Corporate Finance Commons^™

Just Say 'No', Mark S. Beasley, Joseph V. Carcello, Dana R. Hermanson

Faculty Articles

The article discusses the prevention of financial fraud within corporations and businesses in the United States. The types of individuals named in the U.S. Securities and Exchange Commission (SEC) files are examined. Different fraud techniques are looked at, including sham sales, the recording of conditional sales, and unauthorized shipments. The author discusses the status of firms after fraud disclosure and the implications it has for finance professionals.

Instructional Case: Worldwide Shipping Corporation Ltd: Early Or Late Adoption Of A New International Accounting Ssandard?, Pearl Tan, Peter Lee

Research Collection School Of Accountancy

The management of Worldwide Shipping Corp. Ltd. is confronted with a dilemma when a new international accounting standard on leases is introduced which contains a transitional provision allowing firms to defer implementation for a period of 4 years. Students are required to put themselves in the position of managers who have to weigh the adverse impact of early adoption of the new accounting standard against a responsibility for fair financial reporting. The case aims to provide students with a better understanding of the impact of off-balance sheet transactions on a firm's financial statements. The case requires students to examine implications …

The Long-Term Performance Of Initial Public Offerings (Ipos): Venture Capitalists, Reputation Of Investment Bankers, And Corporate Structure, Halit Gonenc

Theses and Dissertations in Business Administration

The Initial Public Offerings (IPOs) literature has uncovered the underpricing, hot issue markets, and long-term underperformance anomalies. The long-term underperformance of IPO firms has gained the focus of recent academic attention. Recent studies document that venture capitalists, and the reputation of investment bankers are associated with the long-term performance of firms going public. The lack of venture capitalists has been shown to relate with the long-term underperformance of IPO firms. On the other hand, IPO firms underwritten by less reputable underwriters have been found to experience more negative long-term market adjusted returns. Unlike previous studies, this study examines the interactive …

Transparency Of Ownership And Control In Germany, Marco Becht, Ekkehart Boehmer

Research Collection Lee Kong Chian School Of Business

We first analyze legal provisions relating to corporate transparency in Germany. We show that despite the new securities trading law (WpHG) of 1995, the practical efficacy of disclosure regulation is very low. On the one hand, the formation of business groups involving less regulated legal forms as intermediate layers can substantially reduce transparency. On the other hand, the implementation of the law is not practical and not very effective. We illustrate these arguments using several examples of WpHG filings. To illustrate the importance of transparency, we show next that German capital markets are dominated by few large firms accounting for …

A Study Note On The Actuarial Evaluation Of Premium Liabilities, Claudette Cantin, Philippe Trahan

Journal of Actuarial Practice (1993–2006)

Several approaches have been used to estimate premium liabilities. The emphasis of these approaches has been on unearned premium and deferred policy acquisition expenses (DPAE), as such items represent the largest components of premium liabilities. The purpose of this paper is to provide a framework for the evaluation of premium liabilities and to augment the actuarial literature. We define and review the individual components of premium liabilities as well as the regulatory requirements and Canadian Institute of Actuaries recommendations and standards of practices related to premium liabilities. We also present an actuarial approach for estimating equity in the unearned premium, …

Commissioners Annuity Reserve Valuation Method (Carvm), Keith P. Sharp

Journal of Actuarial Practice (1993–2006)

This paper describes the commissioners annuity reserve valuation method (CARVM) and highlights the fundamental contrast with insurance valuation. Numerical examples illustrate methods of applying CARVM to particular annuity designs. The application of NAIC Actuarial Guideline 13 on bailouts is given particular attention.

Credibility Calculations Using Analysis Of Variance Computer Routines, Dennis H. Tolley, Michael D. Nielsen, Robert Bachler

Journal of Actuarial Practice (1993–2006)

In this paper we present a method of calculating Buhlmann-Straub credibility factors using standard statistical techniques developed for the analysis of variance. Emphasis is placed on using readily available statistical packages such as SAS and SPSS. Additionally many other computational tools such as EXCEL can be programmed to make such calculations. An example and some sample SAS programs are provided.

