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1 – 10 of over 3000Ann L.‐C. Chan, Stephen W.J. Lin and Norman Strong
The purpose of this paper is to investigate the economic consequences of different dimensions of accounting conservatism: ex ante (balance sheet or unconditional) conservatism and …
Abstract
Purpose
The purpose of this paper is to investigate the economic consequences of different dimensions of accounting conservatism: ex ante (balance sheet or unconditional) conservatism and ex post (earnings or conditional) conservatism. It is argued that the two dimensions of conservatism convey different information to the market about the quality of accounting numbers and have different associations with equity investors' required rates of return.
Design/methodology/approach
The cost of equity capital estimates are based on the Ohlson and Juettner‐Nauroth model. The paper applies a regression model to examine the relationship between the cost of equity capital and accounting conservatism controlling for other risk factors.
Findings
The findings indicate that ex ante conservatism is associated with higher quality of accounting information and lower costs of equity capital and that ex post conservatism is associated with lower quality of accounting information and higher costs of equity capital.
Research limitations/implications
The firm‐level conservatism measures may suffer from measurement error. Future studies can be more specific in determining proxies for ex ante and ex post conservatism.
Practical implications
The results imply that conservative accounting signals information to investors about the quality of a firm's current and future earnings. Investors' required rates of returns may be higher for conservative reporting firms that are more susceptible to opportunistic management discretion.
Originality/value
The paper provides the first UK evidence on the effect of different dimensions of conservatism on equity investors' required rates of return.
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Risk capital is an important input for management functions. Capital structure decisions, capital budgeting, and ex post performance measurement require different measures of risk…
Abstract
Risk capital is an important input for management functions. Capital structure decisions, capital budgeting, and ex post performance measurement require different measures of risk capital. While it has become common to estimate risk capital using VaR models, it is not clear that VaR‐based capital estimates are optimal for applications to management functions (e.g. risk management, capital budgeting, performance measurement, or regulation). This article considers three typical problems that require an estimate of credit risk capital: an optimal equity capital allocation; an optimal capital allocation for capital budgeting decisions; and an optimal capital allocation to remove moral hazard incentives from a compensation contract based on ex post performance. The optimal credit risk capital allocation is different for each problem and is never consistent with a credit VaR estimate of unexpected loss. The results demonstrate that the optimal risk capital allocation depends on the objective.
The Equal Pay Act 1970 (which came into operation on 29 December 1975) provides for an “equality clause” to be written into all contracts of employment. S.1(2) (a) of the 1970 Act…
Abstract
The Equal Pay Act 1970 (which came into operation on 29 December 1975) provides for an “equality clause” to be written into all contracts of employment. S.1(2) (a) of the 1970 Act (which has been amended by the Sex Discrimination Act 1975) provides:
This paper delves into the ex ante rates of return demanded by the private sector in Indonesian public–private partnership (PPP) infrastructure projects and the manifold factors…
Abstract
Purpose
This paper delves into the ex ante rates of return demanded by the private sector in Indonesian public–private partnership (PPP) infrastructure projects and the manifold factors emanating from project attributes that can influence these rates.
Design/methodology/approach
This paper analyzes feasibility studies of 37 PPP projects across different sectors. The studies were carefully selected based on relevance, completeness and validity of data. The analysis uses statistical techniques, including Levene’s tests, t-tests, ANOVA tests, Cohen’s effect size and Pearson correlations, to explore differences in cost of capital and excess returns across various attributes.
Findings
Based on the statistical analysis, no significant difference exists between the excess return of 200 basis points (bps) and the equity excess return of 0 bps. This suggests that the eligibility criteria for PPP projects require an internal rate of return (IRR) equal to the weighted average cost of capital plus 200 bps or an equity IRR equal to the cost of equity. The variations in the tested variables among diverse project attributes do not exhibit statistically significant disparities, even though specific attributes display moderate to high effect sizes.
Originality/value
This paper represents one of the first attempts to examine the rates of return demanded by the private sector in the context of Indonesian PPP projects. It comprehensively explores the factors that influence these rates, drawing on insights derived from feasibility studies.
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This study aims to provide new explanation of the new issue puzzle.
Abstract
Purpose
This study aims to provide new explanation of the new issue puzzle.
Design/methodology/approach
This study uses market implied cost of capital (ICC), rather than ex post realized returns, as proxy for ex ante expected returns, and sheds new light on the question why initial public offering (IPO) firms underperform the market within a 3–5 years period after the offerings.
Findings
Using ICC, the author finds that the market expects to earn higher risk premium for new listing firms than similar firms, which is contradictory to the documented new issue puzzle. The higher expected returns come from higher idiosyncratic volatility for newly listed firms, which are young and have more growth opportunities. The author also reports that investors are negatively surprised by lower-than-expected performances of newly listed firms.
Originality/value
The author’s results provide new empirical evidence that the new issue puzzle does not exist. Previous results observed IPO firms' under-performance is attributable to that ex post realized returns are a noisy proxy for ex ante expected returns, especially for newly listed firms with limited information.
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Zhuo (June) Cheng and Jing (Bob) Fang
This study aims to examine what underlies the estimated relation between idiosyncratic volatility and realized return.
Abstract
Purpose
This study aims to examine what underlies the estimated relation between idiosyncratic volatility and realized return.
