Bill McDonald

Measuring Readability in Financial Disclosures

type=main> Defining and measuring readability in the context of financial disclosures becomes important with the increasing use of textual analysis and the Securities and Exchange Commissions plain English initiative. We propose defining readability as the effective communication of valuation-relevant information. The Fog Index—the most commonly applied readability measure—is shown to be poorly specified in financial applications. Of Fogs two components, one is misspecified and the other is difficult to measure. We report that 10-K document file size provides a simple readability proxy that outperforms the Fog Index, does not require document parsing, facilitates replication, and is correlated with alternative readability constructs.

What's different among banks?

Abstract Based on commercial paper being a nearly perfect substitute for certificates of deposits (CDs) and CD reserve requirements creating a higher cost of funds for banks, Fama shows that the banking industry must have some monopoly power relative to other financial institutions. His analysis does not resolve whether this monopoly power is vested in banks collectively, vis-a-vis other financial institutions, or if the monopoly power extends to the level of individual banks. Using an event study framework to examine the elimination of a reserve requirement, we find significant evidence of monopoly power at the level of individual banks.

Job Satisfaction and Life Satisfaction: An Empirical Evaluation of Their Interrelationship

A survey of job satisfaction, life satisfaction, and work related attitudes was administered to 129 employees of an auto parts manufacturer. The purpose of this study was to investigate the relationship between job and life satisfaction. Using three-stage least squares, the results suggest that the two variables are jointly determined.

Commonality in Codes of Ethics

We create a database of company codes of ethics from firms listed on the Standard & Poor’s 500 Index and, separately, a sample of small firms. The SEC believes that “ethics codes do, and should, vary from company to company.” Using textual analysis techniques, we measure the extent of commonality across the documents. We find substantial levels of common sentences used by the firms, including a few cases where the codes of ethics are essentially identical. We consider these results in the context of legal statements versus value statements. While legal writing often mandates duplication, we argue that value-based statements should be held to a higher standard of originality. Our evidence is consistent with isomorphic pressures on smaller firms to conform.

Multivariate Tests of Asset Pricing: The Comparative Power of Alternative Statistics

This paper examines estimation issues associated with multivariate tests of asset pricing. Two issues are considered: (1) the constraint that the sample size ( N ) must be less than the time series ( T ), and (2) the relative effect on power of using the multivariate statistic versus a univariate counterpart. We find that an alternative statistic that allows for large N does not dominate the usual portfolio tests. More notably, we find that the power of a simple diagonal statistic usually dominates the multivariate statistic for cases considered in this study.

A Reexamination of Economies of Scale in Banking Using a Generalized Functional Form: A Note

Using a sample of 1 ,205 unit banks for the years 1972-77, Clark ( 1984) addresses a number of critical issues in ascertaining the nature of the cost function underlying the banking industry. The generalized functional form methodology used by Clark is ideal for empirically analyzing these questions. This paper addresses three issues evolving from Clarks study. First, a number of econometric problems that were not addressed by Clark can arise in the application of the functional form method. Since the findings of Clark have major implications for the question of scale economies in banking, it is important to verify that these findings are not an econometric artifact. Second, and more importantly, the major modifications that have occurred in the structure of the banking industry during the past few years suggest that the corresponding operating parameters may have changed substantially from those in Clarks 1972-77 sample. Finally, previous literature has debated the relative scale economies of independent banks versus multi-bank holding company (MBHC) affiliates. The methodology of Clark provides a unique opportunity to extend previous research on this issue.

Regulation and Financial Disclosure: The Impact of Plain English

In October 1998, the SEC implemented a rule requiring firms to use plain English in their prospectus filings. In addition to the rule, the SEC encouraged the use of plain English in all filings and communication with shareholders. Did the SEC rule significantly impact managers’ disclosure style? And, more interestingly, did the SEC’s recommendations lead managers to change their disclosure style in filings not under the plain English mandate? Our textual analysis of Form 424, IPO prospectus, and 10-K filings over 1994–2009 finds that the SEC’s implementation of the plain English rule substantively impacted managerial behavior. When we focus on 10-K filings, we find that after the 1998 rule, firms are more likely to improve the stylistic components of their filing before an equity issuance and firms with better corporate governance policies are more likely to comply with the rule.

Event Studies and Systems Methods: Some Additional Evidence

This paper extends a recent study by Malatesta [14] on measuring abnormal performance using joint generalized least squares. For monthly data and a random sample of securities, Malatesta finds that there is little benefit in using more sophisticated econometric techniques to identify abnormal returns. The current study extends these results using a design that is more amenable to the benefits of the generalized methods and is consistent with actual event studies. Most notably, the study uses a sample of securities experiencing an actual event and tests both monthly and daily data. In addition, iterative techniques are compared to the ordinary least squares and estimated generalized least squares methods. The results of this study support the original conclusions of Malatesta, indicating no measurable gain in using any of the systems methods for event study applications.

Functional Forms and the Capital Asset Pricing Model

the functional form model in the context of the returns for 85 mutual funds. Their findings document the presence of significant transformation parameters; how? ever, the impact on estimates of systematic risk does not appear to be substantial. The purposes of this paper are twofold. The first purpose is to derive and test a more generalized form of the CAPM?more general with respect to functional form and also within the context of investment horizons. The second purpose is to investigate nonlinearities, as in [4], and to extend the analysis to a large sam? ple of individual securities. The functional form models to be empirically tested are derived in Section II. Section III discusses the estimation techniques applied to the proposed models and describes the data used in the study. The results are presented in Section IV, along with a discussion of their implications for the horizon problem and the estimation of systematic risk. A summary of the pertinent findings of the study appears in Section V.

An Analysis of Nonlinearities, Heteroscedasticity, and Functional Form in the Market Model

Using a generalized specification of the single-index market model, this study examines the sources of statistical anomalies previously found in estimating the market model. Two generalized models are developed for juxtaposition with the traditional linear specification. The most general model is a Box–Cox model with different λs and heteroscedastic errors. The empirical results indicate that previous findings of significant “nonlinearities” are primarily attributable to nonnormalities and unequal variance.