Search results

This study attempts to conduct a comparative analysis between dynamic and static asset allocation to achieve the long-term target return on asset liability management (ALM). This study conducts asset allocation using the ex ante expected rate of return through the outlook of future economic indicators because past economic indicators or realized rate of returns which are used as input data for expected rate of returns in the “building block” method, most adopted by domestic pension funds, does not fully reflect the future economic situation. Vector autoregression is used to estimate and forecast long-term interest rates. Furthermore, it is applied to gross domestic product and consumer price index estimation because it is widely used in financial time series data. Based on asset allocation simulations, this study derived the following insights: first, economic indicator filtering and upper-lower bound computation is needed to reduce the expected return volatility. Second, to reach the ALM goal, more stocks should be allocated than low-yielding assets. Finally, dynamic asset allocation which has been mirroring economic changes actively has a higher annual yield and risk-adjusted return than static asset allocation.

With the bankruptcy of Enron and the accompanying loss of pension benefits of its employees, pensions have recently received significant press. Accounting for pension plan obligations, for defined benefit plans in particular, requires companies to make assumptions regarding discount rates, projected salary increases, and expected long‐term return on plan assets. Such assumptions, in turn, determine the funding status of the pension plan and the annual pension expense. Higher assumed discount rates reduce the pension obligation, enhance the funding status of the plan, and reduce any lump‐sum payments. Higher expected return on assets reduces the current pension expense. This study investigates the relationship between pension plan assumptions and the funding status of a pension plan. The results reveal that companies with pension plans that are more fully funded assume higher discount rates and expected long‐term return on assets than do companies with less funded plans. The effect of these assumptions is that higher discount rate assumptions lead to better funding status, and higher expected long‐term rates of return on assets partially offset the pension expense impacts of these higher discount rate assumptions. We are doubtful that more funded plans collectively should be assuming higher discount rates and expected long‐term return on plan assets, especially since the actual return on plan assets investigated did not correlate with these assumptions.

Based on a multivariate analysis of long‐term total returns and inflation data over the period 1963‐1993, shows that commercial property total returns reflect both expected and unexpected components of inflation in the long term. There is no evidence that property returns systematically provide, on an annual basis, hedging characteristics against either of these components.

The objective of this study was to identify the impact of a perceived inadequacy of authoritative South African financial reporting guidance for long‐term insurers, on the basic financial statement characteristic of comparability. The authors attempted to identify areas of non‐comparable presentation and disclosure and to suggest relevant guidance. To assess comparability, the financial statements of five insurers were evaluated using a checklist specifically developed for this study. This process identified seven main categories of significant non‐comparable presentation and disclosure practices. Solutions were proposed for these areas, based inter alia on existing international literature and guidance.

Inflation and federal monetary efforts to control it with interest rate hikes have very real and overwhelmingly negative consequences on US local governments following the onset of COVID-19. This study explores the post-pandemic inflationary environment of US local governments; examines the impacts of inflation and high interest rates on local government revenue, operating costs, capital costs, and debt service; reviews local government inflation management strategies, including the use of intergovernmental revenue; and assesses ongoing threats to local government financial health and financial resilience.

This study uses trend and literature analysis to comment on current issues local governments face.

The study finds that the growth of property values and resulting stability of property tax revenue has been important to local government revenues; that local governments bear very real burdens as operating and capital costs increase; and that the combination of high inflation and interest rates affects local government debt issuance by negatively affecting credit quality and interest costs, leading to municipal market contraction. Local governments have benefitted tremendously from intergovernmental revenue, but would be ill-advised to rely on it.

Vulnerabilities owing from revenue mismatch with the economy; inadequate affordable housing, inequality, and social issues; a changing workforce and tight labor market; climate change; and federal fiscal contraction—all of which are exacerbated by high inflation and interest rates—require local governments to act strategically, boldly and collaboratively to achieve fiscal health and financial resilience, and to realize positive returns of investments in people and capital.

This work is unique in addressing the post-pandemic impact of inflation and interest rates on local governments.

The purpose of this paper is to address two questions: did adoption of Statements of Financial Accounting Standards No. 132(R) and No. 158 affect neutrality of the financial reporting with regard to the disclosed expected rate of return (ERR) on pension assets assumptions, and did pension asset allocations change in response to the new recognition and disclosure requirements?

The author uses several measures of association between reported expected return and pension assets allocations to assess neutrality of the reported ERR. The series of tests explores changes in correlations between asset allocations and expected rates of return and changes in the implied risk premiums following adoption of Statements No. 132(R) and No. 158. Granger causality analysis is used to explore the second research question: did pension asset allocations change in response to the new recognition and disclosure requirements?