Determination Of Optimal Premiums As A Constrained Optimization Problem, Farrokh Guiahi

Journal of Actuarial Practice (1993–2006)

A simple stochastic model of an insurer's underwriting and related investment operations is used to determine the optimal amounts of written premiums for one period for the insurer's book of business. The written premium for each class is determined by the solution of a constrained optimization problem. The insurer's objective function is the expected profit on a book of business over the period. The insurer has a safety constraint where a certain portion of capital and surplus can be depleted with a small probability. This paper provides an explicit solution for optimum expected profit and corresponding written premiums by classes. …

A Fuzzy Approach To Grouping By Policyholder Age In General Insurance, Richard J. Verrall, Yakoub H. Yakoubov

Journal of Actuarial Practice (1993–2006)

In general insurance, policyholder age is often treated as a factor with the number of levels requiring that the individual ages of the policyholders be grouped. Although the groups are usually defined by the existing underwriting structure, it should be investigated as part of any premium rating exercise that uses a model to assess past claims experience. It is possible that an incorrect grouping by policyholder age could bias the results of the risk premium estimation. On the other hand, it may not be computationally feasible to use separate ages in the premium model, making some form of grouping necessary. …

Multilife Premium Calculation With Dependent Future Lifetimes, Michel Denuit, Anne Cornet

Journal of Actuarial Practice (1993–2006)

Actuaries traditionally have calculated multi-life (joint life) premiums by assuming the independence of the future lifetimes of insured persons. Recent studies, however, demonstrate dependence of the future lifetimes of couples (such as husbands and wives). This dependence materially affects the values of multi-life annuities and insurances. Using the Frechet-Hoeffding bounds and Norberg's Markov model, we determine the effect of this dependence in lifetimes on the actuarial present values of a widow's pension benefit.

Recognizing Actuarial Assumptions, Victoria Stachowski, Alice Underwood

Journal of Actuarial Practice (1993–2006)

As assumptions underlie every aspect of actuarial calculations, actuaries must be aware of the assumptions they are using and understand their importance and the possible effects of changing assumptions on the results of their calculations. This paper explores the nature of assumptions in: (i) mathematical models, (ii) data selection, (iii) actuarial methods, and (iv) the business environment. We examine reasons for making assumptions such as convenience, tradition, indications in the data, or lack of data. In addition, we discuss (i) how actuaries can judge whether these reasons are sufficient; (ii) methods that can help actuaries quantify the impact of their …

Carvm And Naic Actuarial Guidelines 33 & 34, Keith P. Sharp

Journal of Actuarial Practice (1993–2006)

Annuity valuation under the NAIC Standard Valuation Law is determined according to methods different from those methods used for life insurance. The CARVM assumption of efficient policyholder selection is clarified under NAIC Actuarial Guidelines 33 and 34 to allow for non-elective (e.g., death) benefits. In particular, Actuarial Guideline 34 is oriented toward variable annuities and prescribes methods to be used in the presence of a minimum guaranteed death benefit. In this paper these methods are examined and illustrated with examples.

Journal Of Actuarial Practice, Volume 7, Nos. 1 And 2, 1999, Colin Ramsay , Editor

Journal of Actuarial Practice (1993–2006)

ARTICLES

A Study Note on the Actuarial Evaluation of Premium Liabilities • Claudette Cantin and Philippe Trahan (First Prize)

Recognizing Actuarial Assumptions • Victoria Stachowski and Alice Underwood (Second Prize)

Commissioners Annuity Reserve Valuation Method (CARVM) • Keith P. Sharp (Third Prize)

CARVM and NAIC Actuarial Guidelines 33 & 34 • Keith P. Sharp

Multilife Premium Calculation with Dependent Future Lifetimes • Michel Denuit and Anne Cornet

A Fuzzy Approach to Grouping by Policyholder Age In General Insurance • Richard J. Verrall and Yakoub H. Yakoubov

Determination of Optimal Premiums as a Constrained Optimization Problem • Farrokh Guiahi

Credibility Calculations …

Department Of Fisheries Annual Report 1998/99, Department Of Fisheries, Western Australia

Department of Fisheries Annual Reports

In accordance with Section 62 of the Financial Administration and Audit Act 1985, I submit for your information and presentation to Parliament the Annual Report of the Fisheries Department for the financial year ending 30 June 1999.

The Annual Report of Fisheries WA has been prepared in accordance with the provisions of the Financial and Administration and Audit Act 1985 and Secon 263 of the Fish Resouces Management Act 1994.

