Dan Palmon

Insider Trading and the Exploitation of Inside Information: Some Empirical Evidence

Rule lOb-5 of the Securities Exchange Act of 1934 prohibits the exploitation of inside information by corporate officers, directors, and large stockholders, usually referred to as insiders. The empirical analysis of insider trading has been the subject of several studies (see, e.g., Finnerty 1976b; Jaffe 1974a, 1974; Lorie and Niederhoffer 1968). The focus of most of these studies is whether insiders obtain trading gains from use of inside information. The answer to this question has clear implications for market efficiency: under the semistrong form of the efficient market hypothesis, all public information is fully reflected in prices. Under the strong form of that hypothesis securities prices reflect all relevant information, regardless of what information is publicly available, with the implication that no abnormal profits could be made through the use of inside information (see Fama [1970] for an extensive exposition and discussion of the efficient markets hypothesis).

A Negotiation-Oriented Model of Auditor-Client Relationships

The increasing frequency and complexity of inter-organizational relationships suggests that inter-organizational negotiations should represent an area of increasing concern to management and academicians. Unfortunately, there is little theorizing about, nor study of, these negotiations. The few extant models are heavily influenced by models of individual negotiating styles that are then raised to the inter-organizational level with minimal change. The model developed here attempts to provide a framework for understanding the context of these inter-organizational negotiations by identifying and illuminating factors that influence the outcome of interactions in various long-term supplier relationships. Factors discussed include dynamic and stable environments, organizational cultures, role involvement, previous interactions between the individuals and organizations, and the unique characteristics of the decision-making processes that characterize the specific parties. As a framework for our presentation, we draw upon Kleinman and Palmons (1999) theory of audit firm-client firm relationships, which is based on Kahn et al.s (1964) Role Episode Model and Mertons (1966) Role Set Model. This paper incorporates Shakuns (1988) theory of evolutionary system design. The inclusion of the latter improves upon Kleinman and Palmons work by first providing a better motive for the interaction between the parties, and second by shedding further light on the dynamics of the negotiation process.

Audit Quality A Cross-National Comparison of Audit Regulatory Regimes

The importance of fostering more accurate audits has been heightened by a series of high-profile accounting scandals at the beginning of the millennium. These scandals prompted more stringent regulations over corporate governance and financial reporting and the creation of audit oversight bodies as the Public Company Accounting Oversight Board (PCAOB) in the United States and the Public Oversight Board (POB) in the United Kingdom. In parallel, the growing globalization of business has brought forth calls for adherence to a common set of International Financial Reporting Standards (IFRS). Even if a common standard is promulgated, it will not lead to similar results if implementation differs across countries. Therefore, it is important to investigate the auditing regulatory regimes in different nations and the status of cross-border audit inspections. Accordingly, we begin by describing the cross-national institutions (e.g., the International Federation of Accountants [IFAC]) that impact national regulatory choices. Then we survey the audit regulatory practices of public company auditors of a select group of major economic powers and based on this analysis, we discuss the challenges and obstacles to engaging in intra-national audit, cross-national audit/inspections, and the challenges posed by differences in auditing standards used in various linked (e.g., by joint ventures, etc.) nations. We include in this discussion the effects of national culture, investor legal protection, economic development, and differing financial standard sources.

The relationship between securities' abnormal price movements and Wall Street Journal news

Abstract This study investigates the nature of the news which appear in the Wall Street Journal in the periods surrounding abnormal price movements of securities. A news classification system is developed. This system classified the news for a sample of firms whose stock underwent abnormal price changes. Our findings are inconsistent with the efficient market hypothesis. The nature of the news regarding the average firm precedes the abnormal price changes.

Novice and expert judgment in the presence of going concern uncertainty: The influence of heuristic biases and other relevant factors

Purpose – Prior literature provides clear evidence that the judgments of experts differ from those of non-experts. For example, Smith and Kida concluded that the extent of common biases that they investigated often are reduced when experts perform job related tasks as compared to students. The aim in this theoretical study is to examine whether “heuristic biases significantly moderate the understanding of experts versus novices in the going concern judgment?” Design/methodology/approach – The authors address the posited question by marshalling extant literature on expert and novice judgments and link these to concepts drawn from the cognitive sciences through the Brunswick Lens Model. Findings – The authors identify a number of heuristics that may bias the going concern decision, based on the work of Kahneman and Tversky among others. They conclude that experience mitigates the unintentional consequences played by heuristic biases. Practical implications – The conclusions have implications for the education and training of auditors, and for the expectation gap. They suggest that both awareness of factors that affect understanding of auditing reports and greater attention to training are important in reducing the expectation gap. Originality/value – This paper develops additional theoretical understanding of factors that may impact the expectation gap. While there has been limited prior discussion of the impact of cognitive factors on differences between experts and novices, the paper significantly expands the range of factors discussed. As such, it should provide a stimulus to new research in this important area.

