mean reversion in short horizon expected returns this article develops and estimates a simple model for monthly expected stock returns that relies on the rapidly decaying structure of shorter horizon weekly expected returns the most striking aspect of our findings is that the rapid mean reversion in short horizon expected returns implies much greater variation through time in monthly expected returns than has been documented in earlier studies for instance during the 1962 to 1985 period over 25 percent of the return variance of small firms can be explained by time variation in expected returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

common asset pricing factors in volatilities and returns in futures markets abstract factor based asset pricing models have been used to explain the common predictable variation in excess asset returns this paper combines means with volatilities of returns in several futures markets to explain their common predictable variation using a latent variables methodology tests do not reject a single factor model with a common time varying factor loading the single common factor accounts for up to 53 of the predictable variation in the volatilities and up to 14 of the predictable variation in the means s p500 futures volatility predicted by the factor model is highly correlated with volatility implied in s p500 futures options but both the factor and implied volatilities are significant in predicting future volatility in derivatives pricing both implied volatility from options and factors extracted from asset pricing models should be employed

a model for supply planning under lead time uncertainty the paper is focused on the search of the optimal values of the planned lead times for the mrp method under lead time uncertainty the problem is to find the planned lead times which minimize the expected backlogging and holding costs the aim of the paper is to give a mathematical formulation of this single level multi item dynamic multi period planning problem for the case where lead time does not depend on the lot size and demand level is constant an auxiliary markov model is proposed some new formulations of optimal control policies are obtained using this markov model

the frequency and magnitude of earnings management in china earnings management is an indicator of the corporate governance quality and investor protection standard we study the frequencies and magnitudes of earnings management under two different thresholds zero earnings and prior earnings in the chinese market from 1997 to 2004 we model earnings as a mixed normal distribution and obtain parameter estimators that measure the frequency and magnitude of earnings management we show that the practice of earnings management has gone up both in frequency and magnitude during the post 2000 period we also find that the frequency and magnitude of earnings management are higher when firms try to avoid negative earnings than when firms try to report earnings increase our findings reflect the current economic environment in china and caution investors on the low disclosure quality in the chinese stock market

ceo characteristics and firm r d spending over the past fifteen years a number of studies have examined the determinants of firm r d spending these studies however almost invariably focus on the role of firm or external ownership characteristics in predicting r d spending while overlooking the attributes of the top managers involved in allocating corporate resources in this study we change that focus by empirically examining how r d spending as compared to industry competitors varies at firms based on the characteristics of their ceos using a sample of publicly traded firms we find that ceo characteristics explain a significant proportion of the sample variance in firm r d spending even when corporate strategy ownership structure and other firm level attributes are controlled in terms of individual ceo characteristics we find that r d spending is greater at firms where ceos are younger have greater wealth invested in firm stock and signifacant career experience in marketing and or engineering r d in contrast to existing theory we find that the amount of a ceo s formal education had no significant association with r d spending once a ceo has attained a college degree however significant r d spending increases are found at firms where ceos have advanced science related degrees from subgroup analyses we further find that ceo effects on relative r d spending increase with longer ceo tenure implying that ceos over time may mold r d spending to suit their own preferences from these results we make implications for both research on determinants of r d spending and managerial practice

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

return autocorrelation and institutional investors abstract we propose and test the hypothesis that trading by institutional investors contributes to serial correlation in daily returns our results demonstrate that nyse particles and individual security daily return autocorrelationsare an increasing function of the level of institutional ownership moreover the results are consistent with the hypothesis that institutional trading reflects information and increases the speed of price adjustment the relation between autocorrelation and institutional holdings does not however apparent to be driven by market frictions or rational time varying required rates of return we conclude that institutional investors correlated trading patterns contribute to axial correlation in daily returns

portfolio serial correlation and nonsynchronous trading common stock portfolios of large heavily traded firms exhibit daily first order serial correlation in excess of what would be expected given the individual security coefficients further this correlation rises as the number of securities in the portfolio increases the direct implication of this finding is that nonsynchronous trading is not the only cause of correlation in daily market indices related implications are also discussed

portfolio return autocorrelation abstract this paper investigates whether portfolio return autocorrelation can be explained by time varying expected returns nontrading state limit orders market maker inventory policy or transaction costs evidence is consistent with the hypothesis that transaction costs cause portfolio autocorrelation by slowing price adjustment i develop a transaction cost model which predicts that prices adjust faster when changes in valuation are large in relation to the bid ask spread cross sectional tests support this prediction but time series tests do not

a transactions data analysis of nonsynchronous trading weekly returns of stock portfolios exhibit substantial autocorrelation analytical studies suggest that nonsynchronous trading is capable of explaining from 5 to 65 of the autocorrelation the varying importance of nonsynchronous trading in these studies arises primarily from differing assumptions regarding nontrading periods of stocks we simulate the effects of nonsynchronous trading by sampling stock returns from a return generating process using transactions data to obtain the precise time of each stock s last trade we find that simulated weekly portfolio returns exhibit autocorrelations that are roughly 25 that of their observed crsp weekly returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

