Andrew Yim

Failure Risk and Quality Cost Management in Single versus Multiple Sourcing Decision

The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with non-linear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late/insufficient/no delivery. I derive a closed-form characterization of the optimal production quota allocation for the LUX (Latent defect-Undependable product-eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild requirement. The requirement includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. The key result of the paper is a necessary and sufficient condition determining whether single or multiple sourcing is optimal. Another condition is obtained to determine the exact size of the optimal supply base, provided the mild requirement holds. With minor modifications, the results also hold when a buyer-initiated procurement contract can be used to elicit private information on the suppliers’ unit variable production costs.

Failure Risk and Quality Cost Management in Single versus Multiple Sourcing Decision: Failure Risk and Quality Cost Management

The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with non-linear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late/insufficient/no delivery. I derive a closed-form characterization of the optimal production quota allocation for the LUX (Latent defect-Undependable product-eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild requirement. The requirement includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. The key result of the paper is a necessary and sufficient condition determining whether single or multiple sourcing is optimal. Another condition is obtained to determine the exact size of the optimal supply base, provided the mild requirement holds. With minor modifications, the results also hold when a buyer-initiated procurement contract can be used to elicit private information on the suppliers’ unit variable production costs. (

Renegotiation and Relative Performance Evaluation: Why an Informative Signal may be Useless

Although Holmstroms informativeness criterion provides a theoretical foundation for the controllability principle and interfirm relative performance evaluation, empirical and field studies provide only weak evidence on such practices. This paper refines the traditional informativeness criterion by abandoning the conventional full-commitment assumption. With the possibility of renegotiation, a signals usefulness in incentive contracting depends on its information quality, not simply on whether the signal is informative. This paper derives conditions for determining when a signal is useless and when it is useful. In particular, these conditions will be met when the signals information quality is either sufficiently poor or sufficiently rich.

Industry Effects in Firm and Segment Profitability Forecasting

Academics and practitioners have long recognized the importance of a firm’s industry membership in explaining its financial performance. Yet, contrary to conventional wisdom, recent research shows that industry-specific profitability forecasting models are not better than economy-wide models. The objective of this paper is to further explore this result and to provide insights into when and why industry-specific profitability forecasting models are useful. We show that industry-specific forecasts are significantly more accurate in predicting profitability for single-segment firms and, to some extent, for business segments. For multiple-segment firms, the aggregation of segment-level data for external reporting of firm-level financials obliterates the industry effects of their segments.

Stock Returns and Profitability Forecasting by Quantile Regression

We show that quantile regression is better than ordinary-least-squares (OLS) regression in forecasting profitability for a range of profitability measures following the conventional setup of the accounting literature, including the mean absolute forecast error (MAFE) evaluation criterion. Additionally, we perform both a simulated-data and an archival-data analysis to examine how the forecasting performance of quantile regression against OLS changes with the shape of the profitability distribution. Considering the MAFE and mean squared forecast error (MSFE) criteria together, quantile regression is more accurate relative to OLS when the profitability to be forecast has a heavier-tailed distribution. An application of the distributional shape analysis framework to cash flows forecasting demonstrates the usefulness of the framework beyond profitability forecasting, supports the notion of an inverted-U-shape effect of distribution asymmetry on the incremental forecasting accuracy of quantile regression, and provides additional empirical evidence on the positive effect of tail-heaviness.

How Accounting Firms Compete for Financial Advisory Roles in the M&A Market

Accounting firms are best known for audit services, however, their capital market influence goes far beyond their auditor role. This paper provides evidence on the competitive strength and service quality of accounting firms in the M&A advisory market. The competitive strength relates to the accounting expertise acquired through the audit work, such as better understanding of accruals and industry specialist status, which aid in estimating merger synergy gains. This knowledge spillover translates into high service quality offered by accounting firms exhibited in terms of higher acquirer announcement-period stock returns, lower likelihood of overpaying for the target, and better post-deal performance compared to transactions advised by investment banks. Bidders recognize value offered by accounting firms and reward them with more repeat business, which helps explain why Thomson Reuters ranks accounting firms among top global advisors, particularly in the mid- and low-end of the M&A market. Our study highlights the active role of accounting firms in the M&A advisory market that builds on knowledge spillover from audit to non-audit services.

Industry Effects on Firm and Segment Profitability Forecasting: Do Aggregation and Diversity Matter?

Academics and practitioners have long recognized the importance of a firm’s industry membership in explaining its financial performance. Yet, contrary to conventional wisdom, recent research shows that industry-specific profitability forecasting models are not better than economy-wide models. The objective of this paper is to further explore this result and to provide insights into when and why industry-specific profitability forecasting models are useful. We show that industry-specific forecasts are significantly more accurate in predicting profitability for single-segment firms and, to some extent, for business segments. For multiple-segment firms, the aggregation of segment-level data for external reporting of firm-level financials obliterates the industry effects of their segments.

Mixture and Continuous 'Discontinuity' Hypotheses: An Earnings Management Model with Auditor-Required Adjustment

A model emphasizing cookie-jar earnings management and the effect of auditor-required adjustment is formulated, with the optimal misreporting strategy generally characterized and the closed-form solutions for particular functional form assumptions derived. Using simulation results based on the model, I show that the widely documented discontinuity in the earnings triplet distributions (i.e., earnings, earnings change, and earnings surprise) can be partly due to a steep increase in density appearing like a discontinuity when a continuous distribution is plotted in terms of frequency counts in histogram bins. Additionally, I point out the puzzling volcano shape of the earnings triplet distributions that can be found in prior studies. Simulation results show that the model is capable of accommodating this phenomenon, which can arise from the mixture of a spiky distribution of managed earnings with a bell-shaped distribution of unmanaged earnings. This mixture is due to the auditor’s adjustment decision, which seems stochastic from the public’s or client firm’s perspective. Taken together, the results of this paper provide a unified explanation to two perplexing, salient features of the earnings triplet distributions. Potential applications of the model are suggested, including the construction of an earnings manipulation measure distinct from but complementary to abnormal accruals.