Disclosure, conservatism and the cost of equity capital : a review of the foundation literature

In this review piece, we survey the literature on the cost of equity capital implications of corporate disclosure and conservative accounting policy choice decisions with the principle objective of providing insights into the design and methodological issues, which underlie the empirical investigations. We begin with a review of the analytical studies most typically cited in the empirical research as providing a theoretical foundation. We then turn to consider literature that offers insights into the selection of proxies for each of our points of interest, cost of equity capital, disclosure quality and accounting conservatism. As a final step, we review selected empirical studies to illustrate the relevant evidence found within the literature. Based on our review, we interpret the literature as providing the researcher with only limited direct guidance on the appropriate choice of measure for each of the constructs of interest. Further, we view the literature as raising questions about both the interpretation of empirical findings in the face of measurement concerns and the suitability of certain theoretical arguments to the research setting. Overall, perhaps the message which is most clear is that one of the most controversial and fundamental issues underlying the literature is the issue of the diversifiability or nondiversifiability of information effects.

The cost of carbon : capital market effects of the proposed emission trading scheme (ETS)

In March 2008, the Australian Government announced its intention to introduce a national Emissions Trading Scheme (ETS), now expected to start in 2015. This impending development provides an ideal setting to investigate the impact an ETS in Australia will have on the market valuation of Australian Securities Exchange (ASX) firms. This is the first empirical study into the pricing effects of the ETS in Australia. Primarily, we hypothesize that firm value will be negatively related to a firm's carbon intensity profile. That is, there will be a greater impact on firm value for high carbon emitters in the period prior (2007) to the introduction of the ETS, whether for reasons relating to the existence of unbooked liabilities associated with future compliance and/or abatement costs, or for reasons relating to reduced future earnings. Using a sample of 58 Australian listed firms (constrained by the current availability of emissions data) which comprise larger, more profitable and less risky listed Australian firms, we first undertake an event study focusing on five distinct information events argued to impact the probability of the proposed ETS being enacted. Here, we find direct evidence that the capital market is indeed pricing the proposed ETS. Second, using a modified version of the Ohlson (1995) valuation model, we undertake a valuation analysis designed not only to complement the event study results, but more importantly to provide insights into the capital market's assessment of the magnitude of the economic impact of the proposed ETS as reflected in market capitalization. Here, our results show that the market assesses the most carbon intensive sample firms a market value decrement relative to other sample firms of between 7% and 10% of market capitalization. Further, based on the carbon emission profile of the sample firms we imply a ‘future carbon permit price’ of between AUD$17 per tonne and AUD$26 per tonne of carbon dioxide emitted. This study is more precise than industry reports, which set a carbon price of between AUD$15 to AUD$74 per tonne.

Conservatism, disclosure and the cost of equity capital

This study seeks insights into the economic consequences of accounting conservatism by examining the relation between conservatism and cost of equity capital. Appealing to the analytical and empirical literatures, we posit an inverse relation. Importantly, we also posit that the strength of the relation is conditional on the firm’s information environment, being the strongest for firms with high information asymmetry and the weakest (potentially negligible) for firms with low information asymmetry. Based on a sample of US-listed entities, we find, as predicted, an inverse relation between conservatism and the cost of equity capital, but further, that this relation is diminished for firms with low information asymmetry environments. This evidence indicates that there are economic benefits associated with the adoption of conservative reporting practices and leads us to conclude that conservatism has a positive role in accounting principles and practices, despite its increasing rejection by accounting standard setters.

Correcting for bias when estimating the cost of hospital-acquired infection : an analysis of lower respiratory tract infections in non-surgical patients

Hospital acquired infections (HAI) are costly but many are avoidable. Evaluating prevention programmes requires data on their costs and benefits. Estimating the actual costs of HAI (a measure of the cost savings due to prevention) is difficult as HAI changes cost by extending patient length of stay, yet, length of stay is a major risk factor for HAI. This endogeneity bias can confound attempts to measure accurately the cost of HAI. We propose a two-stage instrumental variables estimation strategy that explicitly controls for the endogeneity between risk of HAI and length of stay. We find that a 10% reduction in ex ante risk of HAI results in an expected savings of £693 ($US 984).

First interim report : cost of tendering

This is the first interim report on the Cost of Tendering component of the Best Value project. This report provides some insight from ‘cost of tendering’ literature and discussions with CRC partners. With the completion of this scoping project, sufficient understanding will be developed to determine the need for more detailed research. This scoping project does not intend to provide guidance for the way to change the tendering process, although a need will be demonstrated for control and reduction of cost of tendering.

