Economics and Information Theory

We evaluate the literature that, for standard-setting purposes, assesses the usefulness of accounting numbers on their stock market value association. For several reasons we conclude the literature provides little insight for standard setting. First, the association criterion has no theory of accounting or standard setting supporting it. Standard setters' descriptions of their objectives and accounting practice are both inconsistent with the criterion. Important forces shaping accounting standards and practice are ignored. Second, many tests in the literature rely on valuation models that omit important factors and many studies do not provide links between valuation model inputs and accounting numbers. Finally, there are a variety of significant econometric issues in the studies.

/pdf/the-relevance-of-the-value-relevance-literature-for-356sm26s5t.pdf

The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1236&context=fnce_papers

The relevance of the value-relevance literature for financial accounting standard setting $

https://www.econ.kyoto-u.ac.jp/~hujii/myweb/GradSchool%202013%20AccA%20Barth%202001.pdf

The relevance of the value relevance literature for financial accounting standard setting: another view $

Originally propounded by the 16th-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it first was advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. Accordingly, over the last three decades, a large literature has built up that examines how much the data deviated from theory, and the fruits of this research have provided a deeper understanding of how well PPP applies in both the short run and the long run. Since the mid 1990s, larger datasets and nonlinear econometric methods, in particular, have improved estimation. As deviations narrowed between real exchange rates and PPP, so did the gap narrow between theory and data, and some degree of confidence in long-run PPP began to emerge again. In this respect, the idea of long-run PPP now enjoys perhaps its strongest support in more than 30 years, a distinct reversion in economic thought.

/pdf/the-purchasing-power-parity-debate-365529mome.pdf

The purchasing power parity debate

There has been considerable research in respect of voluntary disclosure by companies and factors that may explain such disclosure. However, most of the research has been centred in developed countries. This study extends the previous literature by examining voluntary disclosure in a developing country, namely Kenya. Over the last decade, the Kenyan Government has initiated several far-reaching reforms at the Nairobi Stock Exchange (NSE) in order to mobilise domestic savings and attract foreign capital investment. These measures include privatisation of state corporations through the stock exchange and allowing foreign investors to own shares in the listed companies. This study provides a longitudinal examination of voluntary disclosure practices in the annual reports of listed companies in Kenya from 1992 to 2001. The study investigates the extent to which corporate governance attributes, ownership structure and company characteristics influence voluntary disclosure practices.

Our results suggest that the extent of voluntary disclosure is influenced by a firm's corporate governance attributes, ownership structure and company characteristics. The presence of an audit committee is a significant factor associated with the level of voluntary disclosure, and the proportion of non-executive directors on the board is found to be significantly negatively associated with the extent of voluntary disclosure. The study also finds that the levels of institutional and foreign ownership have a significantly positive impact on voluntary disclosure. Large companies and companies with high debt voluntarily disclose more information. In contrast, board leadership structure, liquidity, profitability and type of external audit firm do not have a significant influence on the level of voluntary disclosure by companies in Kenya.

Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies

The study attempts to explain why Australian companies revalue their fixed assets, when a revaluation, by itself, has no discernible direct effect on cash flows and is costly to carry out. A revaluation is hypothesised to affect contracting and political costs. It may also help resolve problems associated with information asymmetries, or be used to signal information to investors. The results support the proposition that economic forces help explain the decision to revalue assets.

Fixed Asset Revaluations and Managerial Incentives

The stochastic approach to index number theory views each commodity price change as an independent observation on the underlying rate of inflation so that inflation can be estimated by averaging over all the prices. This article extends the approach by (a) allowing for sustained changes in relative prices, (b) showing the link with Divisia index numbers, and (c) deriving standard errors for the inflation estimates. The results are illustrated with Australian data.

/pdf/the-measurement-of-inflation-a-stochastic-approach-2yduri3h2o.pdf

The Measurement of Inflation: A Stochastic Approach

This paper provides evidence on underpricing in Australia using 340 industrial initial public offerings over the period 1980 to 1990. It aims to explain why underpricing is consistent with rational behaviour by focusing on differential information across IPO firms. We measure differential information along two dimensions, the quality and the quantity of information. We propose that the quality of information is reflected in the reputation of independent advisers to the preparation of the issuing firm's prospectus. Three such independent external advisers are examined: the investigating accountant, the underwriter, and the expert. The results provide strong support for the reputation effect of the underwriter on underpricing. Although there is evidence showing a negative relation between underpricing and the reputation of the investigating accountant and the expert, it is not significant. Our results also support the differential quantity of information hypothesis. Firms with more information available are, on average, less underpriced.

Differential information and the underpricing of initial public offerings: australian evidence

Price clustering is manifest in some prices being observed more frequently than others, when underlying value is uniformly distributed over the range of admissible prices. It is frequently observed in financial markets. We investigate clustering in individual trades effected on the Australian Stock Exchange's wholly computerised, order-driven trading system. We find that price clustering is pervasive, tending to follow an overall pattern somewhat similar to that found in US securities markets. Clustering results from imprecise beliefs (‘haziness’) about firm value together with the existence of conventional, salient focal points within regions of haziness. Thus we find that clustering increases with the price of the stock (reflecting imprecision in beliefs about firm value) and with surrogates for greater haziness such as higher market-wide volatility, own stock volatility, trade size, and the size of the bid-ask spread. Clustering is lower when price discovery is likely to be more efficient; that is, it decreases with trading frequency, and it is lower for stocks with options traded on them and for stocks that can be sold short.

H.Y. Izan

Papers

Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies

Fixed Asset Revaluations and Managerial Incentives

The Measurement of Inflation: A Stochastic Approach

Differential information and the underpricing of initial public offerings: australian evidence

Price clustering on the Australian Stock Exchange