecting the market value of a firm’s equity and puts forward a mathematical model based on the idea that its investment opportunity set is positively related to reputation, multinationality, size and profitability; and negatively related to leverage and systematic risk. Tests this on 1987‐1993 data on US multinational companies, explains the methods used and shows that the relationship is as hypothesized, although the results depend on the choice of surrogate measures for the variables. Calls for further research.
TL;DR: This paper used survival analysis and Cox's (1972) proportional hazards model to estimate the financial outcome for the shareholders of companies entering C11B between 1984 and 1993 to reduce a previous data set (Russel et al. 1999) to 59 (54 of which gave no value to shareholders) and estimates two models to predict this.
Abstract: Reviews previous research on predicting financial distress and the effects of US Chapter 11 bankruptcy (C11B); and explains how survival analysis and Cox’s (1972) proportional hazards model can be used to estimate the financial outcome for the shareholders of C11B. Reduces a previous data set (Russel et al 1999) of 154 companies entering C11B between 1984 and 1993 to 59 (54 of which gave no value to shareholders) and estimates two models to predict this: one based on firm‐specific covariates only and the other adding market‐wide covariates. Explains the methodology, presents the results and uses receiver operating characteristic curves to compare the predictive accuracy of the two. Finds little difference between the and suggests using the simpler model. Briefly summarizes the variables which are most useful in predicting the value outcomes of C11B for shareholders and recognizes the limitations of the study.
TL;DR: In this article, the authors explore the links between industry-specific and firm-specific variables, IPO price and subsequent share price performance, and find that firms with the highest first day run-ups were not necessarily the ones with long term underperformance.
Abstract: Outlines previous research on the pricing of initial public offerings (IPOs), the particular characteristics of e‐commerce firms and the ways in which internet operations differ from traditional business contexts. Uses data from a sample of 28 US business‐to‐business, internet‐based e‐commerce firms to explore the links between industry‐specific and firm‐specific variables, IPO price and subsequent share price performance. Shows generally very high initial returns (115.2 per cent for the run‐up on the first day’s trading!) but negative long‐term returns; and the pricing is significantly positively affected by firm size, commercial strategies and management experience. Finds firms with the highest first day run‐ups were not necessarily the ones with long term underperformance and concludes that investors do actually use information on firm strategy.
TL;DR: In this paper, the relationship between share prices, dividends and earnings for firms with different investment opportunity set (IOS) levels was investigated using data from US multinationals and showed that the share prices of firms with high IOS levels are related to retained earnings and less strongly to dividends; while for low IOS firms dividends are more relevant than earnings.
Abstract: Summarizes previous valuation models based on accounting information, extends the basic model to include dividends and retained earnings, and develops hypotheses on the relationship between share prices, dividends and earnings for firms with different investment opportunity set (IOS) levels. Tests them using 1992‐1998 data on a sample of US multinationals and shows that the share prices of firms with high IOS levels are related to retained earnings and less strongly to dividends; while for low IOS firms dividends are more relevant than earnings.
TL;DR: In this article, the authors studied data from 1980•1996 SEC enforcement actions against big five accounting firms or their staff to investigate the levels of discretionary accruals made by the relevant clients during the period of investigation.
Abstract: Outlines previous research into the factors influencing managers’ choice of accounting procedures and auditors’ acceptance of them, including regulatory action by the US Securities and Exchange Commission (SEC). Studies data from 1980‐1996 SEC enforcement actions against big five accounting firms or their staff to investigate the levels of discretionary accruals made by the relevant clients during the period of investigation. Explains how the discretionary accruals are estimated over various time frames and shows that clients have more income decreasing accruals as the investigation takes place. Considers possible reasons for this and concludes that it is due to the auditors becoming more conservative.
TL;DR: In this paper, the impact of the investment opportunity set (IOS) on firm financing, dividend and compensation policies is discussed and hypotheses on the effects of IOS changes on these three areas and tests them using 1980−1989 data from a sample of US firms moving high and low IOS rankings plus a control (stable) group.
