Hsuan Chu Lin

Fuzzy set theory in managerial contract analyses

This paper provides a fuzzy solution to managerial contract analyses. The literature shows that due to the existence of information asymmetry, principals could not completely observe real actions of agents. They are actually making contractual decisions subjectively under vague conditions. In this paper, we adopt fuzzy theory to managerial contract analyses and find that it is more efficient than using binary probability methodologies. We also prove that considering the fuzzy factors into the managerial contract analyses scales down agency and production costs and therefore gives a better utility result to a firm.

Does corporate ethics help investors forecast future earnings

Purpose - A firm’s ethical behavior is commonly perceived beneficial to the firm and its investors in the literature. However, activities of corporate social responsibility (CSR) are often delivered with multiple purposes, and their expenses are aggregated with other expenditures in financial statements. These two features motivate us to hypothesize and find that investors’ ability to predict future earnings of ethical firms may not be improved through observing the CSR activities. Our study suggests that CSR spending should be expressed separately from other expenses in financial reports to help investors predict the future performance of CSR firms. Design/methodology/approach - We use future (forward) earnings response coefficients (FERC) to testing whether current stock returns reflect correct information about future earnings. The basic specification of FERC framework, initially developed by Collins, Kothari, Shanken, and Sloan (1994) is a regression of current-year stock returns on past, concurrent and future reported earnings with future stock returns as a control variable. A significantly positive FERC provides evidence that investors have rich and correct information about future earnings. Findings - We find less future earnings information contained in current stock returns for firms with higher intensity of CSR activities. The association is also negative between current stock returns and future earnings reported by firms with a higher degree of CSR spending aggregated with SG&A. In additional analyses, the intensity of CSR activities is positively associated the uncertainty of benefits, measured by the standard deviation of future earnings over the next five years. This future earnings variability does not exist, even though CSR spending is aggregated with SG&A, consistent with the basic principle that accounting expenses create no future economic impacts. Originality/value - We contribute to the current debate over consequences of CSR activities and accounting for CSR spending from a different angle. A common belief is that voluntary disclosure on CSR activities would aid in reducing costs of equity capital and financial reporting errors. These studies provide corporate managers with good reasons and motivations to expect beneficial consequences of voluntary disclosure. Our results show that general investors are less capable of predicting future earnings when there is a higher degree of CSR spending aggregated with SG&A. It also highlights potential problems in the disclosure of general-purpose financial reporting to accounting standard setters.

Audit quality following the Public Company Accounting Oversight Board’s operation

The purpose of this paper is to investigate the extent to which the transition from self-regulation to heteronomy has changed the gap in audit quality between Big Four and non-Big Four auditors.,This study analyzes publicly held companies in the USA between 1999 and 2012 using univariate analysis, multivariate analysis and quantile regression analysis. Audit quality is measured with discretionary accruals.,This study shows an insignificant difference in audit quality between the clients of Big Four and non-Big Four auditors after Public Company Accounting Oversight Board (hereafter, PCAOB) began its operations. In the analysis of the effects of PCAOB inspections on the audit quality of audit firms that are inspected annually and triennially, the findings show that the inspections have more positive effects when carried out annually. This suggests that the frequency of inspection is positively associated with audit quality. Overall, these results provide evidence that recent improvements in audit quality have been caused by changes in regulatory standards.,The paper provides three major original contributions. First, the authors add to the literature on audit quality by further demonstrating a reduced gap in audit quality between Big Four and non-Big Four audit firms due to heteronomy. Secondly, this study contributes to the debate as to whether independent inspections on audit firms are beneficial or not and suggests that the PCAOB inspections help increase audit quality. Finally, the results of this work contribute to the growing literature examining discretionary accruals.

