Readings Flashcards
What did Brimble and Hodgson (2007) examine?
The association between accounting variables and Beta for 129 Australian firms for 1991-00
What are the results of Brimble and Hodgson (2007) study?
- Accounting variables explain between 33-67% of variation in risk
- Time varying beta had highest R^2 while thin trading beta had lowest R^2
- Several were significantly associated with Beta B>2
- 3 accounting variables were always significantly associated with beta- earnings variability, operating leverage and size
- When split into extract and non-extract industries- liquidity and dividend payout were significant in NE
What is credit scoring Mester (1997)?
A method used to predict probability that a loan applicant or existing borrower will default.
Model uses FS data and borrower characteristics.
Models use large samples eg 15000 good and bad.
Only a subset of variables end up in the model.
What do we find out about models for credit scoring Mester (1997)?
- Increasingly being used e.g. Bank One => 30% of all loans under $1m are approved by credit score alone.
What are the credit scoring models being used for in particular Mester (1997)?
- Credit cards
- 97% of banks use it for credit card approval
- 82% use it when soliciting credit card applications
- 20% use it to adjust credit card terms - Mortgages
- Used by regulators in order to promote consistency
- used to ‘securitise’ mortgages
- used by mortgage insurance companies
- used by banks in small business lending
Benefits of credit scoring model Mester (1997)?
- Reduces time taken to approve the loan Allen (1995)- 12 1/2 hours to less than 1 hour, Leonard (1996)-9 days to 3 days
- Cost savings- only $1.50 to $10 per loan (Muolo,1995)
- Improved objectivity- allows lender to ensure different groups are treated equally
- Justify loan decisions- allows banks to avoid minorities lawsuits and gives reason why some are disadvantaged
- Allows expansion in competition- distance loans, no buildings needed and reduce cost for client.
Limitations of credit scoring model Mester (1997)?
- Accuracy- untested in big loan market
- FS data role is small- more focus on customer
- Applicability- each loan application is different
- Difficult decision being modelled- not just grant or don’t grant
- Need to update model for “regime shift”- 54% of banks re-estimated models and 80% raised cut offs
What do Wang and Williams (2011) look at?
-The relationship between income smoothing and shareholder wealth
What are the 2 theories Wang and Williams (2011) have about income smoothing?
- Viewed as “cheating” “misleading” and “immoral”- agency theory view that mgt act in own interests to hide their actions and share price responds negatively
- Income smoothing- improves information value of earnings, reduces information asymmetry and reduces risk. Signalling theory view that insider info is why they smooth and reduces information asymmetry, positive share price response.
What is the data and method for Wang and Williams (2011) study?
- Examines data for 456 firms from 1977-87 but had to have 31st December end date and available data.
- 3756 firm years observations- large sample
- Method = market response to smoothing firms v. market response to non-smoothing firms. Heroic assumption that it is 1 or the other.
- Smoothing= no variability in reported earnings.
- Use regression= absolute % change in EPS
What are the results of Wang and Williams (2011) study?
- Income smoothing firms achieve higher cumulative abnormal returns if they announce unexpected earnings
- Income smoothing firms are less risky because they have a lower Beta 1.07 compared to 1.21
- Unexpected earnings are still positive(1.36) and significant(3.85) when you include other factors such as size which too is significant
- Stock market response to real or artificial smoothing is no different t(b)<2
- Market still reacts more to income smoothing EPS news even when the predictability of earnings is included in the equation
What do Albrecht and Richardson (1990) define income smoothing as?
“The deliberate dampening of fluctuations about some level of earnings which is considered to be normal for the firm”
What are the aims of Christensen and Mohr (2003)?
- To describe the content of a set of NPO’s annual reports
- Differences in reporting due to museum characteristics?
- Compare NFP annual reports with For profits
What do Christensen and Mohr (2003) find about NFPs?
- Big sector; in no. of museums and funding $bn
- Regulations for NFP reports is under developed + new
- Look at a sample of USA museums; reasonably similar in what they do and subject to specific FASB ruling
What was the sample of Christensen and Mohr (2003) study?
- Sent 813 museums letters asking for annual reports
- 341 responses and financial reports provided was 172
- Museums are more likely to produce reports if they are public (government owned)
