Yew Kee Ho

The effects of R&D and advertising on firm value: an examination of manufacturing and nonmanufacturing firms

Firm spending on innovation and marketing, as measured by research and development (R&D) and advertising expenses, respectively, are expected to yield positive returns in terms of share price performance. Given resource limitations, firms prioritize the quantum of their investments in R&D and advertising vis-a/spl grave/-vis other investments. We examine the relationship between firm performance and the intensity of their investments in R&D and advertising over an extended period covering 40 years and 15 039 firm-years. Our findings are consistent with the resource-based literature. Specifically, we find that intensive investment in R&D contributes positively to the one-year stock market performances of manufacturing firms but not for nonmanufacturing firms. We also find that intensive investment in advertising contributes positively to the one-year stock market performances of nonmanufacturing firms. For the three-year stock market performance, in addition to the findings of the one-year period, we find inconclusive evidence that manufacturing firms benefit from investment in advertising. The interactions of R&D and advertising intensities are insignificant in explaining the stock market performance of the firms except for the three-year horizon for nonmanufacturing firms, which is significantly negative. Consistent with the resource-based literature, this implies that firm performances are diluted when they invest their resources in activities outside their core competence.

Management earnings forecasts in a continuous disclosure environment

Purpose – The purpose of this paper is to assess management earnings forecasts in a continuous disclosure environment.Design/methodology/approach – A large sample of hand checked Australian management earnings forecasts are examined. These data are analysed using a series of logistic regressions. Hypotheses are proposed and tested based on Skinners litigation cost hypothesis. Increases in non‐routine management earnings forecasts post‐2000; and increases in the proportion of such forecasts that contain bad news are predicted. The relationship between forecast specificity and forecast news content is investigated.Findings – It was found that, post‐2000, legislative changes and increased enforcement action by ASIC were followed by increased disclosure of non‐routine management earnings forecasts. For routine forecasts, no significant increase in forecast disclosure is observed. This result is consistent with Skinner as is the finding that the increased disclosure is only apparent for bad news non‐routine f...

Exploring the economic rationale of extremes in GARCH generated betas The case of U.S. banks

The estimation of time varying beta is an important and growing area of research. The Multivariate GARCH model has been used in the literature to generate estimates of time varying betas. A common feature of the time varying risk estimates generated by this approach, is that they exhibit large outliers. In this paper, we investigate the incidence of such extreme beta observations in order to establish whether they are a response by the market to the arrival of news or alternatively are a result of the model picking up noise from the mean. Using daily data for a sample of U.S. deposit taking institutions over the period 1976 to 1994, this paper uses a Multivariate GARCH model to generate conditional beta estimates. The presence of large outliers is established and investigated. Generally, the results of this study suggest that these extreme observations are economically induced.

Reported Earnings and Analyst Forecasts as Competing Sources of Information: A New Approach

We apply a new methodology, modified Granger causality tests, to further analyze the information flows between earnings and forecasts. Our application focuses on the dynamic interaction between reported earnings and analysts’ forecasts. Based on long time series of analyst earnings forecasts and reported earnings, we provide formal and compelling evidence of bi-directional ‘causality’. Further, we report that the lag structure in information flows is longer than has been documented in the previous literature. This is consistent with our expectation that, in addition to past earnings reports, the forecasts themselves make a significant contribution to the information that is reflected in future earnings. However, the presence of feedback also suggests that past earnings reports, as well as past forecasts, are incorporated into later forecasts. Collectively, our findings imply that the information in earnings reports has inherent positive value and that forecasts do not fully substitute for earnings releases.

The effects of forecast specificity on the asymmetric short-window share market response to management earnings forecasts

Purpose - This study aims to test the effects of forecast specificity on the asymmetric short-window share market response to management earnings forecasts (MEF). Design/methodology/approach - The paper examines a large sample of hand-checked Australian data over the period 1994 to 2001. Using an analyst news benchmark, it estimates a series of regressions to investigate whether the short-term impact from bad news announcements is greater in magnitude than from good news announcements and whether this differs between routine and non-routine MEFs. Additionally, it examines whether (after controlling for news content of MEF) there is a differential market impact conditional on specificity: minimum versus maximum versus range versus point. Findings - The results indicate that an asymmetric response is evident for the overall sample and a sub-set of non-routine forecasts. Contrary to predictions, the results show that forecast specificity, minimum, maximum, range and point MEFs make no additional contribution to the differences in the market reaction to bad or good news. Originality/value - The study extends the research investigating the short-run market impact of MEFs. The main element of innovation derives from the interaction between specificity and news content, as well as distinguishing between routine versus non-routine cases. Notably, it found little support for the view that more specific forecasts elicit greater market responses. What the results do suggest is that managers appear to choose the form of the forecast to suit the news being delivered. In particular, bad news delivered in a minimum forecast seems to be ignored by the market.

Initiating Coverage, Broker Reputation and Management Earnings Forecasts in Australia

We examine more than 5000 recommendations made by Australian brokers in the period 1996-2001. We find evidence that initiating recommendations produce greater share price responses than continuing recommendations, particularly for hold, underperform and sell recommendations. We also find evidence that initiating recommendations made by higher-reputation brokers and those made in the absence of a management earnings forecast attract different share price responses. Finally, we find that share price responses to initiating recommendations, conditional on the market consensus recommendation, are significantly different to continuing recommendations. Copyright (c) The Authors Journal compilation (c) 2007 AFAANZ.

Agency Costs and Management Contracting: Granting Executive Stock Options as a Strategic Compensation Practice?

This is an exploratory study on the characteristics and performance of firms that choose to grant executive stock options as a strategic compensation practice. According to the push theory of employee ownership, stock options are granted to push employees to create superior financial performance. We find that firms which grant executive stock options offer persistent abnormal firm performance. Firms that grant stock options in lieu of cash compensation do not perform differently in the long run from those that grant stock options as incentives. This finding is consistent with the proposition that the motivation for the use of executive stock options is endogenously determined for any firm given its investment opportunities and technology, risk characteristics and growth options.

Do brokers' recommendation changes generate brokerage? Evidence from a central limit order market

We examine the short‐term response to recommendation changes on the Australian Securities Exchange, a central limit order market. In both central limit order markets and dealer‐driven markets, clients may reward the recommending broker with increased trade volumes. But a central limit order market does not have mandatory market makers and hence provides greater opportunity to free ride. We find evidence supporting the hypothesis that recommending brokers are rewarded with higher trade volumes and brokerage commission. Consistent with the tipping hypothesis, these rewards are concentrated in the period shortly before the release. There is no evidence of free riding.