Does the change of accounting regulation on employee share options give rise to greater scope for earnings management?

Purpose – The purpose of this paper is to address the concern about the impact of accounting regulatory change pertaining to employee share options (ESOs) on earnings management. Following Australia’s adoption of International Financial Reporting Standards (IFRS) in 2005, companies are required to recognise the fair value of ESOs as expenses. Due to inherent imprecision in the estimate of ESO’s fair value, the regulatory change from disclosure to recognition was widely claimed to potentially give rise to an alternative mechanism to manage earnings. This study provides empirical evidence on whether the regulatory change leads to earnings management problems.

Design/methodology/approach – This study uses the regulatory change in accounting for ESOs to provide a direct test of earnings management between disclosed versus recognised regimes for the same sample of firms. The sample consists of Australian firms from S&P/ASX300 for the period from 2003 to 2006.

Findings – The results show that, although the accounting regulatory change from disclosure to recognition may provide an alternative earnings management vehicle, there is no evidence of this occurring. There could be several reasons for this finding. First, the statistical tests lack power. Second, there are stricter audit tests on recognised amounts than on disclosed amounts. Third, given the concern of excessive pay and the close scrutiny of compensation, managers may have already understated ESO values in the disclosure regime. Finally, managers have limited time and resources and the effort involved in the adoption of IFRS in 2005 could have restricted the time available to manage earnings via the ESO reporting channel.

Originality/value – This study adds to the limited research on whether a change in accounting regulation for employee share options from disclosure to recognition gives rise to greater scope for earnings management. One reason for the lack of empirical evidence in the research is due to the problem of designing a test. Bernard and Schipper suggest that within-firm studies have limitations for comparing the effects of recognition versus disclosure when the change is driven by an estimate becoming more reliable. A cross-sectional study is also problematic due to self-selection bias if firms can choose between disclosure versus recognition. This study circumvents potential design problems raised by Bernard and Schipper by setting a test using regulatory change which allows the test to be compared directly using the same company.

Optimal hedge ration with moving least squares - an empirical study using Indian single stock futures data

The use of commodity, currency and stock index futures to hedge risky exposures in the underlying assets is well documented in financial literature. However single stock futures are a relatively new addition to the family of futures and as such, academic research on its use as a hedging tool is relatively thin. In this study we have explored the efficacy of two different methodological approaches that may be applied when hedging a long position in the underlying stock with a single stock future. We use daily trading data covering years 2002 to 2007 from the Indian market, where single stock futures have been really thriving in terms of volume of trade, to extract the optimal hedge ratios using both static OLS as well as 30-day, 60-day and 90-day moving least squares. The method of moving least squares has been in use by market practitioners for some time primarily as a trend analysis and charting tool. Our results indicate that the moving least squares approach outperforms the static OLS in terms of the hedging efficiency, which has been measured by the root mean square hedging error.

What drives stock markets over short horizons? Evidence from emerging markets

The goal of this paper is to examine the importance of permanent and transitory shocks in explaining variations in stock prices for Singapore, Taiwan, and South Korea using a trend-cycle decomposition technique. This study is novel in that in measuring the impact of shocks we not only impose common trend restrictions but also common cycle restrictions. We later undertake a post-sample forecasting exercise to confirm the efficiency gains from imposing common cycle restrictions. We find that over short horizons, transitory shocks are the dominant source of variations in stock prices for South Korea, while permanent shocks explain the bulk of the variations in stock price of Singapore and Taiwan.

Volatility spillover between New Zealand stock market returns and exchange rate changes before and after the 1997 Asian financial crisis

Researchers in the last decade have been investigating the interdependence of stock returns and exchange rate changes within the same economy. Kanas (2000) and Yang and Doong (2004) find that for the G-7 countries, in general, the volatility of the stock market spills over to the exchange rate market but that volatility spillovers from the exchange rate market to the stock market are insignificant. Chen, Naylor, and Lu (2004) find that NZ individual firm returns are significantly exposed to exchange rate changes. This study complements their work by investigating the volatility spillover between the stock market and the foreign exchange market within the NZ economy.

Volatility linkages and spillovers in stock and bond markets : some international evidence

This study investigates the transmission of market-wide volatility between the equity markets and bond markets of Japan, Germany, the U. K., and the U. S. To measure the volatility transmission, the BEKK- a decomposition approach to the multivariate GARCH (1,1) model, is used to examine the cross-market contemporaneous effect of information arrival. Our results suggest that within the domestic cross markets, the volatility transmission is undirectional from the stock market to the bond market. Evidence from international cross-market analysis is mixed, with strong evidence on volatility spillover among these international stock markets, but weak evidence between international stock and bond markets. In addition, there are significant bi-directional volatility transmissions between stock markets in Germany and the U. K., and between Germany and the U. S. The volatility transmissions among these markets suggest that the international diversification of bonds is not prevalent.

