Business Commons^™

An Analytical Approach For Making Management Decisions Concerning Corporate Restructuring, Beixin Lin, Zu Hsu Lee, Richard Peterson

Department of Accounting and Finance Faculty Scholarship and Creative Works

Internal corporate restructuring activities, such as downsizing, sale or termination of a business line, facility closure, consolidation, or relocation, often occur as part of managerial strategies intended to improve efficiency, control costs, and adapt to an ever-changing business environment. Such actions frequently result in fundamental changes in a business's organization, its strategies, its systems, and its operations. They can unsettle a business and often significantly affect current and future earnings and cash flows. In this paper we propose a novel decision-making model through the use of the dynamic programming technique to illustrate how management can determine the optimal timing and …

Insider Trading And Voluntary Disclosures, Qiang Cheng, Kin Lo

Research Collection School Of Accountancy

We hypothesize that insiders strategically choose disclosure policies and the timing of their equity trades to maximize trading profits, subject to the litigation costs associated with disclosure and insider trading. Accounting for endogeneity between disclosures and trading, we find that when managers plan to purchase shares, they increase the number of bad news forecasts to reduce the purchase price. In addition, this relation is stronger for trades initiated by chief executive officers than for those initiated by other executives. Confirming this strategic behavior, we find that managers successfully time their trades around bad news forecasts, buying fewer shares beforehand and …

Strengthening The Foundations Of The Accountability Profession, Sridhar Ramamoorti, Sam M. Mccall, Relmond P. Van Daniker

Accounting Faculty Publications

Article discusses the conceptual foundations of the accountability profession in government. The role of the Academy for Government Accountability in strengthening the accountability profession and advancing research and education initiatives in government financial management is described. The author suggests that government accountability needs to be about stewardship, transparency, accountability and citizen-centric government.

The Effect Of The Options Backdating Scandal On The Stock-Price Performance Of 110 Accused Companies, Gennaro Bernile, Gregg A. Jarrell, Howard Mulcahey

Research Collection Lee Kong Chian School Of Business

Since academic scholars and the Wall Street Journal reported widespread evidence indicating that option grants to executives were backdated, an avalanche of news stories followed documenting this ever-widening corporate scandal. In this study we ask: "How do disclosures of backdating affect shareholder value?" We closely examine 110 companies listed in the Wall Street Journal's Perfect Payday webpage, collecting all news stories related to options backdating. We find that shareholders of these 110 companies suffer on average significant stock-price declines, ranging between 20% and 50%. Moreover, these losses do not seem to be due to temporary overreactions (at least so far). …

Institutional Holdings And Analysts’ Stock Recommendations, Qiang Cheng, Xia Chen

Research Collection School Of Accountancy

Prior studies document that institutional investors outperform the mar- ket. We investigate whether this superior performance is partly derived from institutional investors use of sell-side analysts stock recommenda- tions. First, we find that the quarterly change in institutional ownership is positively correlated with consensus recommendations. After control- ling for other determinants of institutional holdings, the quarterly change in institutional ownership is on average 0.90 percent higher for firms with favorable recommendations than for those with unfavorable recommendations. Second, using large trades to proxy for institutional trading, we find that there are more buyer-initiated than seller-initiated large trades around favorable recommendations …

Transparency In Financial Markets And Institutions: A Catholic Social Thought Perspective, Bridget Lyons, Lucjan T. Orlowski

WCBT Faculty Publications

We argue that transparency, or information disclosure by public and private sector institutions should be viewed as an important component of the Catholic Social Thought process. A higher degree of transparency by a single institution denotes revealing a greater magnitude of truthful information that leads to optimization of actions by other individuals and institutions, thus ultimately, to maximization of social welfare. Based on the precepts of Catholic Social Thought, more detailed and unbiased information allows individuals to make more truthful observations of reality that subsequently rationalize their judgment and actions. This is particularly relevant for financial markets and institutions that …

Six Levels Of Financial Knowledge, George E. Manners Jr.

Faculty Articles

With the appropriate framework to shape financial knowledge, the management accounting function should become an organization's principal decision-support platform. The framework consists of six levels of financial knowledge, and the word "financial" is most operative here. The Level 1 knowledge base connects a business to the outside world. When you have output volume and variable cost per output unit, you have the basis for Level 2 vocabulary. When a business transitions to Level 3, it has learned that return on assets must be employed as the enterprise's guiding profitability gauge. There is a very distinct increment in knowledge when moving …

The Association Between Audit Quality And Abnormal Audit Fees, Jong-Hag Choi, Jeong-Bon Kim, Yoonseok Zang

Research Collection School Of Accountancy

Using a sample of 9,820 firm-year observations over the 2000-2003 period, this paper examines whether, and how, audit quality proxied by unsigned discretionary accruals is associated with abnormal audit fees, i.e., actual audit fees in excess of expected, normal audit fees. The results of various regressions reveal that the association between the two is insignificant for the full sample, significantly positive for the subsample of clients with positive abnormal fees, and insignificantly negative for the subsample of clients with negative abnormal fees. The above results suggest that auditors’ incentives to compromise audit quality differ systematically for more profitable clients (with …

Corporate Financial Policy And The Value Of Cash, Michael Faulkender, Rong Wang

Research Collection Lee Kong Chian School Of Business

We examine the cross-sectional variation in the marginal value of corporate cash holdings that arises from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases.