Cross Sectional Variation Of The Effect Of Bond Rating Changes On Stock Prices, Jeremy C. Goh, Louis H. Ederington

Research Collection Lee Kong Chian School Of Business

Previous research has found that the stock market reacts negatively to bond rating downgrades and that downgrades tend to follow periods of negative returns, indicating that at least some downgrades are partially predictable. Hypothesizing that the reaction to a downgrade depends on both the implications for cash flows and the degree of surprise, we explore how the reaction to downgrade announcements varies across bond issues. We find that the equity market reacts much more negatively to bond rating downgrades to and within the speculative bond category than to downgrades within the investment grade category. Within the speculative category, the reaction …

Bond Rating Agencies And Stock Analysts: Who Knows What When?, Louis H. Ederington, Jeremy C. Goh

Research Collection Lee Kong Chian School Of Business

Both bond ratings agencies and stock analysts evaluate publicly traded companies and communicate their opinions to investors. Comparing the timelines of each, it is found that Granger causality flows both ways. While most bond downgrades are preceded by declines in actual and forecasting earnings, both actual earnings and forecasts of future earnings tend to fall following downgrades. Although part of this post-downgrade forecast revision can be attributed to negative news regarding actual earnings, most appears to be reaction to the downgrade itself. Little change is found in actual earnings following upgrades. Analysts, however, tend to increase their forecasts of future …

Cost Of Capital In The Indian Context, Mahesh Santhanam

IIMB Management Review

The major problem faced while calculating the cost of capital in a developing country like India is the extreme volatility and illiquidity of the financial markets. Drawing upon various theories and empirical evidence specific to the Indian context, Mahesh Santhanam guides managers and finance professionals who analyse and evaluate capital budgeting projects that involve consideration of the cost of capital.

Market Reaction To Seasoned Equity Offerings: The Relevance Of Leverage, Growth Opportunities, And Corporate Structure, Mojib U. Ahmed

Theses and Dissertations in Business Administration

Empirical work on the market's reaction to seasoned equity offerings has rarely considered the impact of the issuing firm's leverage level or its corporate structure. This work is an attempt to include these parameters in order to better understand the market's reaction to such issue announcements.

The current finance literature recognizes the fact that leverage plays an important role in assessing the value of the firm. Leverage has both negative and positive impacts on the value of a firm (McConnell and Servaes, 1995), and thus, has both negative and positive impacts on the market's reaction to seasoned equity offerings. This …

Emerging Technology Companies In India: Equity Compensation As A Strategy, Simon G Zinger

IIMB Management Review

Liberalisation has seen many economies, especially in Asia, opening their hitherto sheltered domestic markets to global competition and providing greater opportunities to trade and foreign investment. The spinoffs of liberalisation bring in new implications, opportunities and challenges for the governments as well as the organisations involved. Round Table features some of the issues discussed in the conference on 'Managing Economic Liberalisation in South Asia : Directions for the 21st Century' held in Chennai, India, from August 10 -13. Selvarajah examines the realignment of economies towards globalisation as a development of regionalism. The shift in economic forces away from multilateral arrangements …

Towards Relevancy In Financial Reporting: Mark-To-Market Accounting, Eunsup Daniel Shim, Joseph M. Larkin

WCBT Faculty Publications

The objectives of this paper are to: discuss the relevancy vs. reliability of current financial reporting practices, survey the literature that describes the impact of mark-to-market accounting, critically examine current GAAP financial statements by comparing them to market value financial statements. With theoretical discussions and a case study, this paper shows that the mark-to-market accounting could present better about the economic reality of transactions and, therefore, tends to provide more useful and relevant information than does historical cost financial reporting. This study suggests that if the objective of financial reporting is to provide "useful" information to the users, existing GAAP …

Qualitative Materiality In Government Audit Planning, Sridhar Ramamoorti, Andrea Lee Hoey

Accounting Faculty Publications

The political sensitivity of the area under audit to adverse media exposure and litigation concerns the nature rather than the size of an amount, such as illegal acts, bribery and corruption, related party transactions, snowballing patterns of error and other risks that grow over time. Qualitative materiality considerations should not be ignored-they can and frequently do influence the nature and scope of governmental audits. Financial Accounting Standards Board Concepts Statement No. 2 defines materiality as the magnitude of an omission or misstatement that would influence the decisions of a user of financial statements. Audit planning needs to incorporate considerations of …

Using Parametric Statistical Models To Estimate Mortality Structure: The Case Of Taiwan, Shih-Chieh Chang

Journal of Actuarial Practice (1993–2006)

A mixture parametric model is used to analyze the changing pattern of Taiwanese mortality from 1926 to 1991. Three different age ranges are modeled as mixtures of extreme value distributions, namely the Weibull, inverse Weibull, and Gompertz distributions. The results show a significant improvement of mortality over the years.

