Jiri Novak

The adoption of IFRS 3: the effects of managerial discretion and stock market reactions

In recent years, several accounting standards, including IFRS 3, issued by the IASB, substitute historical cost with fair value measures and so provide managers with increased discretion to determine fair value without an actual market for the asset. Using Swedish data, we document the accounting consequences of the adoption of IFRS 3 and the stock markets reaction. After the adoption of this standard in January 2005 the amount of capitalized goodwill increased substantially. Goodwill impairments under IFRS are considerably lower than goodwill amortizations and impairments made under Swedish GAAP. Consequently, the adoption of IFRS 3 increased reported earnings. An analysis of economic incentives influencing the impairment decision at the initial adoption of IFRS 3 shows that tenured management is negatively associated with the impairment decision. However, most firms did not reclassify goodwill or make additional impairments. Firms with substantial amounts of goodwill yielded abnormally high returns despite abnormally low earnings. Investors seem to, correctly or incorrectly, have viewed the accrual-based increase in earnings stemming from IFRS 3 as an indication of higher future cash flows.

Signaling by Underpricing the Initial Public Offerings of Primary Listings in an Emerging Market

The signaling hypothesis suggests that firms have incentives to underprice their initial public offerings (IPOs) to signal their quality to the outside investors and to issue seasoned equity (SEO) at more favorable terms. While the initial empirical evidence on the signaling hypothesis was weak, Francis et al. (2010) show that foreign firms from segmented (rather than integrated) markets strategically underprice their IPO in U.S. markets to distinguish themselves from the weaker players. Hence, the attractiveness of the signaling strategy seems to be related to the a priori level of information asymmetry. We examine the use of signaling in an emerging market where the information asymmetry is likely to be higher relative to an established market. Using a sample of 158 Polish IPOs from 2005 – 2009, we show that firms that underprice their IPOs are more likely (i) to issue seasoned equity, (ii) to issue a larger portion of equity at the SEO, and (iii) to make the SEO sooner after the IPO, all of which are consistent with the signaling hypothesis. This evidence suggests that the results of Francis et al. (2010) are not limited to IPOs made by foreign firms in an established market, but they can be extended to primary listings by domestic firms in markets where the information asymmetry is sufficiently large for the benefit of the signal to outweigh its cost.

Accounting Conservatism and Transitory Earnings in Value and Growth Strategies

The value premium earned on value and growth investment strategies increases after adjusting for transitory earnings and for the accounting conservatism bias in the book value of equity. Simple investment strategies based on earnings-to-price (E/P) and book-to-market (B/M) performed on the Swedish stock market between 1980 and 2004 generate an annual value premium of 11 to 14%. Adjustments for transitory earnings and for the conservatism bias increase the value premium by 2 to 4 percentage points, and at the same time they improve the consistency of earning it. These results suggest that transitory earnings and accounting conservatism introduce noise into E/P and B/M measures. Adjusting for these accounting characteristics makes the identification based on E/P and B/M more effective. Copyright (c) 2010 Blackwell Publishing Ltd.

On comparison of SimTandem with state-of-the-art peptide identification tools, efficiency of precursor mass filter and dealing with variable modifications.

The similarity search in theoretical mass spectra generated from protein sequence databases is a widely accepted approach for identification of peptides from query mass spectra produced by shotgun proteomics. Growing protein sequence databases and noisy query spectra demand database indexing techniques and better similarity measures for the comparison of theoretical spectra against query spectra. We employ a modification of previously proposed parameterized Hausdorff distance for comparisons of mass spectra. The new distance outperforms the original distance, the angle distance and state-of-the-art peptide identification tools OMSSA and X!Tandem in the number of identified peptides even though the q-value is only 0.001. When a precursor mass filter is used as a database indexing technique, our method outperforms OMSSA in the speed of search. When variable modifications are not searched, the search time is similar to X!Tandem. We show that the precursor mass filter is an efficient database indexing technique for high-accuracy data even though many variable modifications are being searched. We demonstrate that the number of identified peptides is bigger when variable modifications are searched separately by more search runs of a peptide identification engine. Otherwise, the false discovery rates are affected by mixing unmodified and modified spectra together resulting in a lower number of identified peptides. Our method is implemented in the freely available application SimTandem which can be used in the framework TOPP based on OpenMS.

Measuring CEO Personality Using Machine-Learning Algorithms: A Study of CEO Risk Tolerance and Audit Fees

We rely on recent developments in machine learning and artificial intelligence and use the IBM Watson Personality Insights service to measure personality based on transcripts of Q&A sessions of conference calls made by CEOs. We obtain Big-five personality traits and compute a measure for risk tolerance. We conduct a number of validation tests to show that all personality traits are CEO-specific and not related to firm characteristics and firm performance. We then examine the relation between CEO risk tolerance and audit fees. We find that higher CEO risk tolerance is associated with significantly higher audit fees and that this association is consistent across several Big Five index components. Moreover, we find some evidence that the influence of the CEO’s risk tolerance on audit fees is greater when CEO power is greater. Consistent with upper echelons theory, our results suggest that CEO personalities have an incremental impact on auditors’ assessment of engagement risk.

Competitive Threats, Information Asymmetry and Insider Trading

This paper provides evidence that intensified product market competition increases information asymmetry between corporate insiders and investors. When competitive pressure intensifies future performance becomes dependent on a firm’s success in the competitive process. Firm performance turns more idiosyncratic increasing forecasting relevance of firm-specific information. As firm-specific information is better known to insiders their information advantage increases. I show that when competition intensifies insiders purchase and sell larger volumes of equity and their trading better predicts future stock returns and long-term profitability changes. These results hold for several alternative measures of competitive intensity and they are related to the degree of restrictiveness of insider trading regulation.

Insiders Time Well Both Their Purchases and Sales: They Trade after Market Overreacts to Earnings Announcements

This paper conjectures that insiders exploit their stocks mispricing after earnings announcements to make profitable trades. We design two sets of tests to provide evidence of insider trading on mispricing of their stock. First, insiders purchases and sales are profitable both after positive and negative earnings surprises, which indicates that their trading strategies are superior to simple contrarian or momentum trading strategies. Second, we estimate a model of normal market reaction to an earnings announcement and use the deviation of the fitted value from the realized market reaction as our measure of mispricing after earnings announcements. In line with the mispricing hypothesis, we show that insiders sell (buy) more often after large positive (negative) values of our mispricing measure and earn significant post trading returns.

Some Regulatory Properties of Lactate Dehydrogenase from Germinating Pea Plants

Summary Affinity chromatography on a column of AMP-Sepharose 413 was used for the preparation of electrophoretically homogeneous lactate dehydrogenase from germinating pea plants. The kinetic equation for two-substrate reactions was applied for determining the Michaelis constants for 4 intrinsic substrates - lactate, pyruvate, NAD+ and N AD H and the dissocia.tion constants of enzymeNAD+ and enzyme-NADH binary complexes. The molecular weight of the enzyme is approximately 144,000. The enzyme is inhibited by pyruvate in l’oncentrations higher than 1 mM. AMP, ADP and ATP act as competitive inhibitors towards the coenzymes. The inhibition by A TP is stronger by two orders of ten than inhibition by AMP and depends on the concentration of hydrogen ions in the medium. The results suggest that lactate dehydrogenase is eapable of regulating the pH of the plant cell.