The Importance Of Issues Management In International Mergers And Acquisitions, Mark Chong

Research Collection Lee Kong Chian School Of Business

Issues management is the strategic use of issues analysis and strategic responses to help organizations make adaptations needed to achieve harmony and foster mutual interests within the communities in which they operate (Heath, 1997, p. 3). It seeks to build, maintain and repair relationships with an organizationÆs stakeholders by keeping surveillance for threats and opportunities in the environment that can affect success in achieving organizational mission and goals (Heath, 2002). Accordingly, organizations modify corporate policy, shape legislation or influence public opinion to synchronize themselves with the prevailing or emerging climate of public opinion and sensitivity

Personal Taxes, Endogenous Default, And Corporate Bond Yield Spreads, Sheen X. Liu, Howard Qi, Chunchi Wu

Research Collection Lee Kong Chian School Of Business

Term structure models have often been criticized for failing to explain satisfactorily the yield spread between corporate and Treasury bonds. A potential problem is that the personal tax effect is ignored in these models. In this paper, we employ a structural model to investigate the role of personal taxes on both debt and equity returns in capital structure decisions and assess their impact on corporate bond yield spreads. It is shown that personal taxes affect the firm's optimal capital structure, and the tax premium explains a substantial portion of yield spreads, especially for high-grade bonds. The predictive ability of the …

Central Bank Independence, Inflation Variability, And The Revenue Smoothing Hypothesis, Hermann Sintim-Aboagye, David R. Tufte

Department of Accounting and Finance Faculty Scholarship and Creative Works

This paper examines the revenue-smoothing hypothesis, which posits that an optimizing government will adjust both taxes and inflation to meet shocks to government spending. Our contribution is to examine this through the lens of a new methodology that relates both the first and second moments of inflation rates to central bank independence (CBI) measures. Unlike existing least-squares-based CBI papers, this study uses a maximum likelihood framework that facilitates the direct inclusion of CBI parameters in the residual covariance matrix. This new approach allows for a more intensive use of information contained in the CBI indexes and the estimates obtained are …

How To Use The Changing Components Of The Corporate Annual Report, Deborah S. Archambeault, John G. Fulmer Jr., Richard A. Turpin

Accounting Faculty Publications

The amount of information required in a corporate annual report continues to increase. Most recently, additional reporting requirements brought about by the Sarbanes-Oxley Act of 2002 (SOA), the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC) increase the number of component reports that must be included in the annual report package. Lenders need to be familiar with the additional information that these new components provide. Therefore, this article summarizes the required component reports, discusses the information conveyed in each report and gives some examples of the types of significant new information that can be obtained.

Using Gmm To Flatten The Option Volatility Smile, Tom Arnold

Finance Faculty Publications

By using an over-identified Generalized Method of Moments (GMM) estimation procedure with careful consideration for data biases existing in the previous literature, parameters are estimated for a stochastic volatility jump diffusion option pricing (SVJ) model. The estimated parameters indicate a statistically significant highly negative infrequent jump process in the underlying security return distribution consistent with market crashes. When comparing to a stochastic volatility (SV) option pricing model, the SVJ is more robust but not always the superior model. The robustness of the models is further gauged by evaluating performance up to a year beyond the estimation data.

Recharacterization And The Nonhindrance Of Creditors, David A. Skeel Jr., Georg Krause-Vilmar

All Faculty Scholarship

Using a 1977 article by Robert Clark as the starting point, this article attempts to shed new light on the question of whether and when shareholder loans to her company should be either equitably subordinated or, as courts have done in a few recent cases, recharacterized as equity. In its emphasis on the particular issue of shareholder loans, the article has a narrower compass than Clark’s article, which uses a four-part typology to explore the relationship among fraudulent conveyance law, equitable subordination, veil piercing and dividend restrictions. But the article also expands Clark’s analysis in several respects. The most important …

Government Ownership And The Performance Of Government-Linked Companies: The Case Of Singapore, James Ang, David K. Ding