an empirical examination of the relation between debt contracts and management incentives abstract prior research on the factors influencing the use of debt covenants restricting dividends and additional borrowing is extended by considering management incentives when alternative incentive variables are considered separately we find covenants have a significant negative relation to ceo cash compensation an insignificant relation to the value of ceo equity held and significant positive relations to both the ratio of the value of ceo equity holdings to cash compensation and the fraction of equity held by the ceo in two stage simultaneous equations models only the latter is significant when jointly considered with each of the other incentive variables

performance shocks and misreporting we propose a parsimonious stochastic model of reported earnings that links misreporting to performance shocks our main analytical prediction is that misreporting leads to a negative second order autocorrelation in the residuals from a regression of current earnings on lagged earnings we also propose a stylized dynamic model of earnings manipulation and demonstrate that both earnings smoothing and target beating considerations result in the same predictions of negative second order autocorrelations empirically we find that the distribution of this measure is asymmetric around zero with 27 of the firms having significantly negative estimates using this measure we specify a methodology to estimate the intensity of misreporting and to create estimates of unmanipulated earnings our estimates of unmanipulated earnings are more correlated with contemporaneous returns and have higher volatility than reported earnings with respect to economic magnitude we find that in absolute terms median misreporting is 0 7 of total assets moreover firms in our sample subject to sec aaers have significantly higher estimates of manipulation intensity

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

how to use aggregation and combined forecasting to improve seasonal demand forecasts standard forecasting methods that are designed to cope with seasonal demand often are no longer applicable in practice due to growing assortments and shorter product life cycles demand data may show too high variation or may be insufficient to construct reliable forecast models at the individual item level in this article we present alternative forecasting methods that are based on using demand information from a higher aggregation level and on combining forecasts sales data from two prominent dutch wholesalers are used to illustrate the drawbacks of the standard seasonal forecasting methods and to demonstrate the potential of the new methods the average reduction in forecast error in terms of mse turns out to be three times as large as reported in earlier studies on common seasonal patterns

multifractality in asset returns theory and evidence this paper investigates the multifractal model of asset returns mmar a class of continuous time processes that incorporate the thick tails and volatility persistence exhibited by many financial time series the simplest version of the mmar compounds a brownian motion with a multifractal time deformation prices follow a semi martingale which precludes arbitrage in a standard two asset economy volatility has long memory and the highest finite moments of returns can take any value greater than 2 the local variability of a sample path is highly heterogeneous and is usefully characterized by the local holder exponent at every instant in contrast with earlier processes this exponent takes a continuum of values in any time interval the mmar predicts that the moments of returns vary as a power law of the time horizon we confirm this property for deutsche mark u s dollar exchange rates and several equity series we develop an estimation procedure and infer a parsimonious generating mechanism for the e

liquidity dynamics and cross autocorrelations this paper examines the relation between information transmission and cross autocorrelations we present a simple model where informed trading is transmitted from large to small stocks with a lag in equilibrium large stock illiquidity induced by informed trading portends stronger cross autocorrelations empirically we find that the lead lag relation increases with lagged large stock illiquidity further the lead from large stock order flows to small stock returns is stronger when large stock spreads are higher in addition this lead lag relation is stronger before macro announcements when information based trading is more likely and weaker afterward when information asymmetries are lower

foreign earnings management of us multinational companies the role of decision rights us multinational corporations mncs need to allocate decision rights between parent companies and subsidiaries to manage global operations this article examines how the allocation of decision rights affects foreign earnings management of mncs i find that the extent of foreign earnings management increases when parents retain centralized decision rights but internal cross border frictions between parents and their foreign subsidiaries and the external local legal environment in which foreign subsidiaries operate can mitigate foreign earnings management despite parents having centralized decision rights this study provides evidence on how the decision structures of mncs affect where earnings are managed

on the stock control performance of intermittent demand estimators the purpose of this paper is to assess the empirical stock control performance of intermittent demand estimation procedures the forecasting methods considered are the simple moving average single exponential smoothing croston s method and a new method recently developed by the authors of this paper we first discuss the nature of the empirical demand data set 3000 stock keeping units and we specify the stock control model to be used for experimentation purposes performance measures are then selected to report customer service level and stock volume differences the out of sample empirical comparison results demonstrate the superior stock control performance of the new intermittent demand forecasting method and enable insights to be gained into the empirical utility of the other estimators

trading volume and autocorrelation empirical evidence from the stockholm stock exchange abstract in accordance with studies for other markets swedish index returns exhibit high autocorrelation a after days of above average performance of the stock market b after low absolute returns c when trading volume is low and d following fridays contrary to the non synchronous trading and the transaction cost hypotheses all results extend to individual stock returns it is concluded that autocorrelation patterns are related to the trading patterns of individual investors and not the cross security information processing of the market in particular the observed autocorrelation structure corresponds to feedback trading