The empirical results are consistent with improved neutrality of financial reporting following adoption of Standard No. 132(R). There were no detectable changes in neutrality following adoption of Standard No. 158. While the data are consistent with portfolio allocations changing to a greater degree than did expected rates of return following Statement No. 132(R) adoption, the effect appears short-lived.

The overall results are consistent with Standard 132(R) having a positive effect on the neutrality of the reported ERR. Also, there is no evidence of persistent and systematic structuring of transactions around preferred financial reporting outcomes.

The purpose of this paper is to present novel empirical findings regarding the shareholder-management agency problem.

The paper presents new evidence regarding the shareholder-management agency problem. It expands the set of factors that may cause agency problems to include both dollar value of management holdings and its fractional holdings.

First, the paper finds that this problem is better explained when management fractional holdings and management absolute equity wealth are considered simultaneously than separately. Second, it provides evidence that separation of control and ownership leads management to drive profits artificially upwards by overstating the anticipated long-term rate of return on pension plans (LTROR). The paper's findings point to the LTROR as a promising novel indicator for shareholder-management agency problem.

Samples of 628 US firms during the period 1996-2005. Only 238 firms for pension plans as many firms do not have an internal pension fund.

The paper suggests practical ways to alleviate agency problems.

The paper shows the strategic use of a change in the anticipated LTROR on pension plan assets that stems from an agency problem and affects the firm's reported net profits. The paper observes the strategic determination of LTROR in firms in which the pension funds are controlled by management. A possible social implication can be a risk for employees in firms in which the pension funds are controlled by management.

The paper aims to enrich the current literature using a novel indicator of the agency problem: the long-term change in the anticipated LTROR on pension plan assets.

We compare the financial stock performance of companies that participate in the Carbon Efficient Index (ICO2) and those that participate only in market-wide indices of the BM&FBovespa (the IBOV, IBrX50, and IBrX100). The data includes the daily quotations of the shares from these four indices for September 2010 to December 2014. We exclude companies from market-wide indices that also participated in the ICO2. We use the stock market and average volume liquidity indices in order to analyze liquidity. We employ financial indicators to analyze the performance of the indices. Returns of companies participating in the ICO2 exceed those of all other companies except those participating in the IBrX50. The returns of all indices are statistically similar. There is a proven long-term equilibrium relationship between the indices’ returns. The ICO2 does not present obvious superiority in terms of the Sharpe and Jensen indices, although the results surpass those of the market-wide indices. Although the financial performance of sustainable companies does not surpass that of other companies, the economic benefits are similar. Thus, even though the financial result presents no significant difference, it is crucial to acknowledge that investing in sustainable stocks does not result in financial loss; rather, it has a positive environmental impact. The literature connecting the performance of the shares of the ICO2 and broad indices is scarce. Our study improves understanding of how company stocks can generate economic benefits to both society and companies.

Pension rate estimates are important because they provide information to the market, and because they are useful in estimating future cash flows or for other analytical purposes. This is especially true now, because the economic environment has deteriorated to a point that many investors perceive increased uncertainty with respect to pension plans and the effect they have on future income. In fact, several authors in the popular financial press have speculated on the impact of such fundamental changes in pension assets, liabilities, and estimates. Often, however, these articles are sensational, and do not appear to appreciate fully the complexities of pension accounting. In order to model the economic impact of pension rate declines, we develop a two‐period analytical model of pension cost, which allows us to simulate future pension expense and its associated earnings impact using a triangular distribution of rate estimates. In addition, we model the incremental cash contributions required under these estimates in order to maintain the ratio of pension assets to liabilities at 100 percent. Our results indicate that while the pension expense effect is large in both periods across firms with small, mid‐sized and large pension plans, firms with large plans show the greatest increase in pension expense. Interestingly, however, the earnings impact is the smallest for firms with large plans in both periods. In addition, all firms face significantly increased cash funding requirements in order to prevent funding ratios (plan assets scaled by pension liabilities) from deteriorating. These results suggest not only future earnings reductions from pension rate declines, but also a potentially significant cash flow impact as well.

In 1938, the Civil Aeronautics Board (CAB) was established to regulate the fare and route structures of the domestic airline industry. At that time, policy‐makers were fearful that free market conditions in the airline industry would not foster the growth which was deemed to be optimal in the public interest. After forty years of industry development, however, the market structure of the airline industry does not provide justification for regulation. Furthermore, the regulation itself has created problems which are undesirable to both the industry and the public. On October 25, 1978, President Carter signed into law a bill that will gradually remove the regulatory restrictions under which interstate domestic airlines have operated since 1938. All regulatory control over the airlines will end by 1982, and the CAB will be abolished in 1985.