Business Commons^™

The New Accounting For Operating Leases: Unintended Consequences In The Airline Industry, Renata Bandeira, Bridget M. Lyons, Carolyn Trabuco

WCBT Faculty Publications

By 2020, new accounting rules for operating leases were applicable to publicly traded companies reporting under either the US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). The accounting authorities under both standards noted that the new rules were developed to increase the transparency of lease transactions to provide more relevant and comparable information. We compare two Brazilian airlines reporting under IFRS, Azul and Gol, with an operationally similar US airline reporting under US GAAP, JetBlue, to determine whether the new standards improve the ability to understand, evaluate, and compare performance, managerial decision making and credit metrics. …

Co-Jumps, Co-Jump Tests, And Volatility Forecasting: Monte Carlo And Empirical Evidence, Weijia Peng, Chun Yao

WCBT Faculty Publications

This study classifies jumps into idiosyncratic jumps and co-jumps to quantitatively identify systematic risk and idiosyncratic risk by utilizing high-frequency data. We found that systematic risk occurs more frequently and has larger magnitudes than the idiosyncratic risk in an individual asset, which indicates that volatilities from one sector are largely derived from the contagious effect of other sectors. We further investigated the importance of idiosyncratic jumps and co-jumps to predict the sector-level S&P500 exchange-traded fund (ETF) volatility. It was found that the predictive content of co-jumps is higher than that of idiosyncratic jumps, suggesting that systematic risk is more informative …

Incorporating Financial Statement Information To Improve Forecasts Of Corporate Taxable Income, Danielle H. Green, Erin E. Henry, Sarah M. Parsons, George A. Plesko

WCBT Faculty Publications

We contribute to the research on the information content of earnings as it applies to the forecasting of economic activity across reporting models. We examine whether publicly available financial statement information is incrementally useful in forecasting confidentially reported taxable income. More precise firm-level taxable income forecasts can improve policymakers’ modeling of the tax system and their ability to analyze the effect of proposed changes in corporate tax law. When aggregated, improved micro-forecasts can also yield more accurate macro-forecasts of corporate taxable income, a significant component of the federal budget. We find that financial statement information improves firm-level estimates of future …

The Value Perspective: The Case Of Warren Buffet And His Investment Behavior Towards Apple, Walmart And Amazon, Shanhong Wu, Kermit Kuehn, Jing Jiang

WCBT Faculty Publications

In this paper, we use metrics of Ben Graham’s value investing principle to examine the actions taken by Warren Buffet toward three prominent stocks: Amazon, Apple and Walmart. We find that decisions of investment/dis-investment and not-investment by Buffet toward the stocks are largely in line with Graham’s view on value investing. This paper provides in-depth analysis of value for three stocks and relates to research on the book-to-market anomaly in the finance literature.

Market Risk And Market-Implied Inflation Expectations, Lucjan T. Orlowski, Carolyne Cebrian Soper

WCBT Faculty Publications

We examine interactions between market risk and market-implied inflation expectations. We argue that these interactions are asymmetric and varied in time. Specifically, market risk becomes elevated by expectations of either very low or high expected inflation. Market risk does not react to expectations of moderate, stable inflation. In our analysis, market risk is proxied by VIX and market-implied inflation expectations are reflected by five- and ten-year breakeven inflation. We use daily data for 5 and 10 year breakeven inflation and VIX for the sample period January 3, 2003 – January 24, 2019 for empirical testing. We employ asymptotic VAR, multiple …

An Empirical Examination Of Economic Determinants Of Financial Ceo Compensation: A Comparative Study On Pre And Post Financial Crisis Periods, Mahfuja Malik, Eunsup Daniel Shim

