Corporate Finance Commons^™

The Effect Of Accounting Conservatism On Measures Of Financial Constraints, Taewoo Kim, Brandon Byunghwan Lee, Bo Meng, Daniel Paik

Accounting Faculty Publications

This study examines the relationship between accounting conservatism and measures of financial status. We find that, in general, a higher level of accounting conservatism is associated with a lower level of financial constraints – thereby making external funds less costly. The results also show that for a firm with a higher bid-ask spread or a higher likelihood of bankruptcy, this negative relationship between conservative financial reporting and financial constraints is intensified. In other words, a higher level of accounting conservatism is likely to make external funds less costly especially for those firms with a higher level of bid-ask spread or …

Investcorp, Jeremy Kappes, Haynes King, Jamie Mattioli, Prasad Vaze, Timothy Kyle Benusa, Sam Gottwald, Thomas Arnold, Jeffrey S. Harrison

Robins Case Network

Investcorp is a publicly traded global alternative asset management company headquartered in Manama, Bahrain. It manages a huge hedge fund, along with other assets. The case describes Investcorp’s history, investment strategies, and major competitors. The company has a highly aggressive growth strategy, but it is also facing the retirement of its CEO.

Releasing Information In Xbrl: Does It Improve Information Asymmetry For Early U.S. Adopters?, Marshall A. Geiger, David S. North, Daniel D. Selby

Accounting Faculty Publications

Information released in XBRL is intended to improve the quality and accessibility of SEC filings, leading to less information asymmetry in the equity market. Research findings on the effects of XBRL on information asymmetry in the US., however, are mixed. Kim et al. (2012) reports that XBRL reduces information asymmetry while Blankespoor et al. (2012) reports that XBRL increases information asymmetry. In contrast to these prior studies, we report that the answer as to whether XBRL affects information asymmetry is matter of firm size. In this study we examine shifts in two measures of information asymmetry for early adopters of …

Do Ceos And Principal Financial Officers Take A "Bath" Separately Or Together?: An Investigation Of Discretionary Accruals Surrounding Appointments Of New Ceos And Pfos, Marshall A. Geiger, David S. North

Accounting Faculty Publications

This study presents the first targeted examination of changes in financial reporting surrounding the appointment of both new CEOs and Principal Financial Officers (PFOs). We identify companies that appoint new CEOs and PFOs in the period 1995 to 2002 and find that the change in discretionary accruals is negative and significant in the year of hire (from t-1 to t) for firms appointing a new CEO or both a new CEO and PFO (i.e., the "big bath"), but not for firms appointing only a new PFO. We also find that firms appointing both executives in the same year report significant …

Maintaining A Flexible Payout Policy In A Mature Industry: The Case Of Crown Cork And Seal In The Connelly Era, James Ang, Tom Arnold, C. Mitchell Conover, Carol Lancaster

Finance Faculty Publications

As related in these pages, the history of Crown Cork and Seal (hereafter known as “Crown”) provides us with a case of a company that stopped paying dividends but establish a disciplined share repurchase policy and did so for all the right reasons. Under family ownership in the 1950s, Crown lost market share and was on the brink of bankruptcy when its largest shareholder, John Connelly, was elected chairman of the board in 1957. Under John Connelly’s leadership, the firm restructured its operations and began a payout policy based solely on stock repurchases. During the Connelly era, the firm did …

Real Options Analysis And The Assumptions Of Corporate Finance: A Non-Technical Review, Tom Arnold, Richard L. Shockley Jr.

Finance Faculty Publications

This paper provides a non-technical presentation of the theoretical foundations of corporate financial decision making and the net present value (NPV) rule. Our objective is to show that the concepts of value and value creation arise from a single, unified framework that is firmly rooted in neoclassical microeconomic theory. This, in turn, allow us to demonstrate that the corporate valuation approach generically known as real options analysis is perfectly justifiable - without further qualification - in any situation when investors want managers to maximize NPV.

Paul M. Klekner (B), Roger R. Schnorbus

Robins School of Business White Paper Series, 1980-2022

This is a fictitious case study, including the name of the restaurant and the people involved.

Paul Klekner graduated first in his class from the Culinary Institute of America (CIA) in 1998; his fellow students named him the chef most likely to succeed in the future. After graduation, he and his wife, Sarah, moved back to his home in Richmond, Virginia where he was employed as a chef at several restaurants including Bottega and Old Original Bookbinders. In 2003, he decided to open his own restaurant, Rogerios, in the Tobacco Row section of Richmond. With an inheritance of $300,000 he …

Effects Of Auditor Type And Evidence Domain Type On The Influence Of Irrelevant Internal Control Evidence And The Potential For Audit Failure, Daniel Selby

Bookshelf

Internal control systems consist of two evidence domains, automated control evidence and manual process evidence. Auditors can possess knowledge and expertise in both internal control evidence domains. But, auditors tend to possess more knowledge and expertise in one internal control evidence domain than the other internal control evidence domain. Thus, auditors have superior domain knowledge in one of the internal control evidence domains.

Auditors at large accounting firms tend to specialize in the evidence domain of automated controls (information technology auditors or IT auditors) or manual processes (financial auditors). Audit Standard 5 requires IT auditors and financial auditors to gain …

An Examination Of Value Line’S Long-Term Projection, Andrew Szakmary, C. Mitchell Conover, Carol Lancaster

Finance Faculty Publications

Unlike previous papers, which have focused on the timeliness ranks, we examine Value Line’s 3–5 year projections for stock returns, earnings, sales and related measures. We find that Value Line’s stock return and earnings forecasts exhibit large positive bias, although their sales predictions do not. For stock returns, Value Line’s projections lack predictive power; for other variables predictive power may exist to some degree. Our findings suggest the spectacular past performance of the timeliness indicator reflects either close alignment with other known anomalies or data mining, and that investors and researchers should use Value Line’s long-term projections with caution.

