Michael E. Bradbury

Empirical Evidence on the Corporate Use of Derivatives

Theory indicates that hedging can increase firm value by reducing expected taxes, expected costs of financial distress, and other agency costs. Prior research, based on survey data, has found only weak evidence consistent with theory. This study provides evidence on the corporate use of derivative instruments from the 1994 audited financial statements of 116 firms. We use the fair and contract values scaled by the market value of each firm to measure the extent of derivatives usage and generally in line with theoretical models of corporate risk management.

An international comparison of derivatives use

Derivative instruments are one of the hottest topics in corporate finance. Undoubtedly, public interest has been raised by the publicity surrounding losses on derivatives transactions. Practitioners and academics are also concerned with the appropriate use of financial derivatives in global markets.

Capitalizing Non-cancelable Operating Leases

There have been recent international moves to require the capitalization of non-cancelable operating leases. Most prior research on the constructive capitalization of leases has been undertaken on US data. The results from US studies may not apply to international firms because non-US operating lease contracts may differ in lease term, discount rates, and renewal options. This study presents the financial statement impact of constructive capitalization for 38 firms listed on the New Zealand Stock Exchange. New Zealand is an appropriate institutional setting because the required footnote disclosures for operating leases are similar to the International Accounting Standard. The method of constructive capitalization follows the general approach developed by Imhoff, et al. (1991). The results show that constructive capitalization has a material impact on reported liabilities and financial ratios. The results suggest that, relative to present value procedures of constructive lease capitalization, heuristics used by analysts lead to the overstatement of lease liabilities and lease assets. However, the use of single cross-sectional parameters (e.g., discount rates, lease life) results in constructed lease assets and liabilities that are similar to more elaborate firm-specific procedures.

Derivative Financial Instrument use in Australia

This paper examines the relation between derivatives use and financial characteristics of Australian industrial and mining firms. The firm characteristics proxy for financial distress, tax losses, managerial ownership, growth opportunities, the ability to generate operating cash flows and liquidity. We also control for firm size, dividends and exposure to foreign exchange risk. The results show that firm size and leverage are the main explanatory variables for derivative use for both industrial and mining firms

Firm characteristics and audit committees complying with ’best practice‘ membership guidelines

Abstract This study investigates demand and supply characteristics associated with firms that voluntarily established audit committees meeting ‘best practice’ membership guidelines. We focus on a set of best practice criteria rather than on the separate elements of the best practice criteria as in past studies. We conduct our tests using a sample of New Zealand listed companies that, relative to firms in other capital markets, are smaller and have more concentrated ownership. This setting differs from prior research because we expect the costs of voluntarily achieving best practice to be reasonably high. The results show that demand factors are not significantly related to the presence of an audit committee that conforms with best practice membership guidelines. However, supply factors (i.e. those firms with larger and more independent boards) are more likely to form audit committees that meet best practice. These results suggest that compliance costs will be greater for firms with smaller and less independent boards of directors if they are required to comply with best practice requirements.

The Accuracy of Price-Earnings and Discounted Cash Flow Methods of IPO Equity Valuation

This paper compares estimates of value derived from conventional discounted cash flow and price earnings valuation methods to the market price. For a sample of 45 firms newly listed on the New Zealand Stock Exchange our results suggest that the best discounted cash flow method and the best price earnings comparable have similar accuracy. The median absolute pricing error is around 20 percent; and the models explain around 70 percent; of the cross-sectional variation in market price scaled by book value. The results serve to corroborate the findings of Kaplan and Ruback (1995).

IFRS in New Zealand: effects on financial statements and ratios

Purpose – The purpose of this paper is to examine the financial statement impacts of adopting NZ IFRS during 2005 through 2008.Design/methodology/approach – The effects of NZ IFRS on the financial statements and ratios of first‐time adopters of NZ IFRS for a stratified random sample of 56 listed companies is analysed. In total, 16 of these were early adopters and 40 of which waited until adoption of NZ IFRS became mandatory. The analysis of the financial statement impact of NZ IFRS is conducted in the context of the accounting choice literature.Findings – The results show that 87 per cent of firms are affected by NZ IFRS. The median and inter‐quartile ranges indicate that for most firms the impact of NZ IFRS is small. However, the maximum and minimum values indicate the impact can be large for some entities. The impact has considerable effects on common financial ratios.Research limitations/implications – The usual limitations applicable to small samples apply.Practical implications – The findings may be ...

Government Ownership and Financial Performance in a Competitive Environment: Evidence from the Corporatization of the New Zealand Government Computing Services

This paper examines the financial performance of Government Computer Services (GCS) from 1985 to 1994. During this period GCS moved from a government department to an autonomous agency and was subsequently organized as a limited liability corporation. In 1994, GCS was sold to the private sector. This setting provides a quasi-experiment in which to examine the effect of different governance mechanisms on financial performance, while holding ownership constant. The role of government ownership and its impact on financial performance is an important issue, particularly in the Asia-Pacific region where governments play a significant role in economic development. The financial performance of GCS improves, which is consistent with the hypotheses concerning the deregulation of the product and labor markets and changes to the governance structure.

An Application of Data Envelopment Analysis to the Evaluation of Audit Risk

This article demonstrates how data envelopment analysis can be used to weight audit risk factors. Data from a previously reported study applying the analytic hierarchy process is used to facilitate a comparison between these two methods. Data envelopment analysis (DEA) has several advantages, including the ability to accommodate a range of expert opinions on the importance of a specific risk factor, rather than using the median or mean value. DEA can be used to provide high-risk and low-risk assessments and provides benchmark audit units from which other units can be evaluated.

An estimate of the direct costs of bankruptcy in New Zealand

This paper provides estimates of the direct costs of bankruptcy in New Zealand by analysing 27 corporate receiverships. The analysis indicates that the direct costs of receivership have a median value of 8% of firm value. The evidence also indicates that direct bankruptcy costs are a decreasing function of size.