WCBT Faculty Publications

Inadequate risk monitoring and the executive incentive system of US financial institutions are considered to be significant factors in exacerbating the 2008 financial crisis, and regulators attempted to reform the executive compensation system in the post-crisis period. In this study, we conduct a comparative analysis of the economic determinants of the compensation for chief executive officers (CEOs) between the pre- and post-financial crisis periods, using data from US financial service institutions, since this is the sector that has been most affected by the financial crisis. We find that the mean values of total compensation and its incentive components, including cash …

A Case Study In The Use And Potential Misuse Of Non-Gaap Financial Measures, Benoit Boyer, Ralph Lim, Bridget M. Lyons

WCBT Faculty Publications

Firms reporting under US GAAP are allowed to supplement financial information with non-GAAP measures. We examined 6 Firms in the chemical industry and looked at what information was presented (Dow, Du Pont, Monsanto, FMC, PPG, Praxair). We use the 2014 Annual Report so that we would have comparable data for all companies. For 2 firms we looked at numbers presented in Cap IQ and in Bloomberg and compared them to the numbers presented by the company (Dow and Du Pont). The numbers reported by the firms and the analysts differed greatly.

From Pit To Electronic Trading: Impact On Price Volatility, Lucjan T. Orlowski

WCBT Faculty Publications

This paper investigates the dynamics of price volatility and trading volume of 10-year U.S. Treasury note futures within the context of transition from pit to electronic trading. The analysis is conducted over four discernible phases of futures trading evolution: the pit-only phase, the leap to electronic trading, and the electronic trading dominant phase, which is divided further into two periods, the before and after the financial crisis of 2007/2009. Generalized autoregressive conditional heteroskedasticity with in-mean conditional variance and generalized error distribution parameterization (GARCH-M-GED) tests are conducted to examine the conditional volatility of total returns index as a function of trading …

The Influence Of Director Stock Ownership And Board Discussion Transparency On Financial Reporting Quality, Jacob M. Rose, Cheri Mazza, Carolyn S. Norman, Anna M. Rose

WCBT Faculty Publications

Seventy-two active corporate directors participate in an experiment where management insists on aggressive recognition of revenue, but the chief audit executive proposes a more conservative approach. Results indicate interactive effects of director stock ownership and the transparency of director decisions. Stock-owning directors are more likely to oppose management’s attempts to manage earnings when transparency increases. For non-stock owning directors, however, increasing transparency does not affect the likelihood that directors oppose management’s attempts to manage earnings. The current study challenges suppositions that equate director stock ownership with improved financial reporting and higher corporate governance quality, and it provides evidence that increased …

Teaching Note On The Treatment Of Noncontrolling Interests In Financial Analysis, Cost Of Capital And Valuation: A Case Study Of Verizon Communications, Bridget Lyons

WCBT Faculty Publications

A noncontrolling interest (NCI) arises when a firm fully consolidates subsidiaries that are not wholly owned by the parent. The existence of a noncontrolling interest complicates financial analysis and valuation. Failure to appropriately consider the NCI may lead to errors in equity valuation and share price since the NCI impacts equity value and implied share price of the parent firm. Return on equity calculations must be carefully constructed as there are several net income and equity values reported. Finally, the NCI can impact the weighted average cost of capital. Verizon Communications was selected as a case study based on the …

Credit Risk Dynamics In Response To Changes In The Federal Funds Target: The Implication For Firm Short-Term Debt, Kwamie Dunbar, Abu S. Amin

WCBT Faculty Publications

The recent credit crisis has raised a number of interesting questions regarding the role of the Federal Reserve Bank and the effectiveness of its expected and unexpected interventions in financial markets, especiallyduring the crisis, given its mandate. This paper reviews and evaluates the impact of expected and unexpected changes in the federal funds rate target on credit risk premia. The paper's main innovation is the use of an ACH-VAR (autoregressive conditional hazard VAR) model to generate the Fed's expected and unexpected monetary policy shocks which are then used to determine the effects of a Federal Reserve policy change on counterparty …

Innovation In Treasury Futures: Examining Volatility Patterns Before And After The Shift From Open-Outcry To Electronic Trading, Lucjan T. Orlowski, Bluford Putnam

WCBT Faculty Publications

Key objectives: Identify major stages of transformation of U.S.10Y Treasury futures trading from open-outcry to Globex electronic. Examine major features of institutional changes at each stage of this transformation.

