Victor L. Bernard

What motivates managers' choice of discretionary accruals?

Abstract The papers by Subramanyam (1996) and Kasanen, Kinnunen, and Niskanen (KKN, 1996) both consider why managers manipulate accounting accruals. Subramanyam finds that discretionary accruals are associated with several performance measures, and concludes that managers accrual choices increase the informativeness of accounting earnings. However, a strong competing alternative is that the ‘Jones model’ systematically mismeasures discretionary accruals, so that they contain a significant non-discretionary component. Unlike many US studies, KKN find strong evidence of earnings management in Finland, where Finnish managers set earnings to satisfy the demand for dividends by keiretsu-like institutional investors.

UNANTICIPATED INFLATION AND THE VALUE OF THE FIRM

Abstract Evidence presented here indicates that the relationship between stock returns and unexpected inflation differs systematically across firms. The differences are shown to be consistent with cross-sectional variation in firms nominal contracts (monetary claims and depreciation tax shields). The differences are also partially explained by proxies for underlying firm characteristics that could create interaction between unexpected inflation and operating profitability. Finally, much if not most of the differences appear to arise because unexpected inflation is correlated with changes in expected aggregate real activity, the effects of which tend to vary across firms according to their systematic risk.

Does Post-Earnings-Announcement Drift in Stock Prices Reflect A Market Inefficiency? A Stochastic Dominance Approach

This paper uses a stochastic dominance approach to test for market efficiency following earnings announcements. We find that the stocks that recently announced good earnings news stochastically dominate those that recently announced bad news. The results cast serious doubt on any belief that asset pricing model misspecifications might explain post-earnings-announcement drift.

Commodity Contracts and Common Stocks as Hedges against Relative Consumer Price Risk

Evidence provided here suggests that investors could have identified, ex ante , portfolios that hedge against uncertainty in the prices of three major categories of consumption: food, shelter, and transportation. This finding has implications for the practical importance of multi-period capital asset pricing theories that assume investors can identify such hedge portfolios. The study also provides some surprising evidence about the usefulness of common stocks and commodity futures contracts in hedging against specific price inflation. Certain combinations of common stocks serve as effective hedges, but combinations of commodity futures contracts contribute nothing to hedging ability.

Resolution of Insolvent Thrifts: Fundamental Issues

Once insolvent thrifts are under its control, FSLIC must provide financial assistance to induce others to assume deposit liabilities. But how should FSLIC use its primary resolution alternatives -- assisted acquisition and liquidation -- to minimize the cost of meeting its obligations to depositors? Should FSLIC liquidate all insolvent thrifts? If only some, which ones? In this section we discuss principles that should guide the resolution process and thereby establish a basis for our substantive analysis in Chapters 4 through 6 that follow.

Empirical Evidence on FSLIC’s Cost of Solution

There has been considerable public controversy and speculation surrounding several aspects of FSLIC’s 1988 assisted acquisitions. In particular, people have questioned whether the “December deals” and “Texas deals” were as cost-effective as other deals, and whether deals involving large tax considerations added to the total cost of resolving cases through acquisition. Precisely because of all the controversy, it is important to begin the process of confronting the speculation with empirical evidence.

The Timeliness of Regulatory Action

In this Chapter we examine the sources of liability growth and analyze FSLIC’s efforts to control this growth. Much of this Chapter provides institutional detail about the process by which an insolvent institution is identified and brought under FSLIC control. It is important to point out that inasmuch as FSLIC’s exposure to deposit insurance claims reflects poor investment decisions made by thrifts in the past, the net worth deficit represents a problem that cannot be undone by FSLIC or the FHLBB. Hence, attention should be focused on the time required for FSLIC to assume control of insolvent thrifts and the rate of growth of FSLIC liabilities once an insolvent thrift is under FSLIC control.

FSLIC’s Acquisition Process

In the remainder of this report we describe and analyze FSLIC’s resolution methodology and the application of this methodology during the 1988 calendar year. In this Chapter we analyze the competitive bidding and negotiation process used by FSLIC. The methods used to evaluate the bids and to compare them with the option to liquidate are evaluated in Chapter 5. Empirical analysis of the results of the 1988 resolution process are then presented in Chapter 6.

Analysis of FSLIC’s Methodology for Evaluating Bids

As indicated in Chapter 3, the ideal approach for making the liquidation versus acquisition decision would be for FSLIC to measure directly thrift franchise value. If a positive franchise value exists, FSLIC would attempt to capture that value in sales to acquirers. If no franchise value exists, the thrift would be liquidated provided that the problem assets can be managed by a receivership without too great a loss in efficiency.