Abstract: Summarizes previous research on the impact of the investment opportunity set (IOS) on firm financing, dividend and compensation policies, develops hypotheses on the effects of IOS changes on these three areas and tests them using 1980‐1989 data from a sample of US firms moving high and low IOS rankings (and vice versa) plus a control (stable) group. Explains the sample selection method and shows that most declining IOS firms were small, high‐tech firms; firms dealing in food and consumer products showed increasing IOS; and control firms were mostly from capital intensive industries. Finds that rising IOS firms generally reduced their dividends and market debt‐to‐equity ratio. Adds that all three groups increased their use of stock option plans but this was only significant for the IOS rising firms. Briefly comments on the underlying reasons for the findings and their implications for further research.
TL;DR: In this article, a multi-group hierarchical discrimination method (MHD) was used to assess country risk to lenders and investors, outlining previous research on techniques for doing this and describes a classification method: the multi-Group Hierarchical Discriminative Classification method.
Abstract: Explains the importance of assessing country risk to lenders and investors, outlines previous research on techniques for doing this and describes a classification method: the multi‐group hierarchical discrimination method (MHD). Applies this to 1978‐1995 data for 143 countries, subdivided into four income groups, and compares the results with those from multiple discriminant, logit and probit analyses using jackknife procedures. Finds MHD more accurate overall and for most income groups except the lower‐middle income economies. Briefly considers other applications for MHD and avenues for further research.
TL;DR: In this paper, the authors apply the Treynor-Mazuy model to a sample of 17 Greek equity mutual funds using 1995-1998 daily returns data and present the results, which show no evidence that fund managers can select the right market timing or (except for four) undervalued securities.
Abstract: Outlines the models devised by Jensen (1968, 1969) and Treynor and Mazuy (1966) for measuring the performance of managed portfolios and related empirical research. Applies the Treynor‐Mazuy model to a sample of 17 Greek equity mutual funds using 1995‐1998 daily returns data and presents the results, which show no evidence that fund managers can select the right market timing or (except for four) undervalued securities.
TL;DR: In this article, the authors present an overview of the East Asian financial crisis, focusing on the seven countries most directly involved, and the underlying reasons for its magnitude, including poor regulation and control of the banking system, coupled with an inflow of foreign investment, which investors wrongly believed to be government guaranteed, caused a "bubble" in share and property prices.
Abstract: Gives and overview of the East Asian financial crisis, focusing on the seven countries most directly involved, and the underlying reasons for its magnitude. Examines the 1991‐1999 economic growth rates, inflation rates and current account positions in the area and asserts that the deterioration of macroeconomic fundamentals was insufficient to explain it. Relates a number of external factors in the crisis to some research models and argues that the poor regulation and control of the banking system, coupled with an inflow of foreign investment, which investors wrongly believed to be government guaranteed, caused a “bubble” in share and property prices. Describes the collapse of companies, currency values and share/property prices which followed, exacerbated by a panicky withdrawal of foreign funds, speculative activity and government policy errors. Lists the objectives of and instruments used by the IMF programme and asks if it was too harsh e.g. on bank closures. Considers the lessons of the crisis and its implications for the Basle capital adequacy rules and the imposition of capital controls.
TL;DR: In this article, the authors present a study of the factors leading to online investing and its impact on the industry, and give some advice on choosing an online broker and ranks the top ten by various criteria.
Abstract: Outlines the internet’s contribution to the US economy with particular reference to the growth of online investing since 1994. Presents a study of the factors leading to this growth and its impact on the industry. Tabulates the market shares and stock commissions of the top ten online brokers, discusses their competitive strategies and identifies their key growth drivers. Suggests that they examplify McNair’s (1978) “wheel of retailing” by moving from a new, discounted service to a range of services like those of traditional brokers. Considers the online industry’s current problems (technical, legal, regulatory etc.), gives some advice on choosing an online broker and ranks the top ten by various criteria. Predicts that customers will benefit from increasing competition in the future and that the most successful firms will be middle‐tier ones offering a good combination of cost and service.