Integrating A New Business Into The Financial Planning Process, Barbara M. Tarasovich

WCBT Faculty Publications

A new Controller in this case was recently hired by Unilever, a global 200 consumer products organization, to integrate a newly acquired business into Unilever’s financial planning process. The newly acquired organization was a publically held company and had its own existing financial processes and procedures. Financial planning and reporting are major company activities and finance and accounting professionals are expected to “get it right.” The purpose of this case study is to get students to think about the difficulties and challenges of revamping existing financial processes and procedures and alert them to areas where other financial professionals have encountered …

The Sarbanes Oxley Act's Contribution To Curtailing Corporate Bribery, Karen Cascini, Alan Delfavero, Mario Mililli

WCBT Faculty Publications

In the wake of corporate scandals occurring in the early 2000s, a need for stricter regulation was deemed necessary by the investors of U.S. public companies. In 2002, the Sarbanes-Oxley Act (SoX) was created. Accordingly, under the rules of SoX, U.S. corporations were faced with increased oversight and also needed to substantially improve their internal controls. As companies began to scrutinize their internal affairs more closely, some businesses detected other forms of criminal activity occurring internally, such as bribery. Those companies and individuals found to have committed bribery have violated the Foreign Corrupt Practices Act of 1977 (FCPA). Throughout this …

Financial Contagion And Market Liquidity: Evidence From The Asian Crisis, Shantaram P. Hegde, Rupendra Paliwal

WCBT Faculty Publications

Models of financial crisis and contagion predict that an economic crisis turns into a crisis of market liquidity in the presence of borrowing constraints, information asymmetry and risk aversion. Based on the firm-level data on a sample of exposed and unexposed US stocks to the Asian currency crisis, we find a significant increase (decrease) in the crisis period bid-ask spreads (depth) and their volatilities for both the groups. While our results underscore the imprints of flight to quality, we detect little causal patterns in liquidity innovations. An important implication of our findings, as evidenced by the recent crisis, is that …

The Road To Retirement: Bumpy Or Smooth, Depends On Your Route, Anand Iyer, Madhusudan Subramanian, Vikash Punglia

WCBT Faculty Publications

Defined Contribution (DC) plans are rapidly becoming the primary retirement investment vehicle for a majority of employees across the US and other markets around the globe. Asset allocation for DC plans has to strike a balance between growth and protection assets over the savings lifecycle while protecting the long-term purchasing power of the nest egg. Due to the long duration of retirement investing and various risks associated with it, implementing the right asset allocation has become critical and challenging for DC plans. The unique Risk Focused methodology presented in this paper aims to address the shortcomings of conventional Target Date …

Monthly Seasonality In Emerging Market: Evidence From Bangladesh, Lutfur Rahman, Abu S. Amin

WCBT Faculty Publications

The presence of the seasonal anomaly in stock returns has been reported extensively in finance literature. This paper examines the presence of monthly anomaly in Dhaka Stock Exchange (DSE), the premier stock exchange of Bangladesh. Data used in the study include daily closing prices of DSE indices such as DSE all share prices index (DSI), DSE general index (DGEN) and DSE 20 index for a period of 01.01.2001-30.06.2010. Several hypotheses have been formulated; those hypotheses have been tested and dummy variable regression was used in the study. The result indicates that May and June returns are positive and statistically significant. …

Corporate Financial Policies And Informed Trading, Abu S. Amin

WCBT Faculty Publications

This paper analyzes the information content of corporate financial policies, in particular dividend changes and share repurchases, by examining their announcements effects on the behavior of informed traders. If unexpected dividend changes or share repurchases have information content, then there should be announcements effects on the extent of informed trading. I test this hypothesis by estimating the extent of informed trading before and after the dividends, tender offers and Dutch auctions announcements. I estimate the informed trading when the dividends announcements are informative [i.e. announcements contain surprises] and compares it when dividends announcements are not informative [i.e. announcements contain no …