Analysts’ Recommendation Revisions and Subsequent Earnings Surprises: Pre- and Post- Regulation FD

This study examines the extent to which analyst recommendations were useful in identifying earnings surprises during the pre- and post-Regulation Fair Disclosure (FD) periods. A comparative analysis of the association between recommendation revisions and subsequent earnings surprises suggests a significant decline in the predictive value of analysts’ recommendations after Regulation FD took effect. Recommendation revisions are roughly 55% less useful in predicting earnings surprises in the post-Regulation FD period. Furthermore, the average abnormal return earned by investors following analysts’ advice to exploit earnings surprises is approximately 70% lower in the post-Regulation FD period. Overall, this article’s findings are consistent with Regulation FD having considerably reduced analysts’ comparative advantage in identifying earnings surprises.

Changing Business Environment and the Value Relevance of Accounting Information

The R^2 of yearly regressions of prices on Earnings per Share (EPS) and Book Value per Share (BVPS) has commonly been used to measure the value relevance of accounting information. However, Brown, Lo & Lys (1999) analytically show that the scale effects that are present in levels regressions increase the R-square value and this causes it to be an unreliable measure of relevance. Accordingly, this study examines the value relevance of accounting using a different methodology that does not rely on R^2. Specifically, we measure value relevance using price deflated residuals derived from the estimation of the Ohlson (1995) valuation model. Empirical results based on this methodology clearly indicate the presence of a downward trend in the relevance of accounting during the past 51 years. Further, a comparison of High-Tech companies versus Low-Tech companies suggests accounting information to be less value relevant for companies belonging to high technology industries.

Share values, inflation, and escalating tax rates

The interaction of inflation with a progressive tax system has been known to cause tax rates, and thus tax liabilities, to escalate with nominal income. Often blamed for having undesirable effects on investment and wealth, this feature of modern tax systems has not received formal treatment in the literature. The partial-equilibrium valuation model presented is used to examine the impact of escalating tax rates on the value of corporate equity. It is shown that the combination of moderate inflation and mildly progressive tax rates may have a substantial adverse effect on share values, an effect sharply increasing with the firms real growth rate. A by-product of the analysis is a partial equilibrium explanation for the apparent conflict between the Fisherian hypothesis and the commonly observed inverse relationship between the rate of inflation and the deflated value of stock prices. To the extent that occasional adjustments of the tax schedule do not prevent taxpayers from being pushed toward higher tax brackets, these results suggest a sizable potential benefit from full indexation of tax rates in an economy suffering from chronic inflation. These results also confirm the belief that failure to do so is especially harmful to economic growth.

Who's to Judge? Understanding Issues of Auditor Independence Versus Judicial Independence

Abstract We explore differences in the roles of auditors and judges in the United States, emphasizing the issue of independence for each group. We examine factors that influence the independence of US judges and auditors. We use examples to highlight the potential impact of various factors on each profession and explore how they are affected by differences in the nature of their responsibilities. Based on these examples, we find generalized lessons that are applicable to each profession and explore further questions that should be asked. While much research has been done on factors that could potentially influence auditor independence, no research to date has examined lessons that auditors can learn from the judicial profession with respect to independence in the United States setting, and vice versa. This paper is a contemplation of the different threats that exist to independence and the difficulty in achieving it in two differently structured fields where its attainment was important for achieving societal ends associated with the professional roles. We hope through this discussion and presentation to broaden the perspective of both professions (judges, auditors) by furthering their understanding of the independence dilemmas facing occupants of the other’s role.

Pay Now, Lose Later: The Role of Bonuses and Non-Equity Incentives in the Financial Meltdown of 2007-2009

This paper draws attention to and raises questions about an area of executive incentive compensation, bonuses and non-equity incentives, which seems to have disproportionally rewarded executives while shareholders remain exposed to substantial ongoing economic risks. This area of focus has surfaced because, beginning in 2007 and continuing throughout 2008, financial services firms incurred massive losses, while in the years immediately preceding this deluge of losses many executives were awarded substantial bonuses and non-equity incentives. We assess the risks associated with such payments and build a framework for assessing how shareholder and executive interests diverge as a result of bonuses and non-equity compensation. Our analysis is also meant to serve as a building block for future empirical studies about the relationship between executive incentive compensation paid in cash (bonuses and non-equity incentives) and the financial misstatements and overstatements of income that were at the heart of the financial meltdown.