Petri Sahlström

Impact of International Financial Reporting Standard adoption on key financial ratios

Although previous research has investigated the economic consequences of International Financial Reporting Standard (IFRS) adoption, there is little evidence on the impact of IFRS adoption on key financial ratios. To fill this gap, we examine this issue in a continental European country (Finland). Our results show that the adoption of IFRS changes the magnitude of the key accounting ratios. Moreover, we extend the literature by showing that the adoption of fair value accounting rules and stricter requirements on certain accounting issues are the reasons for the changes observed in accounting figures and financial ratios.

Relative importance of scheduled macroeconomic news for stock market investors

This paper investigates the relative importance of scheduled U.S. macroeconomic news releases for stock valuation. The study focuses on 11 macroeconomic announcements selected on the basis of the previous literature and the Bureau of Labor Statistics classifications of major economic indicators. The paper shows that five out of the 11 announcements have significant influence on stock valuation. These are the Employment Report, NAPM (manufacturing), Producer Price Index, Import and Export Price Indices, and Employment Cost Index. Of these six announcements, the Employment Report and NAPM (manufacturing) exert the greatest influence. The time of the announcement, measured by days from the beginning of the month to the release day, has a moderating impact on the relationship between macroeconomic announcements and its importance.

DISTRIBUTIONAL PROPERTIES AND TRANSFORMATION OF FINANCIAL RATIOS: THE IMPACT OF THE ACCOUNTING ENVIRONMENT

Abstract This study investigates the distributional properties of financial ratios and the usefulness of the Box and Cox (1964) power transformation in normalizing financial ratios in different kinds of accounting environments. The results indicate that the Box-Cox power transformation can substantially improve the normality of financial ratios. The transformation can completely remove the non-normality induced by skewness. However, some kurtosis remains after the transformation. The distributional properties and the usefulness of the transformation are not dependent on the accounting environment. Therefore, researchers can use same financial ratios in different accounting environments. However, some caution is needed in the case of profitability ratios that are substantially affected by the accounting practices and economic situation.

Impact of stock option listings on return and risk characteristics in Finland

Abstract This study investigates the impact of stock option introduction on the return and risk characteristics of underlying stocks in Finland. The results suggest that volatility and bid–ask spread levels are lower after the option listing. Furthermore, return series of stocks exhibit smaller positive first-order autocorrelation. It is found that the adverse selection component, as well as the order processing/inventory holding component of the bid–ask spread, decreases at an equal rate after the option introduction. These findings support the hypothesis that stock option market increases the efficiency of the underlying market in Finland.

Foreign vs domestic investors and the post‐announcement drift

Purpose - This paper aims to investigate who causes post-announcement drift and whether this drift is observed for various types of news announcements. Design/methodology/approach - Using Finnish share ownership data, the authors examine the trading behavior of foreign and domestic investors during the post-announcement periods of scheduled earnings and unscheduled non-earnings announcements. Findings - The results show that the post-announcement drift exists for both types of news, but only if the news is negative. As a group, foreign investors react first by selling shares of firms reporting negative information. Domestic investors act in the opposite manner. Originality/value - The results imply that the post-announcement drift is a special case of a more general post-disclosure phenomenon and that investor differences (most likely information processing skills) is one likely explanation for its pervasiveness.

An Alternative Estimation Method of the Equity Risk Premium using Financial Statements and Market Data

Abstract This paper develops a method to estimate the equity risk premium. The method exploits the Earn Back Period (EBP) formula presented by Luoma and Ruuhela (2001), which is a generalization of the P/E ratio. The EBP has a clear theoretical interpretation and can be used to compare stocks with different earnings growth rates, while the P/E ratio is not useful if stocks have substantially different growth rates. Since growth is taken into account, differences in EBPs are due to risk. Using this property, a stocks risk premium is derived from the stocks current P/E ratio and from its growth rate of earnings. For investors, this offers a practical method for evaluating stocks.

Risk in Audit Pricing: The Role of Firm-Specific Dimensions of Risk

Abstract This chapter investigates the impact of the firm-specific dimensions of risk suggested in the finance literature, the financial risk, operating leverage and business risk on audit fees. It is hypothesized that audit fees are related to these three dimensions of risk, size, audit complexity and a set of the agency theory based control variables. The hypothesis is empirically tested using a sample from the U.K. audit market. The results of the study show that audit fees as hypothesized are positively related to financial leverage, operating leverage and business risk of a firm and that the control variables behave according to expectations. This implies that the three dimensions of the firm-specific risk are taken into account in audit pricing decisions and should therefore be incorporated into models when investigating the audit pricing issues.

DO AUDITORS ASSESS THE SYSTEMATIC MARKET RISK IN THEIR AUDIT PRICING DECISIONS? INTERNATIONAL EVIDENCE

Abstract This study investigates whether auditors assess the systematic market risk in their audit pricing decisions. According to the audit pricing model of Simunic (1980) , the audit fee is a function of the audit effort and the auditor’s client specific risk. Since an auditor has several clients, the systematic risk of a firm should be taken into account in audit pricing. To empirically investigate this issue across different environments, data from Denmark, Hong Kong, Malaysia, Norway, Singapore, South Africa, and the United Kingdom are analyzed. The results of statistical tests show that the market-based risk measure explains auditing fees in addition to the risk measures based on accounting information. However, the performance of the model differs across countries. Moreover, the impacts of the variables in explaining audit fees vary across countries. These findings are in accordance with the proposition of Cobbin (2002) according to which cultural sensitive and market specific variables could potentially have a significant impact on audit fees paid.