Stuart Michelson

The relationship between the smoothing of reported income and risk-adjusted returns

This paper uses risk-adjusted returns for the firms in the S&P 500 to test whether the stock market response to accounting performance measures is related to the smoothness of companies’ reported earnings. Three income models, increasing in their measure of smoothness, test the hypotheses using cumulative average abnormal returns. The results indicate that companies that report smooth income have significantly higher cumulative average abnormal returns than firms that do not. When size is considered, market returns are higher for small companies than for large companies. There is also a significant relationship between the type of industry and income smoothing.

MUTUAL FUND TRADING COSTS

T his article examines the tradmg costs of a large population of mutual funds across investment categories over time. An important piece of information not provided to mutual fund investors in the prospectus trading costs can be a deadweight drag on investment performance. Only if the investor specifically requests the statement of adltional information from the fund company is this information provided. To date, there has been little empirical research in this area. The one exception is a study by Livingston and O’Neal [1996], which examines brokerage costs for 240 equity mutual funds over the 1989-1993 period. The authors find that brokerage commission expenses are significant in relation to other fund expenses, and suggest that these expenses should not be relegated to the statement of additional information, which most investors never see. Our study extends the Livingston-O’Neal study to essentially all classes of mutual funds over a similar time frame. Because investors are concerned with all the costs that reduce their return, not only those included in the expense ratio, the information we provide for mutual fund trading costs should be of particular relevance to the investment community. The analysis first provides summary descriptive statistics on mutual fund brokerage costs and related fund variables. A regression model is then used to examine the relationship between trading costs and fund turnover, expense ratio, size, and load/no-load status. DATA

Applications of WWW technology in teaching finance

Abstract In this article we discuss the need for a personal Web page in finance education, some of the ways Web pages can be used to benefit students, and present a survey of Web page use. We follow with a discussion of how to create and modify a Web page using commonly available computer programs. This information allows faculty the ability to provide valuable and timely information and materials for students.

The information contents of senior offerings that reduce junior securities

Abstract This study examines 196 pure leverage increases consisting of senior offerings that reduce junior securities. The following contributions not previously discovered by the senior-for-junior research are offered. First, firms for which less information exists have positive announcement period stock returns that are significantly greater than firms for which more information exists. Second, the signaling effects associated with the announcement of a premium and with adverse selection exercise a significant impact on stock returns. Last, the decrease in systematic risk, that accompanies senior-for-junior transactions, occurs almost solely for firms for which less information exists.

Active international mutual fund management; can managers neat the index?

We examine the benefits of active international mutual fund management. Is there an advantage to active fund management over investing in index funds? Previous research has found that for domestic funds, active fund management can not outperform index funds. But there has been no clear conclusion as to active international mutual fund management. We utilize Morningstar Mutual Fund data to analyze five international mutual fund categories, and overall, for a sample of 831 funds with 4,835 annual return data points. We find the difference in mean return (index minus fund return) is negative for all fund categories, except for Europe funds. The difference is significant overall and for four of the five fund categories. The results from the multivariate regression show no relationship between total return and expense ratio, but there is a significant positive relationship between total return and turnover, and a significant positive relationship between total return and fund size (LN net assets). As opposed to domestic mutual funds, it appears to be beneficial to select actively managed international mutual funds over index funds.

Manager Skill and Risk Budgeting

Risk budgeting appears to bridge the gap between two important concepts in modern portfolio management: ex ante total return-risk portfolio optimization and ex post performance measurement relative to a benchmark. The fundamental hypothesis is that a marginal increase in allowed tracking error is associated with an increase in expected alpha. Tests of this hypothesis using monthly returns for 366 mutual funds in three asset classes over 1997–2001 reveal little evidence of a relationship between realized alpha and tracking error. In a sample split according to manager skill (information ratio), however, there is a positive relationship between alpha and tracking error for skilled (high information ratio) specialty managers and a negative relationship for unskilled (low information ratio) managers. This suggests that investors who wish to practice risk budgeting share with all investors the difficulty of identifying skilled managers in advance.

The Sarbanes‐Oxley Act of 2002: what impact has it had on small business firms?

Purpose - The purpose of this paper is to explore the impact of the Sarbanes-Oxley (SOX) Act of 2002 on small corporations when compared to large firms and to investigate differences perceived by small and large firms with respect to costs and internal controls. Design/methodology/approach - A questionnaire containing 20 questions (five demographic and 15 addressing issues related to SOX implementation) was mailed to 5,479 board members, chief executive officers (CEOs) and chief financial officers (CFOs) of 676 separate firms with 117 completed surveys returned. Findings - The results of the study show significant differences in the responses between small and large firms concerning: the overall impact of SOX on the firm; the amount of time dedicated to SOX; the role of the external auditor; the firms implementation stage; the most significant challenges due to SOX implementation; the corporate governance reforms instituted; and changes in board compensation. Research limitations/implications - The basic limitation of this paper is the low-response rate (slightly more than 2 per cent) which is not surprising since CEOs, CFOs, and board of directors have a low tendency to respond to surveys. Originality/value - The findings of this paper suggest that: recent actions taken by the Securities and Exchange Commission (SEC) are appropriate in providing much needed relief for smaller public firms; and lend support for further actions of assistance by the SEC. This paper is of value to academicians, practitioners and to an international audience engaged in the harmonization of accounting standards.

The Earnings Forecast Accuracy of Financial Analysts Who are CFA Charterholders

This article examines the earnings forecast accuracy of financial analysts who have earned the right to use the CFA designation. Given the extensive rigor of the three-level CFA examination along with the substantial work experience requirements and required adherence to a strict Code of Ethics and Standards of Professional Conduct, it is hypothesized that CFA charterholders will provide more accurate earnings estimates than other financial analysts not holding the CFA charter. Our estimation results support this hypothesis. We find that, on average, financial analysts who hold the CFA charter provide 3.78% (2.70%) “tighter” forecast accuracy than non CFA charterholders for annual (quarterly) data respectively over the 1986 through 2002 time period. This is important information to the investment community as investors use financial analyst earnings forecasts in making assessments of correct security valuation.

Using instant messenger in the finance course

Purpose - New technologies have provided new tools we may use as finance professors to communicate with our students. Instant messaging (IM) has become a common communication tool in industry and among students. The purpose of this paper is to investigate the use of IM as a communication tool in finance courses. Design/methodology/approach - After reviewing the advantages and disadvantages of IM, the students were surveyed to determine how they viewed IM in comparison to other communication techniques. Findings - The paper finds that 50 per cent or students use IM at any time (not just for class). The majority of the IM users, use it several times a day and have used it for two to three years. Only about 15.7 per cent of our students have used IM for our classes. The range of IM usage in the classes is 7-25 per cent. Of those students who have used IM for our courses, they have used it 2-5 times during the semester and almost all students found it useful. Students were asked to rate various methods of professor/student communication. The students strongly like face-to-face communication, followed by (in order of preference) email, IM, and telephone. Students disagree with the statement that IM is a substitute for face-to-face interaction and agree that IM is a supplement to face-to-face interaction. Originality/value - The findings suggest ways to improve communications with students and other persons.

Do Mutual Fund Supermarket Programs Raise Expense Ratios

This article investigates the hypothesis that there are significant differences in mutual fund expense ratios after inclusion of these funds in the Schwab Retail OneSource supermarket program. The data covers the 1991–1998 peroid for ten investment categories. The results show that there is a significant decrease in expense ratios after inclusion in the Schwab OneSource program. This result is important for investors that are considering investing in mutual funds through a supermarket program because expense ratios have a direct impact on their returns.