trading volume and cross autocorrelations in stock returns this paper finds that trading volume is a significant determinant of the lead lag patterns observed in stock returns daily and weekly returns on high volume portfolios lead returns on low volume portfolios controlling for firm size nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings these patterns arise because returns on low volume portfolios respond more slowly to information in market returns the speed of adjustment of individual stocks confirms these findings overall the results indicate that differential speed of adjustment to information is a significant source of the cross autocorrelation patterns in short horizon stock returns both academics and practitioners have long been interested in the role played by trading volume in predicting future stock returns 1 in this paper we examine the interaction between trading volume and the predictability of short horizon stock returns specifically that due to lead lag cross autocorrelations in stock returns our investigation indicates that trading volume is a significant determinant of the cross autocorrelation patterns in stock returns 2 we find that daily or weekly returns of stocks with high trading volume lead daily or weekly returns of stocks with low trading volume additional tests indicate that this effect is related to the tendency of high volume stocks to respond rapidly and low volume stocks to respond slowly to marketwide information

enforceability of non compete covenants discretionary investments and financial reporting practices evidence from a natural experiment abstract non compete covenants are widely used in employment contracts to promote employee stability using legal amendments of non compete enforceability as a natural experiment we find that as non compete enforceability increases firms display an increased likelihood of meeting short term earnings benchmarks lower discretionary expenditures and declining future performance these effects are more pronounced when ceos have lower ability or shorter tenures and when firms have more growth opportunities or operate in localized industries our results suggest that managers actively adapt investment and financial reporting practices to the changing environment that affects their contractual relations with firms

employment horizon and the choice of performance measures empirical evidence from annual bonus plans of loss making entities we examine the extent to which employment horizon concerns affect the relative emphasis on financial versus nonfinancial performance measures in annual bonus plans we argue that managers of loss making firms are likely to voluntarily or forcibly depart in the near future and consequently have a shorter employment horizon loss making firms then need to increase the emphasis on forward looking nonfinancial performance measures to motivate long term effort of their managers thus we hypothesize that the emphasis on nonfinancial performance measures is greater in loss making than in profitable firms even after controlling for the informativeness of earnings we find consistent support for our hypothesis using different archival survey and field data sources and various proxies for short employment horizon and the emphasis on nonfinancial performance measures

industry product market competition and managerial incentives abstract while some studies suggest that industry product market competition can substitute for managerial incentives other studies suggest a complementary relation the underlying assumption behind these studies is that competition can be uni dimensionally proxied for by industry concentration however recent studies suggest that competition can reflect several dimensions product substitutability market size and entry costs given the level of industry concentration using these determinants of competition this study contributes to the literature by showing that a firms provide stronger incentives when industry competition is greater b competition is multi dimensional in its relation to incentives and c industry characteristics play a major role in influencing incentives

the relation between earnings based measures in firm debt contracts and ceo pay sensitivity to earnings abstract i investigate how implicit incentives provided by earnings based debt covenants affect the structure of ceo compensation contracts this provides a new and unique view of how the ceo s incentives are shaped by not only his compensation contract but also debt contracts i find when debt contracts contain an earnings based covenant the ceo s pay sensitivity to earnings is muted additionally i find some evidence that pay sensitivity to earnings varies with earnings based covenant slack this study provides evidence consistent with shareholders rebalancing the ceo s earnings incentives in the presence of earnings based covenants thereby tilting incentives away from earnings performance

informed trading and portfolio returns we solve a multi period model of strategic trading with long lived information in multiple assets with correlated innovations in fundamental values market makers in each asset can only condition their price functions on trading in the that asset but not on trading in the other asset using daily non public data from the new york stock exchange we test the model s predictions on the lead lag relations of institutional order ows and returns within portfolios we flnd support for the model prediction of positive autocorrelations in portfolio returns as well as the predictions for how informed order ow positively predicts future returns and future informed order ow as the model predicts we flnd these relations strengthen for portfolios formed from assets with higher correlation of fundamental values

delegated trading and the speed of adjustment in security prices abstract institutional trading arrangements often involve the portfolio manager delegating the task of trade execution to a separate division within the firm we model the agency conflict that arises in this setting and show that optimal performance benchmarks often create an incentive to execute orders contrary to concurrent information flow we hypothesize that aggregate contrarian trading resulting from widespread application of such benchmarks leads to delays in the assimilation of information in security prices using institutional trading data we document the hypothesized contrarian trading pattern and relate the pattern to price adjustment delays in the response of individual stocks to index futures returns the evidence supports the assertion that delegated institutional trading contributes to these delays

chief executive officer equity incentives and accounting irregularities this study examines whether chief executive officer ceo equity based holdings and compensation provide incentives to manipulate accounting reports while several prior studies have examined this important question the empirical evidence is mixed and the existence of a link between ceo equity incentives and accounting irregularities remains an open question because inferences from prior studies may be confounded by assumptions inherent in research design choices we use propensity score matching and assess hidden omitted variable bias within a broader sample in contrast to most prior research we do not find evidence of a positive association between ceo equity incentives and accounting irregularities after matching ceos on the observable characteristics of their contracting environments instead we find some evidence that accounting irregularities occur less frequently at firms where ceos have relatively higher levels of equity incentives