Information-Based Trading And The Bid-Ask Spread, Kee H. Chung, Jing Jiang

WCBT Faculty Publications

We analyze the equilibrium spread when the transaction size of informed traders is elastic in the value of private information (α). We show that the pooling equilibrium is likely to be inefficient when trade size is sensitive to α and the inefficient equilibrium can occur before the market breaks down. The pooling equilibrium spread does not monotonically increase with α, although it increases with the elasticity of informed trades to α. The upper bound of the elasticity of informed trades for the market to remain open for the active specialist is higher than the corresponding value for the passive specialist …

Interpreting Financial Results, Bridget Lyons, Rupendra Paliwal, Danny A. Pannese

WCBT Faculty Publications

The article discusses three accounting changes issued by the Financial Accounting Standards Board (FSAB). The Statement of Financial Accounting Standards (SFAS) No. 158 "Employers' Accounting for Defined Benefit Pension and Other Retirement Plans" and the SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements" are mentioned. Financial Interpretation 48 "Accounting for Uncertainty in Income Taxes, an Interpretation of FSAB Statement No. 109" is mentioned.

The takeaway? Financial analysts, investors, and creditors need to carefully interpret ratios and measures, including debt to equity, liabilities to equity, and return on equity. Financial ratios used in loan covenants should be clearly designed and …

Should Individual Investors Use Technical Trading Rules To Attempt To Beat The Market?, Thomas S. Coe, Kittipong Laosethakul

WCBT Faculty Publications

Problem statement: Despite widespread academic acceptance of the Efficient Markets Hypothesis, some stock traders still use technical trading rules in an attempt to beat the market. Approach: This study looked at four trading rules, namely, the arithmetic moving average, the relative strength index, a stochastic oscillator and its moving average. These trading rules compare the relationship of current prices to past price patterns to generate a signal when to buy and sell stocks. The trading rules were tested over the years 2000-2009, a period of time that exhibited bull and bear markets, to determine if traders could actively …

Teaching The Budgeting Process Using A Spreadsheet Template, Benoit Boyer

WCBT Faculty Publications

The purpose of this article is to demonstrate how to use a template to teach the budgeting process and how to use the same template to do a sensitivity analysis once the budget process is completed. The template can be used as-is by non-accounting majors. They just have to fill in all of their assumptions by replacing the red numbers. The template can be locked so that students cannot modify the formulas by mistake. Simply protect the worksheet (Review tab > Protect Sheet) and students will be able to only change the assumptions. Accounting majors are shown how to build their …

Proliferation Of Tail Risks And Policy Responses In The Eu Financial Markets, Lucjan Orlowski

WCBT Faculty Publications

This study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to …

Path To Financial Inclusion: The Success Of Self-Help Groups-Bank Linkage Program In India, Sivakumar Venkataramany, Balbir B. Bhasin

WCBT Faculty Publications

Financial inclusion has been a major theme in both industrialized and developing economies in the era of financial globalization. When microcredit institutions have received limited success in many countries, microfinance is being used in India for the purpose of accomplishing universal financial inclusion. This paper recognizes the overwhelming efforts of the Government of India and focuses on the success of the linkage between commercial banks and self-help groups (SHGs). The SHGs comprising predominantly women groups help in the social cause of alleviation of poverty, increase of sustainability, reduction of vulnerability, improvement of capacity building and help the weaker sections build …

Stochastic Business Cycle Volatilities, Capital Accumulation And Economic Growth: Lessons From The Global Credit Market Crisis, Kwamie Dunbar