Design/methodology/approach
Idiosyncratic volatility has a dual effect on stock pricing: it not only affects investors' expected return but also affects the efficiency of stock price in reflecting its value. Therefore, the estimated relation between idiosyncratic volatility and realized return captures its relations with both expected return and the mispricing-related component due to its dual effect on stock pricing. The sign of its relation with the mispricing-related component is indeterminate.
Findings
The estimated relation between idiosyncratic volatility and realized return decreases and switches from positive to negative as the estimation sample consists of proportionately more ex ante overvalued observations; it increases and switches from negative to positive as the estimation sample consists of proportionately more ex post overvalued observations. In sum, the relation of idiosyncratic volatility with the mispricing-related component dominates its relation with expected return in its estimated relation with realized return. Moreover, its estimated relation with realized return varies with research design choices and even switches sign due to their effects on its relation with the mispricing-related component.
Originality/value
The novelty of the study is evident in the implication of its findings that one cannot infer the sign of the relation of idiosyncratic volatility with expected return from its estimated relation with realized return.
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In the presence of “real effects” of disclosure in a production economy, this research aims to investigate the link between disclosure and cost of capital relating to different…
Abstract
Purpose
In the presence of “real effects” of disclosure in a production economy, this research aims to investigate the link between disclosure and cost of capital relating to different time periods: namely the post-disclosure cost of capital (the cost of capital subsequent to disclosure), the pre-disclosure cost of capital (the cost of capital for the period leading up to disclosure) and the overall cost of capital (the cost of capital across both periods). The author also extends the analysis to whether and how in the presence of a real effect of disclosure, investors' ex ante welfare might be affected.
Design/methodology/approach
This research is conducted via stylized models.
Findings
The author demonstrates that, first, in contrast to findings in a pure-exchange economy, in a production-based economy where disclosure affects firms' investment decisions, both the overall cost of capital and the investors' ex ante welfare can be affected by disclosure quality. As disclosure quality improves, the post-disclosure cost of capital may either increase or decrease, as may the pre-disclosure cost of capital. The change in the post-disclosure cost of capital is not fully offset by the change in the pre-disclosure cost of capital, and therefore the overall cost of capital can either increase or decrease. Second, a firm's profitability of existing and new production are critical factors in determining whether cost of capital increases or decreases with disclosure quality. The author characterizes conditions under which higher disclosure quality increases or decreases the disclosing firm's cost of capital over different time periods. Third, when disclosure affects interrelated firms' production decisions, the disclosing firm's overall cost of capital changes with disclosure quality, even when the marginal (unconditional) distribution of the disclosing firm's cash flow is not affected by the disclosure.
Originality/value
This research contributes to a largely unexplored but important area: the real effect of disclosure on the cost of capital.
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In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the…
Abstract
In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.
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Mahfuzul Haque and Oscar Varela
The purpose of this paper is to apply safety‐first portfolio principles in an environment where financial risk exists because of the probability of terrorist attacks, where the…
Abstract
Purpose
The purpose of this paper is to apply safety‐first portfolio principles in an environment where financial risk exists because of the probability of terrorist attacks, where the catastrophic events of September 11, 2001 (911) are the focal point of the analysis.
Design/methodology/approach
Safety‐first portfolios of US equities bilaterally combined with 12 developed and emerging region global equity indices are obtained for 911. Extreme value theory and safety‐first principles are used to optimize these portfolios for US risk‐averse investors. The actual performances of all portfolios in the post‐911 period are compared to the optimal results. The robustness of the results is examined by replicating the analysis for the period following July 7, 2006, when no actual terrorist attacks occurred on US soil.
Findings
Optimal ex ante (ex post) safety‐first portfolios on 911 have high (low) US weights, and on July 7, 2006 low US weights. The differences are attributed to changes in market projections and/or conditions. In all cases, wealth is preserved even without the ex post optimal portfolios.
Practical implications
Safety‐first portfolio optimization can protect wealth given financial risks of extreme events like terrorist attacks.
Originality/value
The paper shows that quantitative assessments of financial risk are feasible, even though uncertainty with experts' risk assessments of extreme events such as 911 exists because of limited historical data and low probability of occurrence. The results are useful to investors developing international diversification strategies to protect wealth given the risks of terrorist attacks.
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Kim Hin David Ho and Faishal bin Ibrahim Muhammad
From the perspective of the macro‐economy and real estate sector interaction, this paper aims to examine the maturing prime retail real estate sector versus the developing…
Abstract
Purpose
From the perspective of the macro‐economy and real estate sector interaction, this paper aims to examine the maturing prime retail real estate sector versus the developing suburban retail real estate sector.
Design/methodology/approach
This paper adopts a highly specific dynamic computable general equilibrium model under system dynamics programming to structure the resulting system complexity within the context of Singapore.
Findings
Ex post and ex ante model estimations find that the suburban retail real estate sector is on the whole more susceptible to gross domestic product (GDP) growth policy that affects both GDP expansion and retail rents in actual and expectation terms as well as returns.
Research limitations/implications
The DCGE model ex ante estimations for the planned scenarios, under low or high GDP growth for the prime and suburban retail real estate sectors, enhances understanding of structural factors and dynamic interaction in the maturation phase of the prime retail real estate sector in Singapore.
Practical implications
In comparison, Singapore's suburban retail real estate sector is found to be in a developing phase.
Originality/value
There is limited local research on the underlying relationship between the economy and the retail real estate sector, although Singapore's retail sector and retail real estate sector form an integral part of sustainable economic expansion.
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