industry information diffusion and the lead lag effect in stock returns i argue that the slow diffusion of industry information is a leading cause of the lead lag effect in stock returns i find that the lead lag effect between big firms and small firms is predominantly an intra industry phenomenon moreover this effect is driven by sluggish adjustment to negative information and is robust to alternative determinants of the lead lag effect small less competitive and neglected industries experience a more pronounced lead lag effect the lead lag effect is related to the post announcement drift of small firms following the earnings releases of big firms within the industry

empirical tests of budget ratcheting and its effect on managers discretionary accrual choices abstract in this paper we investigate whether budgets ratchet using business unit data from a large multinational corporation we find evidence consistent with ratcheting where favorable budget variances result in performance budget increases that are larger than decreases associated with unfavorable variances of the same magnitude we argue that under ratcheting the cost of reporting positive transitory earnings surprises outweigh the short term benefits of the current period bonus consequently we hypothesize that managers make income decreasing discretionary accruals to offset transitory earnings surprises beyond the level expected under fixed budgets using a proxy for transitory earnings surprise we find evidence consistent with this hypothesis

the investment opportunity set and accounting procedure choice abstract this paper provides evidence on the cross sectional relation between firms investment opportunities their debt and compensation contracts their size and financial leverage and their accounting procedure choices this evidence is important because previous studies hypothesize that the link between firms investment opportunities and their accounting choices helps explain extant results on the size debt equity and bonus plan hypotheses however while i find that firms investment opportunities do affect the nature of their contracts i also find that the traditional explanations for accounting choice are important after controlling for the effects of the investment opportunity set

a further investigation of the weekend effect in stock returns this study uses a longer time period and additional stocks to further investigate the weekend effect we find consistently negative monday returns 1 for the s p composite as early as 1928 2 for exchange traded stocks of firms of all sizes and 3 for actively traded over the counter otc stocks the otc results are based on bid prices and therefore appear to reject specialist related explanations for the 30 individual stocks of the dow jones industrial index the average correlation between friday and monday returns is positive and the highest of all pairs of successive days the latter finding is inconsistent with fairly general measurement error explanations some of the most puzzling empirical findings reported in recent years indicate that the distribution of common stock returns varies by day of the week most notably the average return for monday close friday to close monday is significantly negative cross 3 and french 6 find negative monday returns using the standard and poor s composite index and gibbons and hess 7 find negative monday returns for the 30 individual stocks of the dow jones industrial index 1 this negative monday return or weekend effect has yet to be explained this study undertakes a further investigation of the weekend effect in stock returns we examine additional time periods extending the total period covered to 55 years we examine additional stocks such as those of small low capitalization firms and those traded over the counter in all cases the data exhibit a weekend effect that is at least as strong as that reported in previous studies the study also readdresses potential explanations for the effect such as measurement error but concludes that none of these explanations is satisfactory the first section presents a history of the weekend effect from 1928 through 1982 based on the standard and poor s composite index we essentially double the length of the period beginning in 1953 examined by french 6 the results indicate consistently negative monday returns throughout the 55 year period during much of the 25 year period from 1928 through 1952 the new york stock exchange was open on saturdays so monday s return is then computed from saturday s close to monday s close 2 these returns for one day weekends are consistently negative and not significantly different from the two day weekend

stock return cross autocorrelations and market conditions in japan we show that changes in market conditions significantly affect cross autocorrelations and speed of adjustment in weekly stock returns we find significant positive cross autocorrelations between weekly returns on a portfolio of small firms and lagged large firm portfolio returns only when the lagged aggregate market has experienced a decline in value these positive return cross autocorrelations are also associated with lower abnormal portfolio trading volume and greater delays in the adjustment of individual stock prices to negative market wide information particularly for small firms the effect of lagged market states cannot be explained by market microstructure biases such as nonsynchronous trading or thin trading

smoothing income in anticipation of future earnings abstract recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance we find support for this theory our evidence suggests that when current earnings are poor and expected future earnings are good managers borrow earnings from the future for use in the current period conversely when current earnings are good and expected future earnings are poor managers save current earnings for possible use in the future however sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings

real investment implications of employee stock option exercises this paper examines a real cost of awarding employee stock options based on the observation that managers are extremely concerned about earnings per share dilution in equity related compensation we predict and find that firms experiencing significant employee stock option eso exercises shift resources away from real investments towards the repurchase of their own stocks we further find weak evidence of a decline in subsequent firm performance as measured by return on assets for several years following the cut in discretionary investments as a result of stock option exercises though this result is sensitive to the metric used to measure performance collectively our findings indicate that eso exercises potentially impose a real cost on the firm in terms of foregone investment opportunities

the small business capital market behavior in athens stock exchange financing small and medium enterprises smes especially business investments and growth is a composite and particular complicated affair in the greek entrepreneurial reality this paper examines the significance of secondary capital markets as an alternative source of financing small medium enterprises new entrepreneurial plans cointegration technique is applied to test the relationship between the secondary capital market and the dominant sectors in athens stock exchange ase causality tests are also used to provide evidence on the existence of interdependence between the cointegrated series the results indicate that there is significant uni directional causality between primary and secondary capital market in greece enhancing us to suggest valuable policy implications