WCBT Faculty Publications

The recent global economic downturn in a number of economies was preceded by rising credit market risk brought on by a massive financial market failure. This paper develops a small open economy model that analyzes the interaction of business cycle volatilities with capital accumulation and the subsequent impacts on economic growth. We use a stochastic dynamic programming model to test the central hypothesis that rising volatility shocks is an inhibitor to capital accumulation and subsequently economic growth. The model illustrates that traditional capital-based growth models which assume a constant capital stock are not consistent with the business cycle variation in …

Finance Flies High: How Unilever Redesigned The Finance Function To Build Brand Value And Drive Growth, Barbara M. Tarasovich, Bridget Lyons

WCBT Faculty Publications

Unilever's finance team played a key role in the success of their brands. The company achieved its fourth consecutive year of accelerating organic sales growth from less than 0.5% in 2004 to more than 7% in 2008, according to Jim Lawrence, Unilever's CFO. Its strategy is to focus on volume growth and strengthening the competitive position of the company's brands. In this article, the authors examine how the finance function at Unilever was redesigned to deliver the firm's strategic goals, including an emphasis on volume growth and competitive position of its brands. Beginning in 2005, the finance team at Unilever …

How The Madoff Fraud Could Affect Your Cpa Practice, Stephen Scarpati

WCBT Faculty Publications

With an estimated $65 billion lost from trust funds, retirement plans, pensions, investment funds, inheritance monies, and nonprofit organizations, many people have been adversely affected by the Ponzi scheme perpetrated by Bernard L. Madoff. When you combine a lot of lost money with a lot of angry people, the result is a lot of lawsuits. The breadth of those lawsuits will encompass all associated with the affected organizations--including CPAs. Those messages were loud and clear at the May 27, 2009, breakfast symposium "Are CPAs the Next Madoff Victims? The Accountant's Liability," sponsored by The CPA Journal.

The Dynamics Of Quote Adjustments, Kee H. Chung, Chairat Chuwonganant, Jing Jiang

WCBT Faculty Publications

Liquidity providers on the NYSE make faster quote adjustments towards equilibrium spreads and depths than they do on NASDAQ. Liquidity providers in both markets make faster spread and depth adjustments for stocks with more frequent trading, greater return volatility, higher prices, smaller market capitalizations, and smaller trade sizes. We find that stocks with greater information-based trading and in more competitive trading environments exhibit faster quote adjustments. The speed of quote adjustment is faster after decimalization in both markets. These results are robust and not driven by differences in stock attributes between the two markets or time periods. Overall, our results …

After The Acquisition: Here Are Seven Steps To Successfully Integrating Finance And Accounting Functions After A Merger Or Acquisition, Barbara M. Tarasovich, Bridget Lyons, John Gerlach

WCBT Faculty Publications

Although much has been written regarding the factors critical to successful integration after a merger or acquisition, very little research has focused on the particulars of integrating the finance and accounting functions of the companies involved. As with overall business integration, detailed planning, effective communication, and speed of execution are critical. The authors recommend a seven-step process that will help balance the needs of the business during an acquisition as well as ensure financial controls are established. The overall steps provide the key activities to be accomplished and provide specific and explicit guidance. This seven-step process includes: 1. Begin planning, …

An Assessment Of The Impact Of The Sarbanes-Oxley Act On The Investigation Violations Of The Foreign Corrupt Practices Act, Karen Cascini, Alan L. Delfavero

WCBT Faculty Publications

During the late 1990s and early 2000s, a plethora of corporate scandals occurred. Due to these corporate debacles, corporate executives have been placed under fire. In response to such unethical conduct with regard to internal practices and financial reporting, legislation has been passed in order to ensure that corporations conduct their business in an ethical manner. The purpose of this paper is to assess the connection between the Foreign Corrupt Practices Act of 1977 (FCPA) and the Sarbanes-Oxley Act of 2002 (SOx), to determine whether SOx has influenced the FCPA’s investigative violation activities by examining the number of such investigations …