Joy Begley

Bankruptcy Classification Errors in the 1980s: An Empirical Analysis of Altman's and Ohlson's Models

Empirical accounting researchers often use Altmans (1968) and Ohlsons (1980) bankruptcy prediction models as indicators of financial distress. While these models performed relatively well when they were estimated, we show that they do not perform as well in more recent periods (in particular, the 1980s), even when the coefficients are re-estimated. When we compare the performance of Ohlsons original model to our re-estimated version of his model and to that of Altmans original and re-estimated models, we find that Ohlsons original model displays the strongest overall performance. Given that Ohlsons original model is frequently used in academic research as an indicator of financial distress, its strong performance in this study supports its use as a preferred model.

An empirical examination of the relation between debt contracts and management incentives

Abstract Prior research on the factors influencing the use of debt covenants restricting dividends and additional borrowing is extended by considering management incentives. When alternative incentive variables are considered separately, we find covenants have a significant, negative relation to CEO cash compensation, an insignificant relation to the value of CEO equity held, and significant positive relations to both the ratio of the value of CEO equity holdings to cash compensation and the fraction of equity held by the CEO. In two-stage simultaneous equations models, only the latter is significant when jointly considered with each of the other incentive variables.

Is there Information in an Earnings Announcement Delay

Using a sample of announcements drawn from the 1980s and early 1990s, we reassess the relation between earnings news and earnings announcement timing. Using analyst forecast errors to proxy for news, we find that early announcements are associated with good news relative to late announcements. The relation between news and timing, however, does not appear to be strictly monotonic. Furthermore, we find that unexpected earnings explain 4% or less of the variation in timing. Finally, we assess whether abnormal returns behave in a manner that is consistent with a good news early, bad news late relation.

Debt covenants and accounting choice

Abstract In this issue Duke and Hunt and Press and Weintrop show that leverage is significantly related to the existence of, and closeness to, accounting-based debt covenants. Alternative rationales for this relation are presented. The theory requires more rigorous specification to define closeness to covenants and determine which measure of leverage produces a more appropriate proxy for closeness to covenants. Then Healy and Palepu investigate a sample of firms close to their dividend restriction and find in general they are no more likely than other firms to change accounting methods. Their sample selection criteria reduces the generalizability of their results.

Modeling Goodwill for Banks: A Residual Income Approach with Empirical Tests

This paper uses the residual income valuation technique outlined in Feltham and Ohlson [1996] to examine the relation between stock valuations and accounting numbers for a prototypical banking firm. Prior work of this nature typically assumes a manufacturing setting. This paper contributes to the prior research by clarifying how the approach can be extended to settings where value is created from financial assets and liabilities. Key elements of our model include allowing banks to generate positive net present value from either lending or borrowing activities, and, allowing for accounting policy to affect valuation through the loan loss allowance. We validate our model using archival data analysis, and interpret coefficients in light of our modelling assumptions. These results suggest that banks create value more from deposit-taking activities than from lending activities. Voung tests confirm that our model outperforms adaptations of the unbiased accounting model of Ohlson [1995], and of the base model proposed by Beaver, Eger, Ryan and Wolfson [1989]. However, our model is outperformed by the popular net income-book value model used in many empirical studies, and we can formally reject one of our key modeling assumptions. These tests of our model suggest future avenues for improving upon the theoretical analysis.

Modeling Goodwill for Banks: A Residual Income Approach with Empirical Tests Discussion of "Modeling Goodwill for Banks: A Residual Income Approach with Empirical Tests"

This paper uses the residual income valuation technique outlined in Feltham and Ohlson [1996] to examine the relation between stock valuations and accounting numbers for a prototypical banking firm. Prior work of this nature typically assumes a manufacturing setting. This paper contributes to the prior research by clarifying how the approach can be extended to settings where value is created from financial assets and liabilities. Key elements of our model include allowing banks to generate positive net present value from either lending or borrowing activities, and, allowing for accounting policy to affect valuation through the loan loss allowance. We validate our model using archival data analysis, and interpret coefficients in light of our modelling assumptions. These results suggest that banks create value more from deposit-taking activities than from lending activities. Voung tests confirm that our model outperforms adaptations of the unbiased accounting model of Ohlson [1995], and of the base model proposed by Beaver, Eger, Ryan and Wolfson [1989]. However, our model is outperformed by the popular net income-book value model used in many empirical studies, and we can formally reject one of our key modeling assumptions. These tests of our model suggest future avenues for improving upon the theoretical analysis.

La modélisation de la survaleur dans le secteur bancaire: Méthode du résultat net résiduel et tests empiriques

This paper uses the residual income valuation technique outlined in Feltham and Ohlson [1996] to examine the relation between stock valuations and accounting numbers for a prototypical banking firm. Prior work of this nature typically assumes a manufacturing setting. This paper contributes to the prior research by clarifying how the approach can be extended to settings where value is created from financial assets and liabilities. Key elements of our model include allowing banks to generate positive net present value from either lending or borrowing activities, and, allowing for accounting policy to affect valuation through the loan loss allowance. We validate our model using archival data analysis, and interpret coefficients in light of our modelling assumptions. These results suggest that banks create value more from deposit-taking activities than from lending activities. Voung tests confirm that our model outperforms adaptations of the unbiased accounting model of Ohlson [1995], and of the base model proposed by Beaver, Eger, Ryan and Wolfson [1989]. However, our model is outperformed by the popular net income-book value model used in many empirical studies, and we can formally reject one of our key modeling assumptions. These tests of our model suggest future avenues for improving upon the theoretical analysis.