are us stock index returns predictable evidence from automatic autocorrelation based tests this article re examines the evidence of return predictability for three major us stock indices using two recently developed data driven tests namely the automatic portmanteau box pierce test and the wild bootstrapped automatic variance ratio test in tracking the time variation of return predictability via rolling estimation window we find that those periods with significant return autocorrelations can largely be associated with major exogenous events theoretically the documented time varying nature of predictable patterns is consistent with the adaptive markets hypothesis

market serial correlation on a small security market a note this note reports on an empirical investigation into the relative importance of different explanations of market serial correlation market serial correlation taken as the first order serial correlation in the logarithmic differences of a market index may apparently be explained by the serial correlation of individual stock returns the other less apparent explanation advanced in the literature concerns nonsynchronous trading in individual stocks recently perry 9 and atchinson butler and simonds 1 1 have shown that there seems to be yet an additional unexplained component present that tends to induce serial correlation in portfolio returns at least in u s data in this paper the actual contribution of these explanations to the first order autocorrelation of changes in the value weighted market index on a markedly thin security market the helsinki stock exchange hese 2 in finland will be examined the hese is a specific case in the sense that its trading procedure may create additional first order market serial correlation we will show that the rules of the exchange produce additional intraday nonsynchroneity in stock returns and thus aggravate the problem of market serial correlation an attempt to assess the importance of this additional cause of market serial correlation will also be made in 1966 lawrence fisher 7 observed that an index return calculated on the basis of the latest recorded trading prices will tend to be serially correlated if share prices tend to react similarly to certain types of news this will be the case when some share prices react almost immediately whereas others simply because of an absence of trading will experience a reaction delay if nonsynchronous trading is taken to be the first cause of market serial correlation the second one is the serial correlation of individual stock returns cohen hawawini maier schwartz and whitcomb 6 review the literature on why individual stock returns especially in thin markets may be serially corre

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

agency costs and innovation abstract stylized facts indicate that small firms are responsible for a disproportionate share of innovative research there are many possible explanations for this fact the paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations it is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes mixing hard to measure activities innovation with easy to measure activities routine is particularly costly since it will either lead to misallocation of attention across tasks or to misallocation of risk larger firms are at a comparative disadvantage in conducting highly innovative research because of the costs associated with managing a heterogeneous set of tasks it is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets both of which are hostile to innovation

overreaction delayed reaction and contrarian profits this paper presents a decomposition of short horizon contrarian profits into various sources based on an analysis os stock price reactions to common factors an firm specific information in sharp contrast with the conclusions in the extant literature we find that the lead lag structure in stock prices contributes less than 5 of the observed contrarian profits with most of the profits being attributable to stock price overreaction

does managerial sentiment affect accrual estimates evidence from the banking industry abstract we examine whether managerial sentiment is associated with errors in accrual estimates using public banks we find 1 managerial sentiment is negatively associated with loan loss provision estimates 2 future charge offs per dollar of provision are positively associated with sentiment when the provision is estimated and 3 the effects of sentiment are greater for firms with more uncertain charge offs results are similar for private banks suggesting accrual manipulation related to capital market incentives is unlikely to explain the results although economic fundamentals explain most of the variation in the provision we find sentiment has an incremental and economically meaningful effect

asymmetric predictability of conditional variances we show that there is an asymmetry in the predictability of the volatilities of large versus small firms using both univariate and multivariate arma garch m parameterizations we find that volatility surprises to large market value firms are important to the future dynamics of their own returns as well as the returns of smaller firms conversely however shocks to smaller firms have no impact on the behavior of either the mean or the variance of the returns of larger capitalization companies article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on cross sectional analysis in accounting research abstract this paper examines cross sectional analysis procedures common to many market based accounting research papers both the economic and econometric properties of levels and returns studies are discussed topics covered include the relations between the accounting studies and cash flow valuation models the role of expectations of accounting variables deflators spurious inference risk adjustment and its relation to growth size and leverage residual dependence dependence among explanatory variables and the effect of scale differences across firms major conclusions are that market value is the correct deflator in returns studies and that levels and returns studies are economically but not econometrically equivalent

the interplay between forward looking measures and target setting we examine whether financial targets are based on both forward looking and financial information rather than on financial information only we collect sales and performance appraisal data of store managers in a retail chain the firm issues directives focused on the provision of excellent customer service and assesses store managers compliance with these directives subjectively we demonstrate that controlling for current sales compliance with directives scores predicts future sales performance we find that next to objective sales information this forward looking information is impounded in the next year s sales target finally we find some evidence that suggests that incorporating forward looking information improves the accuracy of sales targets this paper was accepted by mary barth accounting