Principles And Application Of Credibility Theory, Vincent Goulet

Journal of Actuarial Practice (1993–2006)

We review the history of the practical development of credibility theory. Emphasis is placed on the two main approaches to credibility theory: limited fluctuation credibility and greatest accuracy credibility. We explain when each approach should and should not be used. The presentation of greatest accuracy credibility theory starts with a review of (exact) Bayesian credibility and then moves to the Buhlmann-Straub model. Estimators of the structure parameters are discussed. Examples are presented to illustrate the concepts. Finally, the hierarchical credibility and crossed classification credibility models are presented.

Outlier Analysis Of Annual Retail Price Inflation: A Cross-Country Study, Wai-Sum Chan

Journal of Actuarial Practice (1993–2006)

Wilkie's stochastic investment model and its variants have been increasingly applied by actuaries around the world to actuarial modeling and simulation. This paper performs time series outlier analysis on retail price inflation, which is the driving force of Wilkie's composite model. The data come from four developed countries: the United Kingdom, the United States, Canada, and Australia. The fit of the model is significantly improved after the adjustment of outliers. The analysis also identifies exogenous events that have intervened in the inflation dynamics. An example is given to demonstrate the importance of outlier analysis on stochastic simulation. Finally, inflation trends …

Stability Of Representative Crediting Rate Scenarios Under Monte Carlo Simulations, Sarah L.M. Christiansen, Kelley Buchacker

Journal of Actuarial Practice (1993–2006)

We develop a methodology to ensure that a Monte Carlo simulation of the distribution of the primary rates, used for determining an interest crediting rate, is stable regardless of the initial random number seed. We consider the implications of the use of antithetic random normal deviates upon the scenario process and modifications to the candidate list and the choice function within the representative process. It is shown that the use of antithetic random deviates alone does not have a statistically significant effect on our results. The other two modifications (candidate selection algorithm and choice function) are statistically significant. Furthermore, the …

An Analysis Of Australian Pensioner Mortality By Pre-Retirement Income, David Knox, Andrew Tomlin

Journal of Actuarial Practice (1993–2006)

The existence of a relationship between an individual's socioeconomic status and his or her mortality is often accepted, but it is difficult to measure this relationship objectively. This study analyses the relationship between an individual's final salary immediately prior to retirement and mortality rates during retirement. The data used are taken from a large Australian public sector pension plan. A strong inverse relationship is found, which decreases with age. Some of the implications of these results for individual annuity markets and public pension policy are discussed.

A Frailty Model For Projection Of Human Mortality Improvements, Shaun S. Wang, Robert L. Brown

Journal of Actuarial Practice (1993–2006)

Based on the everyday observations that individual human beings vary significantly in their capacity to combat death, we adopt a so-called frailty model of human mortality. This frailty model assumes that each individual in a given population is endowed with his or her own frailty index, r, which remains constant for life. In addition, we assume that the individual's force of mortality (hazard rate function) at age x, Ux(r), satisfies Ux(r) = rUx where Ux is the population's base force of mortality at age x. Given the probability distribution of the frailty index among the newborns in the population, an …

Actuarial Techniques In Risk Pricing And Cash Flow Analysis For U.K. Bank Loans, Philip Booth, Duncan E.P. Walsh

Journal of Actuarial Practice (1993–2006)

A cash flow model is developed to set the price for a loan to a borrower with known risks. Similarities are noted between this model and those used for profit testing in life insurance. We emphasize aspects that reasonably can be treated in several ways and also indicate where the cash flow model differs from the pricing methods usually employed in bank lending. The sensitivity of interest rates to various parameters of the model such as the length of loan and the expected default rate is examined. Also, we examine how features of loans, including cash back and early repayments, …

Derivatives, Corporate Hedging, And Shareholder Wealth: Modigliani-Miller Forty Years Later, Kimberly D. Krawiec

Faculty Scholarship

No abstract provided.

Journal Of Actuarial Practice, Volume 6, Nos. 1 And 2, 1998, Colin Ramsay , Editor

Journal of Actuarial Practice (1993–2006)

ARTICLES

Principles and Application of Credibility • Vincent Goulet

Actuarial Techniques in Risk Pricing and Cash Flow Analysis for U.K. Bank Loans • Philip Booth and Duncan E.P. Walsh

Stability of Representative Crediting Rate Scenarios Under Monte Carlo Simulations • Sarah L.M. Christiansen and Kelley Buchacker

Outlier Analysis of Annual Retail Price Inflation: A Cross-Country Study • Wai-Sum Cha

An Analysis of Australian Pensioner Mortality by Pre-Retirement Income • David Knox and Andrew Tomlin

Using Parametric Statistical Models to Estimate Mortality Structure: The Case of Taiwan • Shih-Chieh Chang

A Frailty Model for Projection of Human Mortality Improvements • Shaun …