Research Collection Lee Kong Chian School Of Business

In an emerging economy, the alternative to government control is often no governance. We investigate the governance structure of government-linked companies (GLCs) in Singapore under the ownership/control structure of Temasek Holdings, the government holding entity, which typically owns substantial cash flow rights but disproportional control rights and exercises no operational control. We compare the financial and market performance of GLCs with non-GLCs, where each has a different set of governance structure, the key difference being government ownership. We show that Singaporean GLCs have higher valuations and better corporate governance than a control group of non-GLCs. The results hold even when …

Audit Committee Financial Experts: A Closer Examination Using Firm Designations, Joseph V. Carcello, Cw Hollingsworth, Terry L. Neal

Accounting and Information Management Publications and Other Works

The Sarbanes-Oxley Act (SOX) requires the disclosure of whether the audit committee has a financial expert. We examine disclosures related to audit committee financial experts (ACFEs) in the first year that this disclosure requirement is in effect. We find that virtually all companies disclose whether an ACFE is on the audit committee, although the transparency of the disclosure regarding the ACFE’s background is limited. We also find that most ACFEs do not have a background in accounting or finance, although there are notable differences between stock exchanges on this dimension. In addition, we find that companies designate ACFEs who would …

Estimation Of Large Insurance Losses: A Case Study, Tine Buch-Kromann

Journal of Actuarial Practice (1993-2006)

This paper demonstrates an approach to analyzing liability data recently developed by a Danish insurance company. The approach is based on a Champernowne distribution, which is corrected with a non-parametric estimator. The correction estimator is obtained by transforming the data set with the estimated modified Champernowne cdf and then estimating the density of the transformed data set by using the classical kernel density estimator. Our approach is illustrated by applying it to an actual data set.

Solvency Of Life Insurance Companies: Methodological Issues, Rosa Cocozza, Emilia Di Lorenzo

Journal of Actuarial Practice (1993-2006)

The paper deals with solvency assessment for life insurance business; some methodological issues concerning the solvency of life insurance companies, particularly connected to the investment risk, are suggested. Considerations about the technical equilibrium of an insurance portfolio and the financial regulation lead to a dynamic system involving risk measure and solvency assessment. The formal model is applied to a life annuity cohort in a stochastic context in order to exemplify the potential of the model, especially referred to the need to frame solvency assessment in a dynamic perspective.

A Note On The Instability Of The Unprojected Individual Level Premium Cost Method, Pierre Devolder, Valerie Goffin

Journal of Actuarial Practice (1993-2006)

We compare the unit credit and the unprojected individual level premium cost methods in a continuous time environment and show that the latter may produce unstable contribution rates in a dynamic environment. Specifically, assuming there are no unfunded liabilities, we prove that the unprojected individual premium cost method may produce non-bounded contributions if benefits change too close to the normal retirement age.

Consistent Assumptions For Modeling Credit Loss Correlations, Jan Dhaene, Marc J. Goovaerts, Robert Koch, Ruben Olieslagers, Olivier Romijn, Steven Vanduffel

Journal of Actuarial Practice (1993-2006)

We consider a single period portfolio of n dependent credit risks that are subject to default during the period. We show that using stochastic loss given default random variables in conjunction with default correlations can give rise to an inconsistent set of assumptions for estimating the variance of the portfolio loss. Two sets of consistent assumptions are provided, which it turns out, also provide bounds on the variance of the portfolio's loss. An example of an inconsistent set of assumptions is given.

On Some Risk-Adjusted Tail-Based Premium Calculation Principles, Edward Furman, Zinoviy Landsman

Journal of Actuarial Practice (1993-2006)

This paper explores two tail-based premium calculation principles, the tail standard deviation (TSD) premium and the tail conditional expectation (TCE) premium, in their risk-adjusted and unadjusted forms. They are risk-adjusted using so-called distortion functions. We prove that the proportional hazard (PH) risk-adjusted TCE premium is larger than the unadjusted TCE premium. Additionally, given a risk distribution with location and scale parameters, we prove that the PH risk-adjusted TCE premium reduces to the unadjusted TSD premium.

Bayesian Analysis Of A Health Insurance Model, Helio S. Migon, Edison M.O. Penna

Journal of Actuarial Practice (1993-2006)

We consider the problem of determining health insurance premiums based on past information on size of loss, number of losses, and size of population at risk. The size of loss and the number of losses are treated as mutually independent random variables. The number of losses is assumed to follow a Poisson process, and the loss sizes are independent and identically distributed non-negative random variables, and the population at risk is assumed to follow a non-linear growth model. An expression for the premium is obtained through maximization of the insurer's expected utility under a Bayesian model. The parameter estimation process …

Bayesian Analysis Of Insurance Losses Using The Buhlmann-Straub Credibility Model, Abraham J. Van Der Merwe, Kobus N. Bekker

Journal of Actuarial Practice (1993-2006)

We propose a Bayesian analysis to develop credibility estimates of the well known Biihlmann-Straub model. We describe simple numerical methods to obtain exact posterior distributions and predictive densities under this model. These distributions are obtained through Monte Carlo simulations that generate independent samples from the joint posterior distribution. Our methods are therefore preferable to methods such as Gibbs sampling, which generates dependent samples from the joint distribution. The methods discussed also can be extended to more complicated credibility models.