TL;DR: The authors analyzed 1989-1997 daily exchange rate data for six currencies to examine the relative information content and predictive power of implied and historical volatility and the existence of overreaction in option markets, concluding that implied volatility has more information than volatility based on past prices, and is better than GARCH-based or historic volatility forecasts for horizons up to three months.
Abstract: Restates the importance of asset volatility forecasts for option pricing and portfolio management and outlines previous research on forecasting models. Discusses the relative information content and predictive power of implied and historical volatility and the existence of overreaction in option markets. Analyses 1989‐1997 daily exchange rate data for six currencies to examine this. Presents the results, which suggest that implied volatility has more information than volatility based on past prices; and is better than GARCH‐based or historic volatility forecasts for horizons up to three months; but can be a biased predictor of future realized volatility. Finds limited evidence that long term volatilities in option prices overreact to short term volatilities.
TL;DR: In this paper, a mathematical, multi-factor, risk-return model was developed and applied to Greek data for this period, split into two sub-periods: 1980−1986 and 1986−1992.
Abstract: Outlines previous research on the capital asset pricing model and its extensions; and fluctuations in the Greek economy and capital market between 1980 and 1992. Develops a mathematical, multi‐factor, risk‐return model and applies it to Greek data for this period, split into two sub‐periods: 1980‐1986 and 1986‐1992. Identifies and discusses the m ost important macrovariables influencing security returns for both periods. Concludes that the model does capture the features of a changing economic environment and links risk premia to macroeconomic factors, although it lacks intertemporal stability.
TL;DR: In this paper, the authors used data from a sample of US manufacturing firms to examine this link and found that firms do not systematically invest in earnings increasing projects and that if losses are excluded, capital expenditure generally gives positive information about future earnings.
Abstract: Notes that although previous research has found capital expenditure to be value relevant, there has been no direct evidence that it has a positive linear association with future earnings. Uses 1976‐1989 data from a sample of US manufacturing firms to examine this link and finds that firms do not systematically invest in earnings increasing projects. Shows that firms without future losses (“winners”) had a positive association between capital expenditure and future earnings but those with losses (“losers”) had a negative one; and that if losses are excluded, capital expenditure generally gives positive information about future earnings. Considers consistency with other research, the limitations of the study and avenues for further research.
TL;DR: The future for multimedia applications in corporate training, e‐business and higher education is predicted to be very widely used as the technology improves.
Abstract: Outlines the technological problems which make it hard to deliver high quality video over the internet, e.g. insufficient bandwidth, clients’ machines etc.; and considers how they might be solved. Describes how digital video, audio presentations and animations can be streamed to a computer and the ways in which various US sectors are actually using streaming media at the moment. Discusses the future for multimedia applications in corporate training, e‐business and higher education; and predicts they will be very widely used as the technology improves.
TL;DR: In this paper, the adoption of Islamic law theoretically affects a political economy, why it requires the abolition of interest rates as a price for money and how this is achieved, and how to achieve it.
Abstract: Explains how the adoption of Islamic law (Shariah) theoretically affects a political economy, why it requires the abolition of interest rates as a price for money and how this is achieved. Takes Saudi Arabia as an example of a Muslim country governed by Shariah and investigates how far it accords with theory. Argues that equity financing (including non‐interest bearing government bonds) has helped to finance growth and insulated the stock market from speculative financing. Looks at statistics on the financial structures, assets and loans of Saudi banks (including joing ventures with foreign banks) and concludes that they have “done well” in implementing Islamic principles; and that interest‐free financing is appropriate for this country.
TL;DR: This article investigated the stochastic structure of time-varying beta in Hong Kong, Malaysia and Singapore using the bi-variate GARCH-in-mean model and fractional tests.
Abstract: Reviews previous research on the nature of beta and investigates the stochastic structure of time‐varying beta in Hong Kong, Malaysia and Singapore using the bi‐variate GARCH‐in‐mean model and fractional tests. Develops mathematical models and applies them to 1989‐1998 daily data from all three stock markets. Presents the results, which suggest, in contrast to other findings, that all three time‐varying betas are slowly mean‐reverting (long memory).