Chi-Wen Jevons Lee

The 150-hour rule

Abstract This paper adapts Dyes (1995) model to evaluate the effects of the 150-hour rule on the audit market. Incorporating the auditors’ education as a joint input with the audit effort for determining the audit quality, we show that the audit fee is higher, pre-rule CPAs are better off, and audit clients are worse off as results of the Rule. Additionally, more pre-rule CPAs elect to enter the audit market. Some less wealthy post-rule CPAs who would otherwise get into the audit market choose not to. Surprisingly, the average audit quality in the market can be lower due to the Rule.

Accounting infrastructure and economic development

Abstract The capital market serves an important role in efficient intertemporal resources allocation. As an economy progresses on its way toward industrialization, lack of an efficient capital market is often a major bottleneck in the economic development. This editorial analyzes an important element of the efficient capital market: the well-developed accounting infrastructure. The accounting infrastructure is comprised of the facilities of information production, the framework of information diffusion, and the structure for information monitoring and contract enforcement.

Inventory Accounting Switch And Uncertainty

Typically, a LIFO firm may not switch back to the FIFO method except after being approved by the Commissioner of the Internal Revenue Service and paying a tax penalty, but a FIFO firm can adopt the LIFO method at low cost.1 In a world of uncertainty, the ability to postpone an irreversible decision is a valuable option. In this paper we identify, in an option framework, trade-offs involving current tax savings obtainable from a LIFO switch and the value of a timing option of postponing the switch. We show that it can be optimal to forego certain current LIFO tax savings when the future economic environment is uncertain.2

A VARMA Test on the Gibson Paradox

We applied the VARMA test to examine the dynamic relation between prices and interest rates. The dynamic relation, which is important to characterize the nature of the Gibson paradox, provides economists new insight in discriminating against competing theories. In light of our empirical findings, all theories in the literature lose their persuasiveness. We found some evidence of unidirectional relation from prices to interest rates, but we found no evidence of unidirectional relation from interest rates to prices. Hence, the business cycle explanations advanced by Wicksell (1907), Keynes (1930), Lee and Petruzzi (1986), and Barsky and Summers (1988) are especially in jeopardy. A century and a half after its birth, this paradox is more puzzling than ever. Copyright 1990 by MIT Press.

Abnormal Returns and Expected Managerial Performance of Target Firms

We argue that the association between abnormal returns and expected managerial performance of target firms reveals alternative motives behind acquisitions. We test for the disciplinary motive by regressing abnormal returns against the earnings forecast revisions of target firms. A negative slope coefficient is consistent with disciplinary acquisitions because gains from disciplinary actions are likely to be high when target firms’ managerial performance is expected to decline in the future as stand-alone firms. A positive coefficient is consistent with non-disciplinary acquisitions because unexpected increases in targets’ performance as stand-alone firms imply higher expected gains associated with better investment decisions. Our results indicating higher abnormal returns for targets with negative earnings forecast revisions suggest that investors are more optimistic about disciplinary rather than non-disciplinary acquisitions.

Structural changes and the forecasting of quarterly accounting earnings in the utility industry

Abstract This paper presents a statistical procedure to identify effects of three potential structural changes on accounting earnings – temporary, short-run, and long-run. The procedure is applied to quarterly accounting earnings of 39 utility companies. Structural changes are found to be commonplace. Statistical forecasting models that explicitly incorporate structural change effects are found to generate more accurate forecasts than other statistical models in the literature. Although no statistical model significantly dominates Value Line, a firm-specific model with structural change adjustment forecasts as well as Value Line. Moreover, all statistical models examined have significant marginal forecasting power to complement Value Line forecasts.

Information content of financial columns

Abstract This paper examines the information content of financial columns. Since the stock market uses information efficiently, no investor can extract excess returns by blindly following the advice of a financial column. But, the labor market for financial columnists is competitive, so a surviving columnist should provide some positive services. This paper demonstrates that a surviving columnist can provide consistently superior service in the short run but not in the long run. I also show that the surviving columnists advice is better than tossing a fair coin. Hence an investor with his prior information should benefit positively from a financial column.

The Gibson Paradox and the Monetary Standard

This paper analyzes the Gibson paradox, a strong positive correlation between prices and interest rates over the past 250 years. The phenomenon of Gibsons paradox is significant in Britain but not significant in the United States. However, there is a significant correlation between British interest rates and U.S. price levels. The price movements show a strong characteristic of random walk under the gold standard, but appear not to be random walk under the non-gold standard. Based on (a) the price random walk assumption and (b) the real return arbitrage assumption, this paper constructs a simple model to explain the above interesting empirical results.

Prices, interest rates, and the monetary standard: A study of the Gibson-Kitchin phenomenon☆

Abstract This paper analyzes the correlation between interest rates and prices that has persisted for the past 250 years: the Gibson-Kitchin phenomenon. We find that the Gibson-Kitchin phenomenon is not stationary throughout history. The stochastic process of prices and interest rates went through a significant structural change when the United States and Britain switched their monetary system from the gold standard to fiduciary standard. We do find convincing evidence for the presence of the Gibson-Kitchin phenomenon in the gold standard era. There was no significant trace of the Gibson-Kitchin phenomenon in the nongold standard era. We propose a “quantity theory of gold” hypothesis to explain these findings.

Bayesian adaptive stochastic process termination

This paper considers the problem of optimally terminating a number of stochastic processes when the time varying random rewards have distributions belonging to an exponential family with an unknown parameter. The problem is formulated as a Bayesian adaptive control model with the objective of minimizing the difference between the expected reward and the optimal reward when the parameter is known. The paper establishes an asymptotic lower bound on this difference and constructs policies based on a Kullback-Leibler index that obtain this lower bound. The results are applied to models of tree harvesting and destructive testing. A simulation study shows that these policies are efficient when the number of processes is large.