Journal of Business Finance & Accounting

Antoniou, Antonios; Pescetto, Gioia; Violaris, Antonis

doi: 10.1111/1468-5957.05409pmid: N/A

This paper addresses the important relationship between stock index and stock index futures markets in an international context. By simply examining the spot‐futures relationship within a single country as most of the extant literature does and thus ignoring possible market interdependencies between countries, the dynamics of price adjustments may be misspecified and thus findings misleading. The main contribution of the paper is to improve our understanding of the pricing relationship between spot and futures markets in the light of international market interdependencies. Using a multivariate VAR‐EGARCH methodology, the paper investigates stock index and stock index futures market interdependence, that is lead‐lag relationships and volatility interactions between the stock and futures markets of three main European countries, namely France, Germany and the UK. In addition, the paper explicitly accounts for potential asymmetries that may exist in the volatility transmission mechanism between these markets. The main conclusions of the paper imply that investors need to account for market interactions across countries to fully and correctly exploit the potential for hedging and diversification.

Maris, Brian A.; Maris, Jo‐Mae; Yang, Tyler T.

doi: 10.1111/1468-5957.05390pmid: N/A

The IASC recently recommended that employee compensation in the form of stock options be measured at the ‘fair value’ based on an option pricing model and the value should be recognized in financial statements. This follows adoption of SFAS No. 123 in the United States, which requires firms to estimate the value of employee stock options using either a Black‐Scholes or binomial model. Most US firms used the B‐S model for their 1996 financial statements. This study assumes that option life follows a Gamma distribution, allowing the variance of option life to be separate from its expected life. The results indicate the adjusted Black‐Scholes model could overvalue employee stock options on the grant date by as much as 72 percent for nondividend paying firms and by as much as 84 percent for dividend paying firms. The results further demonstrate the sensitivity of ESO values to the volatility of the expected option life, a parameter that the B‐S model or a Poisson process cannot accommodate. The variability of option life has an especially big impact on ESO value for firms whose ESOs have a relatively short life (5 years, for example) and high employee turnover. For such firms, the results indicate a binomial option pricing model is more appropriate for estimating ESO value than the B‐S type model.

Ioannidis, Christos; Peel, David A.; Peel, Michael J.

doi: 10.1111/1468-5957.05201pmid: N/A

This paper re‐evaluates the time series properties of financial ratios. It presents new empirical analysis which explicitly allows for the possibility that financial ratios can be characterized as non‐linear mean‐reverting processes. Financial ratios are widely employed as explanatory variables in accounting and finance research with applications ranging from the determinants of auditors’ compensation to explaining firms’ investment decisions. An implicit assumption in this empirical work is that the ratios are stationary so that the postulated models can be estimated by classical regression methods. However, recent empirical work on the time series properties of corporate financial ratios has reported that the level of the majority of ratios is described by non‐stationary, I(1), integrated processes and that the ratio differences are parsimoniously described by random walks. We hypothesize that financial ratios may follow a random walk near their target level, but that the more distant a ratio is from target, the more likely the firm is to take remedial action to bring it back towards target. This behavior will result in a significant size distortion of the conventional stationarity tests and lead to frequent non‐rejection of the null hypothesis of non‐stationarity, a finding which undermines the use of these ratios as reliable conditioning variables for the explanation of firms’ decisions.

Del Brio, Esther B.; Perote, Javier; Pindado, Julio

doi: 10.1111/1468-5957.05254pmid: N/A

We bring together three disparate strands of literature to develop a comprehensive empirical framework to examine the efficiency of security analysts' earnings forecasts in Singapore. We focus specifically on how the increased uncertainty and the negative market sentiment during the period of the Asian crisis affected the quality of earnings forecasts. While we find no evidence of inefficiencies in the pre‐crisis period, our results suggest that after the onset of the crisis, analysts (1) issued forecasts that were systematically upward biased; (2) did not fully incorporate the (negative) earnings‐related news; and (3) predicted earnings changes which proved too extreme.

Loh, Roger K.; Mian, Mujtaba

doi: 10.1111/1468-5957.05443pmid: N/A

We bring together three disparate strands of literature to develop a comprehensive empirical framework to examine the efficiency of security analysts' earnings forecasts in Singapore. We focus specifically on how the increased uncertainty and the negative market sentiment during the period of the Asian crisis affected the quality of earnings forecasts. While we find no evidence of inefficiencies in the pre‐crisis period, our results suggest that after the onset of the crisis, analysts (1) issued forecasts that were systematically upward biased; (2) did not fully incorporate the (negative) earnings‐related news; and (3) predicted earnings changes which proved too extreme.

