Paul J. M. Klumpes

A trade-level DEA model to evaluate relative performance of investment fund managers

We develop a trade-level measure to evaluate fund managers’ efficiency in their buying and selling activities relative to the trades of other fund managers. We customize an additive Data Envelopment Analysis (DEA) model to focus on risk-adjusted returns during different time periods as trade-level outcomes. The model does not consider any input–output process. Instead, it considers tradeoffs between multiple outcomes. We find that fund managers do not have symmetric ability in buying and selling. Some managers do well in buy transactions but not in sell transactions while others perform well in selling but not in buying. We also explore the determinants of fund managers’ trading performance. Compared to trade characteristics, portfolio characteristics have a greater influence in explaining fund managers’ relative trading efficiency.

The Pricing of Audit and Non-Audit Services in a Regulated Environment: A Longitudinal Study of the UK Life Insurance Industry

This paper studies the relationship between audit and non-audit service fees in the UK life insurance industry in the period 1999-2009. Moreover, we examine the impact of ownership structure and internal governance on the level of direct audit fees. Utilizing panel data econometric techniques, we find that audit fees are positively (negatively) affected by actuarial (legal service) fees. We conclude that actuarial services generate knowledge spillover, while legal services impair auditors independence. Our results indicate that the improved corporate governance environment after the Revised Code of 2003 filtered the fundamental nature of different non-audit services. Furthermore, mutual ownership and independent board of directors increase the level of audit fees. Finally, we find evidence for the inter-temporal determination of audit fees.

Mergers and Acquisitions in the Global Insurance Industry: Valuation Effects

This paper examines whether global insurance mergers and acquisitions (M&As) create value for shareholders by conducting an event study of M&A transactions for the period 1990-2006. Insurance acquirers realized small positive cumulative average abnormal returns (CAARs), whereas targets realized substantial positive CAARs. Both cross-border and within-border transactions led to substantial value-creation. Market value gains for acquirers are centered in the U.S. and Europe; acquirer CAARs for Asian M&As are mostly insignificant. Targets realize significant market value gains in the U.S., Europe, and Asia. Acquirers from the insurance industry realize small market value gains from within-industry transactions, but cross-industry M&As are value-neutral. Targets realize significant market value gains in both cross and within-industry transactions, but the within-industry gains are significantly larger. The results suggest that insurers should concentrate on focusing rather than diversifying transactions.

Stock Market Sensitivity to U.K. Firms' Pension Discounting Assumptions

New U.K. pension accounting regulations significantly increase the exposure of the balance sheets of U.K. firms to volatilities in pension fund valuations. We examine whether the abnormal returns of firms that voluntarily used market‐based pension discount rates are significantly different from the abnormal returns of industry‐matched pair samples of firms that retained traditional cost‐based valuation assumptions during the period surrounding the release of the related exposure draft. We also examine the interest rate sensitivity of stock price returns over the 4‐year period before and after the announcement date. Consistent with our hypotheses, U.K. stock price returns incorporate the effect of unexpected interest rate changes on sources of pension earnings for firms that voluntarily switched to market‐based assumptions but do not incorporate these effects for firms that did not switch. These results suggest that unexpected changes in interest rates have a differential effect on a firms sources of pension, financial, and core earnings.

Determinants of government underfunded public pension liabilities in the OECD

Underfunded government liabilities for public pensions constitutes a major expenditure in the management of social programmes in many countries, but to date has not attracted much attention from accountants as it does not easily fit within an accrual-based accounting system. This paper discusses major measurement problems associated with this liability and then examines determinants of variations in projected flow-based funding patterns among OECD governments. Alternative ‘behavioural persistence’ and ‘regression to the mean’ hypotheses about the determinants of underfunding practices are formulated and tested using an OECD data set describing the financial and socio-economic characteristics of government-sponsored public pension systems in these countries. Consistent with the behavioural persistence hypothesis, cross-sectional variations are found to be associated with the funding ratio and the rate of taxation required to keep government debt constant. Variations in underfunding practices across the sample are also sensitive to cultural differences in attitude towards public pension accountability between continental European and Anglo-American countries.

The Impact of Hedge Accounting Rules on Enterprise Risk Management Adoption Practices by Multinationals

We predict that adoption of Enterprise Risk Management (ERM) by multinational non-financial firms is inter-related with firm hedge accounting policies and GAAP quality. We hypothesize that sources of both market risk and idiosyncratic risk mitigate the ability of ERM-adopting firms to produce greater risk reduction. Therefore, we predict that sources of firm specific risk, such as pension risk, and hedge accounting policies, as well as GAAP quality, interact with ERM to affect incentives facing multinational firms to reduce their risk. Consistent with this hypothesis, we find that firms adopting ERM experience a reduction in stock return volatility but only for the period following implementation. Our results also find that income smoothing; GAAP choice and geographical complexity mitigate the effect of ERM adoption on risk and return volatility for ERM-adopting firms.