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

are governmental expenditures also sticky evidence from the operating expenditures of public schools abstractexisting research on cost stickiness focuses primarily on for profit companies this study investigates cost behaviour in the public sector a new setting that deserves more research attent

nonsynchronous security trading and market index autocorrelation the theoretical portfolio autocorrelation due solely to nonsynchronous trading is estimated from a derived model this estimated level is found to be substantially less than that observed empirically the theoretical and empirical relationship between portfolio size and autocorrelation also is investigated the results of this study suggest that other price adjustment delay factors in addition to nonsynchronous trading cause the high autocorrelations present in daily returns on stock index portfolios

the effect of owner versus management control on the choice of accounting methods abstract this paper examines the relationship between the ownership control status of firms and the accounting methods they adopt the arguments of watts and zimmerman s positive theory are integrated with those of managerial economists to generate the prediction that management controlled firms are more likely than owner controlled firms to adopt accounting methods which increase reported earnings this prediction is inconsistent with fama s hypothesis that the market for managerial talent will prevent management controlled firms from acting differently than owner controlled firms this paper compares the depreciation methods used by a sample of management and owner controlled firms for financial reporting purposes the comparison considers and controls for the factors of firm size leverage and the depreciation method used for tax reporting purposes the comparison reveals that there is a significant difference in the depreciation methods adopted by management controlled and owner controlled firms for financial reporting purposes

indexing and stock market serial dependence around the world abstract we show a striking change in index return serial dependence across 20 major market indexes covering 15 countries in north america europe and asia while many studies find serial dependence to be positive until the 1990s it switches to negative since the 2000s this change happens in most stock markets around the world and is both statistically significant and economically meaningful further tests reveal that the decline in serial dependence links to the increasing popularity of index products e g futures exchange traded funds and index mutual funds the link between serial dependence and indexing is not driven by a time trend holds up in the cross section of stock indexes is confirmed by tests exploiting nikkei 225 index weights and standard poor s 500 membership and in part reflects the arbitrage mechanism between index products and the underlying stocks

industry wide corporate fraud the truth behind the volkswagen scandal corporate fraud committed under climate mitigation pressures is becoming more frequently observed in line with the ever increasing environmental standards and relevant regulation enforcements one example is the volkswagen emission gate scandal using firm level panel data of major automobile manufacturers from 2000 to 2015 this study empirically identifies the motives behind the corporate deception scandal we develop a conceptual model summarising the factors affecting decision making and the firms environmentally responsible investments eris including the truthfulness of related public communications our findings identify legal and regulatory pressures the firm s existing level of eris competency and expertise pressures from emission regulation market competitors consumers owners or shareholders as the key factors inducing the scandal the empirical findings show that firms are more likely to experience corporate fraud if their senior managers are paid with substantial variable components that may lead them to engage in riskier business behaviour and to be more short term focused thereby supporting the well established contract theory to avoid corporate fraud and engage in legitimate business competitiveness we suggest that firms should focus on technological innovation as well as improving corporate governance and leverage ratios to effectively control and monitor management in addition policy makers should be more realistic about practical and commercial limitations in the policy setting process and take on a more supporting role in achieving technological innovations and effective corporate governance in summary we argue that cleaner production is not only the result of technologically progress and research but importantly it also involves issues associated with corporate governance and business ethics

economic consequences of firms depreciation method choice evidence from capital investments abstract this study identifies several interrelated reasons why firms depreciation method choice is likely to influence managers capital investment decisions we find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight line depreciation further we find that there has been a migration away from accelerated depreciation to straight line depreciation over the past two decades firms that make such accounting changes make smaller capital investments in the post change periods than in the pre change periods these results suggest that a choice made for external financial reporting purposes influences managers capital investment decisions

demand forecasting for multiple slow moving items with short requests history and unequal demand variance modeling the lead time demand for the multiple slow moving inventory items in the case when the available requests history is very short is a challenge for inventory management the classical forecasting technique which is based on the aggregation of the stock keeping units to overcome the mentioned historical data peculiarity is known to lead to very poor performance in many cases important for industrial applications an alternative approach to the demand forecasting for the considered problem is based on the bayesian paradigm when the initially developed population averaged demand probability distribution is modified for each item using its specific requests history this paper follows this approach and presents a new model which relies on the beta distribution as a prior for the request probability and allows to account for disparity in variance of demand between different stock keeping units to estimate the model parameters a special computationally effective technique based on the generalized method of moments is developed simulation results indicate the superiority of the proposed model over the known ones while the computational burden does not increase

r d and ceo departure date do financial incentives make ceos more opportunistic the purpose of this article is to examine whether research and development r d expenditure is biased downward because of self serving behavior of highly incentivized managers this offers an insight into the general relationship between incentives and opportunism using instrumental variables and panel data methods for a sample of high r d spenders in the uk we examine whether r d is reduced in cases of imminent departure of the ceo results show evidence for this but only for the sample above the median in intensity of stock and options in the compensation package this suggests that opportunism is enhanced by inappropriately strong incentives the main results are robust to the inclusion of a number of corporate governance variables jel classification g30 o30

index futures arbitrage and the behavior of stock index futures prices this article examines intraday transaction datafor s p 500 stock indexfutures prices and the intraday quotes for the underlying index the data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the s p 500 index this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes which induces autocorrelation in the index changes we advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value that this mispricing increases on average with maturity and that it is path dependent evidence supporting these hypotheses is presented