Strategies for minimising the whole of life cycle cost of reinforced concrete bridge exposed to aggressive environments

n design of bridge structures, it is common to adopt a 100 year design life. However, analysis of a number of case study bridges in Australia has indicated that the actual design life can be significantly reduced due to premature deterioration resulting from exposure to aggressive environments. A closer analysis of the cost of rehabilitation of these structures has raised some interesting questions. What would be the real service life of a bridge exposed to certain aggressive environments? What is the strategy of conducting bridge rehabilitation? And what are the life cycle costs associated with rehabilitation? A research project funded by the CRC for Construction Innovation in Australia is aimed at addressing these issues. This paper presents a concept map for assisting decision makers to appropriately choose the best treatment for bridge rehabilitation affected by premature deterioration through exposure to aggressive environments in Australia. The decision analysis is referred to a whole of life cycle cost analysis by considering appropriate elements of bridge rehabilitation costs. In addition, the results of bridges inspections in Queensland are presented

The applicability of biased estimation in model and model order selection

Biased estimation has the advantage of reducing the mean squared error (MSE) of an estimator. The question of interest is how biased estimation affects model selection. In this paper, we introduce biased estimation to a range of model selection criteria. Specifically, we analyze the performance of the minimum description length (MDL) criterion based on biased and unbiased estimation and compare it against modern model selection criteria such as Kay's conditional model order estimator (CME), the bootstrap and the more recently proposed hook-and-loop resampling based model selection. The advantages and limitations of the considered techniques are discussed. The results indicate that, in some cases, biased estimators can slightly improve the selection of the correct model. We also give an example for which the CME with an unbiased estimator fails, but could regain its power when a biased estimator is used.

Estimating the cost of health care–associated infections : mind your p’s and q’s

Monetary valuations of the economic cost of health care–associated infections (HAIs) are important for decision making and should be estimated accurately. Erroneously high estimates of costs, designed to jolt decision makers into action, may do more harm than good in the struggle to attract funding for infection control. Expectations among policy makers might be raised, and then they are disappointed when the reduction in the number of HAIs does not yield the anticipated cost saving. For this article, we critically review the field and discuss 3 questions. Why measure the cost of an HAI? What outcome should be used to measure the cost of an HAI? What is the best method for making this measurement? The aim is to encourage researchers to collect and then disseminate information that accurately guides decisions about the economic value of expanding or changing current infection control activities.

Some novel techniques of parameter estimation for the dynamical models in biological systems

Inverse problems based on using experimental data to estimate unknown parameters of a system often arise in biological and chaotic systems. In this paper, we consider parameter estimation in systems biology involving linear and non-linear complex dynamical models, including the Michaelis–Menten enzyme kinetic system, a dynamical model of competence induction in Bacillus subtilis bacteria and a model of feedback bypass in B. subtilis bacteria. We propose some novel techniques for inverse problems. Firstly, we establish an approximation of a non-linear differential algebraic equation that corresponds to the given biological systems. Secondly, we use the Picard contraction mapping, collage methods and numerical integration techniques to convert the parameter estimation into a minimization problem of the parameters. We propose two optimization techniques: a grid approximation method and a modified hybrid Nelder–Mead simplex search and particle swarm optimization (MH-NMSS-PSO) for non-linear parameter estimation. The two techniques are used for parameter estimation in a model of competence induction in B. subtilis bacteria with noisy data. The MH-NMSS-PSO scheme is applied to a dynamical model of competence induction in B. subtilis bacteria based on experimental data and the model for feedback bypass. Numerical results demonstrate the effectiveness of our approach.

Accuracy of rate estimation using relaxed-clock models with a critical focus on the early metazoan radiation

In recent years, a number of phylogenetic methods have been developed for estimating molecular rates and divergence dates under models that relax the molecular clock constraint by allowing rate change throughout the tree. These methods are being used with increasing frequency, but there have been few studies into their accuracy. We tested the accuracy of several relaxed-clock methods (penalized likelihood and Bayesian inference using various models of rate change) using nucleotide sequences simulated on a nine-taxon tree. When the sequences evolved with a constant rate, the methods were able to infer rates accurately, but estimates were more precise when a molecular clock was assumed. When the sequences evolved under a model of autocorrelated rate change, rates were accurately estimated using penalized likelihood and by Bayesian inference using lognormal and exponential models of rate change, while other models did not perform as well. When the sequences evolved under a model of uncorrelated rate change, only Bayesian inference using an exponential rate model performed well. Collectively, the results provide a strong recommendation for using the exponential model of rate change if a conservative approach to divergence time estimation is required. A case study is presented in which we use a simulation-based approach to examine the hypothesis of elevated rates in the Cambrian period, and it is found that these high rate estimates might be an artifact of the rate estimation method. If this bias is present, then the ages of metazoan divergences would be systematically underestimated. The results of this study have implications for studies of molecular rates and divergence dates.