Filbeck, Greg; Preece, Dianna

doi: 10.1111/1468-5957.05362pmid: N/A

In this paper we examine the market reaction to the announcement by Fortune of the ‘Best 100 Companies to Work for in America.’ Employees rate firms based on several criteria including trust in management, pride in work/company and camaraderie. To examine long‐term performance, we calculate raw and risk‐adjusted returns and then compare them to the returns of a matched sample of firms. In addition, we calculate the return on a buy and hold investment in the sample firm less the return on a buy‐and‐hold investment in a matched sample firm (BHARs). We find a statistically significant positive response to the announcement of the ‘100 best companies to work for’ by Fortune. Also, based on all measures of risk‐adjusted return, we find these firms generally outperform the matched sample of companies. The BHAR results, although not exhibiting the level of statistical significance, are consistent with the raw and risk‐adjusted return results.

Lekkos, Ilias

doi: 10.1111/1468-5957.05364pmid: N/A

In this paper we examine the stationarity of all the rates comprising the USD, GBP, DM and JPY spot and forward term structures. Instead of focussing on short maturity interest rates, as most other papers do, we perform a detailed analysis of the whole range of spot and forward interest rates of the 4 main currencies. We investigate the issue of stationarity within the framework of an equilibrium interest rate model such as Vasicek (1977), that defines the cross‐sectional and time series properties that interest rates of various maturities must satisfy. We show that within a one‐factor interest rate model, such as Vasicek, all interest rates are restricted to exhibit the same mean reverting behaviour. This restriction allows us to apply more powerful panel unit root tests. This methodology increases considerably the number of observations available and as a result the power of the unit root tests. The higher power of these tests allows us to demonstrate that there does exist mean reversion on the spot and forward US interest rates and the forward DM and GBP interest rates.

Stammerjohan, William W.; Hall, Steven C.

doi: 10.1111/1468-5957.05418pmid: N/A

This paper provides another test of the litigation hypothesis proposed by Hall and Stammerjohan (1997) and provides evidence that subtle differences in the underlying business environment may be very important in predicting the accounting reaction of management to major events. The litigation hypothesis predicts that firms that are defendants in litigation with potentially large damage awards (major litigation) will attempt to reduce the size of those damage awards by making income‐decreasing accounting choices. The oil firms in the Hall and Stammerjohan study appeared to systematically reduce reported earnings during the litigation periods by under‐reporting new reserves. The fourteen chemical and pharmaceutical firms, involved in fifteen litigation events, examined by this study produce a very different result. The chemical and pharmaceutical firms faced a different business environment during their litigation periods and appear to have made income‐increasing accounting choices. These firms appear to have been able to perpetuate earnings growth without corresponding sales revenue growth during the litigation periods through unexpected reversals in deferred income tax expense.

Brusa, Jorge; Liu, Pu; Schulman, Craig

doi: 10.1111/1468-5957.05386pmid: N/A

In this paper, we examine whether the ‘reverse’ weekend effect recently documented by Brusa, Liu and Schulman (2000) is concentrated in a few industries or widely spread across all the industries. The findings in this paper indicate that the ‘reverse’ weekend effect exists not only in broad indices, but also in most industries. The results suggest that the ‘reverse’ weekend effect may be driven by economic events that affect all industries, rather than industry‐specific factors. Although the patterns of Monday returns are similar between broad indices and industry indices, they are different between the pre‐ and the post‐1988 periods. Monday returns tend to be negative in the pre‐1988 period, but tend to be positive in the post‐1988 period, for both broad market indices and industry indices. These conclusions are valid even after considering the influence of the month‐of‐the‐year and the week‐of‐the‐month effects.

Adams, Mike; Hardwick, Philip

doi: 10.1111/1468-5957.05505pmid: N/A

This study uses 1991–99 data gathered from the United Kingdom's life insurance industry to test empirically the notion that the reported annual surplus of a life insurer may be influenced by four firm‐specific characteristics: namely, reinsurance, output mix, organizational form and firm size. Consistent with expectations, the results indicate that the annual reported surplus is positively related to reinsurance and firm size and negatively related to the degree of product diversification. Contrary to our expectations, however, we find no evidence that proprietary (stock) life insurers tend to report higher annual surpluses than mutual life insurers.