Duration Measures For Corporate Project Valuation, Tom Arnold, David S. North

Finance Faculty Publications

Sensitivity analysis is a very common exercise performed with the forecasting of project cash flows. In this paper, a duration-type measure is generated that provides a single number for the assessment of project cash flows relative to changes in the discount rate (or adjusted for changes in a particular cash flow model parameter). The calculation is no more difficult than the duration measures that already exist for bonds. Yet, the calculation provides valuable insight that many times is lost when performing sensitivity analysis. Further, at a minimum, the measure provides a gauge for the consequences of mis-specifiying the discount rate …

A Simplified Approach To Understanding The Kalman Filter Technique, Tom Arnold, Mark J. Bertus, Jonathan Godbey

Finance Faculty Publications

The Kalman filter is a time series estimation algorithm that is applied extensively in the field of engineering and recently (relative to engineering) in the field of finance and economics. However, presentations of the technique are somewhat intimidating despite the relative ease of generating the algorithm. This article presents the Kalman filter in a simplified manner and produces an example of an application of the algorithm in Excel. This scaled-down version of the Kalman filter can be introduced in the (advanced) undergraduate classroom as well as the graduate classroom.

The Effectiveness Of Insider Trading Regulation: International Evidence, Art Durnev, Amrita S. Nain

Finance Faculty Publications

There is a long standing debate in the finance and law literatures about the need for insider trading regulation. Some scholars and practitioners argue that insider trading restrictions should be revoked because insider trading allows private information to be quickly incorporated into stock prices, thereby leading to more informationally efficient stock prices (Carlton and Fischel (1983); Dye (1984)). For example, Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: “You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public …

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.

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.

Using The Wacc To Value Real Options, Tom Arnold, Timothy Falcon Crack

Finance Faculty Publications

We present a real option valuation using the weighted average cost of capital (WACC). This is an alternative to risk-neutral real option valuation. Using the WACC involves a marginal increase in mathematical complexity, but it is easy to implement in a spreadsheet, and it is easy to present to management. Our analysis reveals, however, that because the real option valuation is immune to choices of admissible discount rates (as per Arnold and Crack 2003a), the critical issue is correct estimation of volatility, not choice of discount rate. We also point out that the natural and conservative tendency to overestimate risk …

Campbell Soup Company In 2004 (A), Roger R. Schnorbus

Robins School of Business White Paper Series, 1980-2022

As fiscal 2004[1] began, Doug Conant, the President and CEO of the Campbell Soup Company could take pride in the results of his 3-year transformation plan instituted in fiscal 2001 to revitalize the company. The key initiatives of the plan were to restore revenue and profitability growth and stimulate shareholder wealth.

Conant, who became President and CEO in January of 2001, called the plan, “the single most comprehensive commitment to revitalization ever undertaken in the 132-year history of Campbell Soup Company.”

The financial results achieved in fiscal 2002, the first year of the plan, were a mixed bag. Although net …

Beware Of The Ides Of March: The Demise Of Hih Insurance, Bonnie Buchanan, Tom Arnold, Lance Nail

Finance Faculty Publications

Despite differences in corporate governance systems in the United States and Australia, the corporate governance failures that led to each country’s largest bankruptcy are strikingly similar. WorldCom in the United States and HIH Insurance in Australia were both created by a rapid series of major acquisitions, failed after their last major acquisitions, and attempted to hide their declining performance with aggressive and/or fraudulent accounting practices. In this paper we present a clinical examination of the corporate governance failures that led to the demise of HIH Insurance and show that corporate governance failures are not endemic to the existing corporate governance …

Appearances Are Important: Outsourced Internal Audit Services And The Perception Of Auditor Independence, Marshall A. Geiger, D. Jordan Lowe, Kurt J. Pany

Accounting Faculty Publications

The appearance of independence is an important facet of the regulation of auditor independence. The authors conducted a research study to gauge how some financial statement users—loan officers—view and make decisions based on loan proposals that present various types of relationships between the applicant, the auditor that performs the external audit, and the auditor that performs the internal audit function (whether performed in-house or outsourced to the hypothetical loan applicant's external auditor).

The results are insightful: The closer the relationship between the external auditor and the audit client, the higher the perception of inappropriateness, and the less likely the loan …

Adr Risk Characteristics And Measurement, Tom Arnold, Lance Nail, Terry D. Nixon

Finance Faculty Publications

While a healthy empirical literature exists on international diversification and its benefits, surprisingly few studies have examined the risk characteristics and efficacy of asset pricing models for one avenue of international diversification – investments in American Depository Receipts (ADRs). Originating in approximately 1927, ADRs provide an opportunity for investors to indirectly purchase shares of foreign firms. ADRs represent a claim to a given number of shares of a foreign firm held by a U.S. financial institution (e.g., Bank of New York). With the increasingly significant presence of ADR trading in the American stock markets – increasing six-fold between 1990 and …

Investor Views Of Audit Assurance: Recent Evidence Of The Expectation Gap, Marshall A. Geiger

Accounting Faculty Publications

Investors and financial statement users long have agreed on the usefulness of the audit in financial reporting. Over time, however, auditors have been expected to provide assurance in varying degrees and for different purposes. Differences in perception -- especially regarding assurances provided -- between users, preparers and auditors have been termed the "expectation gap. This article provides some startling evidence of the existence of such a gap in investor perceptions of the assurance provided by an audit.