Regulating the cost of small loans : overdue or overkill?

Small-amount short-term lending began in 1994 in response to the initial exemption of such loans from consumer credit regulation. Growing demand for such loans now produces industry turnover of approximately $800 million each year. Regulators recognised early the need for consumer protection due to the vulnerability of borrowers and the emergence of various predatory practices. This led to reforms designed to regulate these loans, prevent particular misconduct and provide remedies against injustice. Some were enacted as part of the National Consumer Credit Protection Act 2009 (Cth), which also imposed licensing and responsible lending requirements on lenders and increased consumer access to remedies. The Government has now introduced the Consumer Credit and Corporations Amendment (Enhancements) Bill 2011 which limits the price that can be charged for credit and restricts access to small loans. This article examines the extensive reforms which have taken place in this sector, and compares these regulatory approaches with the “bright line approach” of the Enhancements Bill. The article argues that the repercussions of this step will require careful monitoring to ensure that further harm is not suffered by those least able to bear it, and that the government will also need to facilitate other, more sustainable, solutions to the problem that small loans are currently used to solve. After we wrote this article, the Report of the Parliamentary Joint Committee on Corporations and Financial Services and the Report of the Senate Economics Legislation Committee on the Enhancements Bill were released. These are referred to in a postscript.

Malnutrition and its impact on cost of hospitalization, length of stay, readmission and 3-year mortality

Background & aims: The confounding effect of disease on the outcomes of malnutrition using diagnosis-related groups (DRG) has never been studied in a multidisciplinary setting. This study aims to determine the prevalence of malnutrition in a tertiary hospital in Singapore and its impact on hospitalization outcomes and costs, controlling for DRG. Methods: This prospective cohort study included a matched case control study. Subjective Global Assessment was used to assess the nutritional status on admission of 818 adults. Hospitalization outcomes over 3 years were adjusted for gender, age, ethnicity, and matched for DRG. Results: Malnourished patients (29%) had longer hospital stays (6.9 ± 7.3 days vs. 4.6 ± 5.6 days, p < 0.001) and were more likely to be readmitted within 15 days (adjusted relative risk = 1.9, 95%CI 1.1–3.2, p = 0.025). Within a DRG, the mean difference between actual cost of hospitalization and the average cost for malnourished patients was greater than well-nourished patients (p = 0.014). Mortality was higher in malnourished patients at 1 year (34% vs. 4.1 %), 2 years (42.6% vs. 6.7%) and 3 years (48.5% vs. 9.9%); p < 0.001 for all. Overall, malnutrition was a significant predictor of mortality (adjusted hazard ratio = 4.4, 95% CI 3.3-6.0, p < 0.001). Conclusions: Malnutrition was evident in up to one third of the inpatients and led to poor hospitalization outcomes and survival as well as increased costs of care, even after matching for DRG. Strategies to prevent and treat malnutrition in the hospital and post-discharge are needed.

Evaluation of the Suchey-Brooks Method of age estimation in an Australian subpopulation using computed tomography of the pubic symphyseal surface

Despite the prominent use of the Suchey-Brooks (S-B) method of age estimation in forensic anthropological practice, it is subject to intrinsic limitations, with reports of differential inter-population error rates between geographical locations. This study assessed the accuracy of the S-B method to a contemporary adult population in Queensland, Australia and provides robust age parameters calibrated for our population. Three-dimensional surface reconstructions were generated from computed tomography scans of the pubic symphysis of male and female Caucasian individuals aged 15–70 years (n = 195) in Amira® and Rapidform®. Error was analyzed on the basis of bias, inaccuracy and percentage correct classification for left and right symphyseal surfaces. Application of transition analysis and Chi-square statistics demonstrated 63.9% and 69.7% correct age classification associated with the left symphyseal surface of Australian males and females, respectively, using the S-B method. Using Bayesian statistics, probability density distributions for each S-B phase were calculated, providing refined age parameters for our population. Mean inaccuracies of 6.77 (±2.76) and 8.28 (±4.41) years were reported for the left surfaces of males and females, respectively; with positive biases for younger individuals (<55 years) and negative biases in older individuals. Significant sexual dimorphism in the application of the S-B method was observed; and asymmetry in phase classification of the pubic symphysis was a frequent phenomenon. These results recommend that the S-B method should be applied with caution in medico-legal death investigations of Queensland skeletal remains and warrant further investigation of reliable age estimation techniques.