stale prices and strategies for trading mutual funds we demonstrate that an institutional feature of numerous mutual funds funds managing billions in assets generates fund net asset values that reflect stale prices because investors can trade at these navs with limited transaction costs in many cases obvious trading opportunities exist these opportunities are especially prevalent in funds that buy japanese or european equities simple feasible strategies generate sharpe ratios excess return divided by standard deviation that are many times greater than the sharpe ratio of the underlying fund we illustrate the potential of the strategy for three vanguard group mutual funds a particular issue to keep in mind is that when the strategies are implemented the gains from these strategies are matched by offsetting losses incurred by buy and hold investors in these funds

the accuracy of a modified croston procedure a modified croston procedure to forecast intermittent demand is reviewed the modified procedure published in this journal in 2004 consists of a new method for estimating the mean demand and a smoothing method for estimating the variance of the forecasted demand rate it is found that the smoothed variance estimate is based on an invalid measure of forecast accuracy moreover it is shown that the method of forecasting mean demand produces biased forecasts the accuracy of this method is assessed using simulated data and the mean square error measure and compared with croston s method and single exponential smoothing it is found that croston s method is generally more accurate than its modification particularly for strongly intermittent series

return autocorrelations around nontrading days we document a pattern in the serial dependence of security returns around nontrading days the correlation of returns the second day after a weekend or holiday with returns the first day after is unusually low and in many return series is negative implying a reversal of price movements we also document unusually large positive return autocorrelations the last day before and the first day after weekends and holidays the pattern has existed in equity returns for over 100 years and also exists in several futures markets implying that the pattern is robust to alternative market microstructures article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a pure jump transaction level price model yielding cointegration we propose a new transaction level bivariate log price model that yields fractional or standard cointegration the model provides a link between market microstructure and lower frequency observations the two ingredients of our model are a long memory stochastic duration process for the waiting times k between trades and a pair of stationary noise processes ek and k which determine the jump sizes in the pure jump log price process our model includes feedback between the disturbances of the two log price series at the transaction level which induces standard or fractional cointegration for any fixed sampling interval t we prove that the cointegrating parameter can be consistently estimated by the ordinary least squares estimator and we obtain a lower bound on the rate of convergence we propose transaction level method of moments estimators of the other parameters in our model and discuss the consistency of these estimators

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

the impact of market competition on ceo salary in the us energy sector1 abstract in this work we examine the impact of market competition on ceos salaries by analyzing a sample of alls p american firms in the energy sector in the 1992 2015 time span and measuring market competition by means of the so called herfindhal hirschman index we divide industries into three sub groups based on small medium and high market concentration and try to expand our research by exploring the impact of the recent financial crisis the paper investigates how ceos salaries are affected by firm level determinants e g firm size returns on assets returns on equity capital expenditure market concentration tobin s q etc as well as by the individual characteristics of each ceo e g ceos age gender based on our findings the market concentration index in the us energy sector has a negative and statistically significant impact on ceo salary for all firms that operate in either a highly monopolistic or a purely competitive environment the results of this empirical work are robust after examining for different alternative high order fixed effects specifications

how do nonprofit hospitals manage earnings abstract we hypothesize that unlike for profit firms nonprofit hospitals have incentives to manage earnings to a range just above zero we consider two ways managers can achieve this they can adjust discretionary spending hoerger t j 1991 profit variability in for profit and not for profit hospitals journal of health economics 10 259 289 and or they can adjust accounting accruals using the flexibility inherent in generally accepted accounting principles gaap to test our hypothesis we use regressions as well as tests of the distribution of earnings by burgstahler and dichev burgstahler d dichev i 1997 earnings management to avoid earnings decreases and losses journal of accounting and economics 24 99 126 on a sample of 1 204 hospitals and 8 179 hospital year observations our tests support the use of discretionary spending and accounting accrual management like hoerger 1991 we find evidence that nonprofit hospitals adjust discretionary spending to manage earnings however we also find significant use of discretionary accruals e g adjustments to the third party allowance and allowance for doubtful accounts to meet earnings objectives these findings have two important implications first the previous evidence by hoerger that nonprofit hospitals show less variation in income may at least partly be explained by an accounting phenomenon second our findings provide guidance to users of these financial statements in predicting the direction of likely bias in reported earnings

price dynamics in a market with heterogeneous investment horizons and boundedly rational traders this paper studies the effects of multiple investment horizons and investors bounded rationality on the price dynamics we consider a pure exchange economy with one risky asset populated with agents maximizing crra type expected utility of wealth over discrete investment periods an investor s demand for the risky asset may depend on the historical returns so that our model encompasses a wide range of behaviorist patterns the necessary conditions under which the risky return can be a stationary iid process are established the compatibility of these conditions with different types of demand functions in the heterogeneous agents framework are explored we find that conditional volatility of returns cannot be constant in many generic situations especially if agents with different investment horizons operate on the market in the latter case the return process can display conditional heteroscedasticity even if all investors are so called fundamentalists and their demand for the risky asset is subject to exogenous iid shocks we show that the heterogeneity of investment horizons can be a possible explanation of different stylized patterns in stock returns in particular mean reversion and volatility clustering