Volatility transmissions between stock and bond markets : evidence from Japan and the U.S.

This study attempts to investigate the transmission of market-wide volatility between the equity markets and bond markets of Japan and the U.S. To measure the volatility transmission, the BEKK (Baba, Engle, Kraft and Kroner, 1990) method, a decomposition approach of the multivariate GARCH (1,1) model, is used to examine the cross-market contemporaneous effect of information arrival. The time series analysis provides evidence to the long-run phenomena of causality in conditional variances of paired assets within the local and international markets. Within various pairings, some evidence of bi-directional volatility transmissions such as informational linkages have been observed. Our empirical results suggest that within the domestic cross markets, the volatility transmission is unidirectional from the stock market to the bond market. Evidence from international cross-market analysis is mixed, with strong evidence on volatility spillover among these international stock markets, but weak evidence between international stock and bond markets. In addition, there are significant directional volatility transmissions between DJI index and FTSE100 index, and between DJI index and DAX200 index. The volatility transmission between these two markets indicates that the international diversification of bonds is not prevalent.

Volatility transmission between stock and bond markets : evidence from US and Australia

This paper investigates the cross-market informational dependence between these assets under disparate interest rate conditions of the U.S and Australia. With conditional variance as a proxy for volatility, we use the BEKK – a matricular decomposition of the bivariate GARCH (1,1) model to examine the cross-market contemporaneous effect of information arrival. Applying the model to the stock and bond indices of both countries, we find evidence of volatility spillover, thereby supporting the notion of informational dependence between each market

Sustainable retrofit potential in lower quality office stock in the central business district

Given the relationship between energy consumption, greenhouse gas emissions and climate change, the built environment has significant potential to lessen overall emissions. With around half of all greenhouse gas emissions attributed to the built environment; it has a significant role to play in mitigating global warming. With large percentages of office stock structurally vacant in some city centres and only 1 or 2% of new buildings added to the total stock each year; the scope for reductions lay with adaptation of existing buildings. The stock with the highest levels of vacancy and obsolescence offers the highest potential of all.

Many cities are now aiming to become carbon neutral. Successful retrofit demands that social, technological, environmental, economic and legislative criteria are addressed. Buildings have to meet user and community needs. City centres comprise a range of different type of office stock with regards to age, size, location, height, tenure and quality. All buildings present challenges and opportunities with regards to retrofit and sustainability and integrating retrofit measures that reduce energy, water and resource consumption.

Using a selection of low grade office buildings to develop retrofit profiles, this paper addresses the questions; (a) what is the nature of retrofits in relation to low quality office building stock in the Central Business District (CBD) and, (b) what is the extent and scope for sustainable retrofits to low quality office buildings. Using Melbourne CBD retrofit events of low quality office buildings were analysed between 1998 and 2008 to identify the scope and extent for integrating sustainability into retrofits projects.

Voluntary disclosure in a changing regulatory environment : evidence from Chinese stock market

This paper investigates the voluntary disclosure made by 297 Chinese listed firms in their 1995-2006 annual reports. It aims to determine how firms in the Chinese stock market have responded to the coercive pressure exerted upon them by the market regulatory body, the Chinese Security Regulatory Commission (CSRC) in terms of providing transparent information to the stock market. The findings show that over the study period, listed firms have gradually increased their voluntary disclosure. This paper also explores the main characteristics of voluntary disclosure made by listed firms in the Chinese stock market. It is concluded that voluntary disclosure has been adopted by firms to achieve institutional legitimacy in the stock market.

BreastScreen Australia evaluation : a review of methodological options for evaluating the effect of BreastScreen Australia on breast cancer mortality

This report provides evidence-based recommendations for appropriate and cost-effective methods that could be used to evaluate the impact of the national BreastScreen Australia population-based mammographic screening program on mortality from female breast cancer. The report represents a significant collaboration between the Australian Government, the National Breast Cancer Centre as well as Australian and international experts in mammography research and evaluation, epidemiology and health services research.

The recommendations are based on a review of national and international evidence on approaches used to assess the impact of mammography screening programs on breast cancer mortality in other settings. The review has used a systematic approach to assessing the strategic and methodological approaches taken in each of the studies identified and their potential limitations.

The national evaluation of the BreastScreen Australia Program aims to assess the appropriateness, efficiency and effectiveness of the BreastScreen Program. The completion of this report marks an important first step in that process. In addition, the review and recommendations in this report may have broader application at an international level.