Journal Of Actuarial Practice, Volume 13, 2006, Colin Ramsay , Editor

Journal of Actuarial Practice (1993-2006)

ARTICLES

Bivariate Archimedean Copula Models for Censored Data in Non-Life Insurance • Michel Denuit, Dana Purcaru, and Ingrid Van Keilegom 5

Bayesian Analysis of Insurance Losses Using the Biihlmann-Straub Credibility Model • Abraham J. van der Merwe and Kobus N Bekker . 33

Bayesian Analysis of a Health Insurance Model • Helio S. Migon and Edison M. O. Penna 61

Solvency of Life Insurance Companies: Methodological Issues • Rosa Cocozza and Emilia Di Lorenzo . 81

Pricing Insurance Policies with a Distribution-Free Financial Pricing Model • Min-Ming Wen . 103

A Note on the Instability of the Unprojected Individual Level …

Analysis Of An Insurance Risk Model With Thinning Dependence And Common Shock, Lai Mei Wan, Kam Chuen Yuen, Wai Keung Li

Journal of Actuarial Practice (1993-2006)

We consider a continuous-time insurance risk model with m dependent classes of business with dependent claim number processes due to thinning dependence and a common shock. The impact of the dependence is studied via the adjustment coefficient. The case m = 2 is investigated analytically for exponential claim distributions and via simulation for non-exponential claim distributions.

Do Option Markets Substitute For Stock Markets?, Tom Arnold, Gayle Erwin, Lance Nail, Terry D. Nixon

Finance Faculty Publications

Using a sample of cash tender offers occurring between 1993 and 2002, we find evidence that the options market has become the preferred venue for traders attempting to profit on anticipated announcements. Options offer advantages relative to stocks. Traders gain leverage by trading in options and multiple options contracts on an individual stock. The results of our study indicate that a substitution effect does exist. Abnormal volume in the option market replaces abnormal volume in the stock market prior to cash tender offer announcements, and this abnormal option volume precedes abnormal stock volume for targets with or without traded options.

Corporate Governance, Public Accounting Firm And Multinational Corporation: The Us Sox Act Perspective, Marc Massoud, Eunsup Daniel Shim

WCBT Faculty Publications

The purpose of this paper is to review US corporate governance systems and to highlight the mandated roles of audit committee and external auditor within the SOX Act. In addition, it discusses requirements and implications of the SOX Act for the foreign accounting firms and multinational corporations. Finally this paper provides a perspective on improvement of corporate governance and financial integrity. In order to regain trust from the financial market, the SOX Act mandates (1) to improve auditor’s independence by reducing conflicts of interest; (2) to increase corporate financial reporting responsibility by requiring a CEO or a CFO certify accuracy …

Journal Of Actuarial Practice - Volume 13 (2006) - Contents And Masthead

Journal of Actuarial Practice (1993-2006)

Contents

Editorial Policy: Topics suitable for this journal include AIDS, annuity products, asset-liability matching, cash-flow testing, casualty rate making, credibility theory, credit insurance, disability insurance, expense analysis, experience studies, FASB issues, financial reporting, group insurance, health insurance, individual risk taking, insurance regulations, international issues, investments, liability insurance, loss reserves, marketing, pensions, pricing issues, product development, reinsurance, reserving issues, risk-based capital, risk theory, social insurance, solvency issues, taxation, valuation issues, and workers' compensation

Review Process

Editor - Colin Ramsay, University of Nebraska

Associate Editors: Robert Brown, University of Waterloo ○ Cecil Bykerk, Mutual of Omaha ○ Ruy Cardoso, Actuarial Frameworks ○ …

Spatial Distribution Of Frequency And Severity Of Water Claims In California, Gurbhag Singh, Max Tang, Don Mcneill, Lyn Hunstad

Journal of Actuarial Practice (1993-2006)

We examine the frequency and severity of water loss claims for homeowners insurance across the state of California for the experience years 2000, 2001, and 2002. The spatial distribution patterns of frequencies and severities are mapped and analyzed at the zip code level. The maps reveal the pockets of high frequencies and severities. The information provided in this paper will assist actuaries and policy makers in their quest to set accurate rates for homeowners insurance.