a parametric nonlinear model of term structure dynamics recent nonparametric estimation studies pioneered by ait sahalia document that the diffusion of the short rate is similar to the parametric function r superscript 1 5 estimated by chan et al whereas the drift is substantially nonlinear in the short rate these empirical properties call into question the efficacy of the existing affine term structure models and beg for alternative models which admit the observed behavior this article presents such a model our model delivers closed form solutions for bond prices and a concave relationship between the interest rate and the yields we show that in empirical analyses our model outperforms the one factor affine models in both time series as well as cross sectional tests article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the perils of financial intermediaries setting security prices the mutual fund wild card option economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals we demonstrate the problem in a specific context the exchange of open end mutual fund shares mutual funds typically set fund share price nav using an algorithm that fails to account for nonsynchronous trading in the fund s underlying securities this results in predictable changes in nav which lead to exploitable trading opportunities a modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability however there are many other potential sources of distortion when intermediaries set prices copyright the american finance association 2001

the october 1987 s p 500 stock futures basis five minute changes in the s p 500 index and futures contract are examined over a ten day period surrounding the october 1987 stock market crash since nonsynchronous trading problems are severe in these data new index estimators are derived and used the estimators use the complete transaction history of all 500 stocks nonsynchronous trading explains part of the large absolute futures cash basis observed during the crash the remainder may be due to disintegration of the two markets even after adjustment for nonsynchronous trading the index displays more autocorrelation than does the futures and the futures leads the index

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

a tale of three schools insights on autocorrelations of short horizon stock returns this article reexamines the autocorrelation patterns of short horizon stock returns we document empirical results which imply that these autocorrelations have been overstated in the existing literature based on several new insights we provide support for a market efficiency based explanation of the evidence our analysis suggests that institutional factors are the most likely source of the autocorrelation patterns

partial adjustment or stale prices implications from stock index and futures return autocorrelations we investigate the relation between returns on stock indices and their corresponding futures contracts to evaluate potential explanations for the pervasive yet anomalous evidence of positive short horizon portfolio autocorrelations using a simple theoretical framework we generate empirical implications for both microstructure and partial adjustment models the major findings are i return autocorrelations of indices are generally positive even though futures contracts have autocorrelations close to zero and ii these autocorrelation differences are maintained under conditions favorable for spot futures arbitrage and are most prevalent during low volume periods these results point toward microstructure based explanations and away from explanations based on behavioral models

additional evidence on bonus plans and income management abstract we extend healy 1985 by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980 1990 period contrary to healy we find that when earnings before discretionary accruals fall below the lower bound managers select income increasing discretionary accruals and vice versa we believe that our results are more consistent with the income smoothing hypothesis than with healy s bonus hypothesis however mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results

components of short horizon individual security returns abstract in this paper we present a simple model which relates security returns to three components an expected return a bid ask error and white noise the relative importance of the various components is empirically assessed and the model s ability to explain the various time series properties of individual security and portfolio returns is tested time varying expected returns and bid ask errors are found to explain substantial proportions up to 24 of the variance of security returns we also reconcile the typically negative autocorrelation in security returns with the strong positive autocorrelation in portfolio returns

autocorrelation of daily index returns intraday to intraday versus close to close intervals abstract first order autocorrelation coefficients of 1 daily equally weighted open to open returns 2 daily equally weighted intraday to intraday returns terminating at each of 23 successive 15 minute intervals of the trading day beginning at 10 15 a m and 3 daily equally weighted and value weighted close to close returns interval 24 are examined a number of findings concerning the behavior of these autocorrelations are reported first order autocorrelation is shown to follow a crude u shaped pattern when plotted against the time of the trading day but there is no significant difference in the behavior of autocorrelations based on open to open returns and 24 hour returns terminating at 10 15 a m evidence that intraday patterns in autocorrelation cannot be explained fully by trading delays also is presented

real effects of accounting rules evidence from multinational firms investment location and profit repatriation decisions we analyze survey responses from nearly 600 tax executives to better understand corporate decisions about real investment location and profit repatriation our evidence indicates that avoiding financial accounting income tax expense is as important as avoiding cash income taxes when corporations decide where to locate operations and whether to repatriate foreign earnings this result is important in light of the recent research about whether financial accounting affects investment and in light of the decades of research on foreign investment that examines the role of cash income taxes but heretofore has not investigated the importance of financial reporting effects our analysis suggests that financial reporting is an important factor to be considered in the policy debates focused on bringing investment to the united states

ceo stock based compensation an empirical analysis of incentive intensity relative mix and economic determinants the use of stock based compensation for u s ceos has increased significantly throughout the 1990s research interest in particular on stock option compensation has similarly increased yet contradictory results create questions about the theoretical underpinnings therefore we revisit the controversy surrounding stock option awards and we further the understanding of restricted stock grants which have escaped similar research focus using a recent data set we obtain convincing empirical support for most theoretical predictions about stock option awards we also find that restricted stock due to its linear payoffs is relatively inefficient in inducing risk averse ceos to accept risky value increasing investment projects copyright 2000 by university of chicago press