Nonparametric bounds for European option prices

There is much research whose efforts have been devoted to discovering the distributional defects in the Black-Scholesmodel, which are known to cause severe biases. However, with a free specification for the distribution, one can only find upper and lower bounds for option prices. In this paper, we derive a new nonparametric lower bound and provide an alternative interpretation of Ritchken’s (1985) upper bound to the price of the European option. In a series of numerical examples, our new lower bound is substantially tighter than previous lower bounds. The financial support of National Science Council, Taiwan, Republic of China (NSC 96-2416-H006-039-), is gratefully acknowledged. H.-C. Lin (*) Graduate Institute of Finance and Banking, National Cheng-Kung University, Tainan, Taiwan e-mail: hsuanchu@mail.ncku.edu.tw R.-R. Chen Graduate School of Business Administration, Fordham University, New York, NY, USA e-mail: rchen@fordham.edu O. Palmon Department of Finance and Economics, Rutgers Business School – Newark and New Brunswick, Piscataway, NJ, USA e-mail: palmon@business.rutgers.edu C.-F. Lee, J. Lee (eds.), Handbook of Financial Econometrics and Statistics, DOI 10.1007/978-1-4614-7750-1_7, # Springer Science+Business Media New York 2015 207 This is prevalent especially for out-of-the-money (OTM) options where the previous lower bounds perform badly. Moreover, we present that our bounds can be derived from histograms which are completely nonparametric in an empirical study. We first construct histograms from realizations of SP calculate the dollar beta of the option and expected payoffs of the index and the option; and eventually obtain our bounds.We discover violations in our lower bound and show that those violations present arbitrage profits. In particular, our empirical results show that out-of-the-money calls are substantially overpriced (violate the lower bound).

Investigation on Privatization Effect of State-Owned Firms in Taiwan

Abstract In this paper we examine the effects of privatization in Taiwan from six financial and operational dimensions using a sample of twenty one privatized state-owned firms from 1989 to 2006. Applying the absolute performance measure of Megginson, Nash and Van Randenborgh [10] and the relative performance measure modified from that of Ogden and Watson [13], our findings show that the performance of the nonfinancial firms in our sample improved in almost all dimensions during their post-privatization periods, which echoes the findings of previous studies. However, in contrast to previous literature, our empirical results show that the performance of financial sample firms did not significantly improve in many dimensions after privatization. In fact, they underperformed. This “converse” privatization effect observed in our study to some extent implies incompletion of the Taiwanese government’s privatization policies.

Corrigendum Fuzzy set theory in managerial contract analyses [Experts Systems with Applications 36 (3P1) (2009) 4535-4540]

Corrigendum ‘‘Fuzzy set theory in managerial contract analyses” [Experts Systems with Applications 36 (3P1) (2009) 4535–4540] Hsuan-Chu Lin , Fang-Chi Lin *, Tzy-Yih Hsiao , Yu-Cheng Lin c Department of Accountancy, National Cheng Kung University, No. 1, University Road, Tainan City 701, Taiwan Department of Accounting, Feng Chia University, No. 100, Wenhwa Road, Seatwen, Taichung 407, Taiwan Department of Banking and Finance, National Chi Nan University, No. 1, University Rd., Puli, Nantou County 54561, Taiwan

Corrigendum "Fuzzy set theory in managerial contract analyses" [Experts Systems with Applications 36 (3P1) (2009) 4535-4540] (DOI: 10.1016/j.eswa.2008.05.012)

Corrigendum ‘‘Fuzzy set theory in managerial contract analyses” [Experts Systems with Applications 36 (3P1) (2009) 4535–4540] Hsuan-Chu Lin , Fang-Chi Lin *, Tzy-Yih Hsiao , Yu-Cheng Lin c Department of Accountancy, National Cheng Kung University, No. 1, University Road, Tainan City 701, Taiwan Department of Accounting, Feng Chia University, No. 100, Wenhwa Road, Seatwen, Taichung 407, Taiwan Department of Banking and Finance, National Chi Nan University, No. 1, University Rd., Puli, Nantou County 54561, Taiwan

Solving the Multi-Period Agency Problem and Design of Corporate Securities

This paper identifies and solves the multi-period agency problem. Overcoming the major weakness of traditional agency theory in a one period world, we adopt a multi-period option method to show adverse incentive problems with debt solving for the actual agency cost using compound options. It does not require asymmetric information as exists with current agency models. We find that firms can have debts greater than their asset value and continue to operate as long as current payments are being met. This situation creates an incentive for them to sell off their best assets that increases the risk of their remaining business and reduces survival. A major result of this model is to show why sinking funds actually increase a firms agency costs explaining the demise of the traditional sinking fund over the last twenty years.