Premium Fees Research Articles

The quality-assuring role of mutual fund advisory fees

Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager's one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

The Economic Value of Time: Evidence from Africa

AbstractWhen excessive and inefficiently implemented, government interventions can result in significant economic losses for citizens. These include the often‐significant cost of lost time. This paper thus aims to estimate the potential economic welfare benefit of reducing public office waiting times. Based on data from Johannesburg, Lagos and Addis Ababa, we show that a one‐hour reduction in waiting time improves welfare by 66‐74% of the average local wage. High‐income earners, college graduates and private‐sector employees enjoy higher gains. Moreover, we note that the proxies currently used to quantify time‐saving benefits diverge significantly from the rate at which individuals substitute time for money. Our analysis also indicated a substantial delay‐induced citywide efficiency loss. Introducing public–private partnership and charging premium fees for faster service delivery are justifiable both on grounds of equity and efficiency.

Endogeneity: How Failure to Correct for it can Cause Wrong Inferences and Some Remedies

Although researchers in business and management are becoming increasingly aware of the importance of endogeneity affecting regression analysis, they frequently do not have the right methodological toolkit to adjust for this issue. In this paper we discuss such a toolkit. There are also areas in business and management research which to date seem to be mostly oblivious about the endogeneity issue. We highlight such an area, which studies the question of whether firms that are cross‐listed on a foreign stock exchange are charged premium fees by their auditors. When the same methodology (pooled ordinary least squares) as in the existing literature is used, the existence of an audit fee premium for cross‐listed firms seems to be confirmed. However, once methodologies are used which adjust for the various types of endogeneity (i.e. omitted variable bias, simultaneous and dynamic endogeneity) there is no longer support for the existence of such a generalized premium. Hence, not only do we illustrate that failure to adjust for endogeneity has severe consequences such as drawing the wrong inferences, but we also review various ways to control for the different types of endogeneity.

Techno-economic analysis of a 2.1 kW rooftop photovoltaic-grid-tied system based on actual performance

As more attention is being focus on the development of renewable energy resources globally, technical and economic assessments of these resources are crucial to ascertain their viability. These assessments can be more meaningful, if they are based on field and actual performance of the renewable energy conversion systems. This study presents the economic analysis of a rooftop 2.07kW grid-connected photovoltaic energy system installation located in Ås (59.65°N and longitude 10.76°E, and about 105m above sea level), Norway. Both the annual and monthly costs of energy produced by the system are determined. In addition, the feed-in tariff that can give internal rate of return of about 7.5% on investment on this installation was examined. Based on assumptions used in this study, feed-in-tariff of US$0.356/kWh is estimated for a project with economic life of 25years with no other financial support. This translates to US$0.110/kWh premium over the levelized cost of energy of US$0.246/kWh generated by the system. However, if the financial support is more than 45% of the initial investment cost, no further premium fee is necessary to support this type of system.

Moral Hazard in Mutual Fund Management: The Quality-Assuring Role of Fees

Active fund managers implicitly promise to research profitable portfolio selection. But active management is an experience good subject to moral hazard. Investors cannot tell high from low quality up front and therefore fear manager shirking. We show how the parties mitigate the moral hazard by paying the manager a premium fee sufficiently high that the manager’s one-time gain from shirking is less than the capitalized value of the premium stream he earns from maintaining his promise to provide high quality. Premium advisory fees act as a quality-assuring bond. Our model has a number of revealing extensions and comparative statics.

Corporate social responsibility reporting in professional accounting firms

This paper examines the corporate social responsibility (CSR) reporting undertaken by the 20 largest professional accounting firms in the United Kingdom. Professional service firms are knowledge-intensive organisations, eager to communicate their legitimacy, status and reputation, to an external world. These social evaluations (prestige) allow them to enhance their intellectual capital and consequently charge premium fees and, effectively increasing partner wealth. This investigation undertakes a content analysis of firms' annual reviews, corporate social responsibility reports, websites, and recruitment literature.

Moral Dimensions of Moral Hazards

‘Moral hazard’ is an economic term which commonly refers to situations in which people have a tendency to increase their exposure to risk when the costs of their actions, should they get unlucky, befall someone else. Once insured, for example, a person might have little reason, financially speaking, to be careful if he will get fully reimbursed for his losses should things go wrong, especially if he does not risk an increase in his insurance premium fees. In this article, I argue that moral hazards are not morally neutral. To this end, I distinguish between concepts that (a) call for a moral value judgement but do not have a fixed moral value and (b) those that call for a moral value judgement and also have a fixed moral value. In short, this article examines questions that lie at the intersection of ethics and economics.

When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As

ABSTRACTWe provide new evidence on the role of financial advisors in M&As. Contrary to prior studies, top‐tier advisors deliver higher bidder returns than their non‐top‐tier counterparts but in public acquisitions only, where the advisor reputational exposure and required skills set are relatively larger. This translates into a $65.83 million shareholder gain for an average bidder. The improvement comes from top‐tier advisors' ability to identify more synergistic combinations and to get a larger share of synergies to accrue to bidders. Consistent with the premium price–premium quality equilibrium, top‐tier advisors charge premium fees in these transactions.

Revenue Management in the Golf Industry: Focus on Throughput and Consumer Benefits

The golf industry has been experiencing a major change in sustained interest from players since the peak year of 2001. Industry surveys indicate that players complain most about the slow pace of play of the game. The current research uses the two-part revenue management system of increasing throughput or rounds played and research on attitudes of players regarding the game and acceptability of waiting during the game to maximize player benefits and course pricing. A decision support system is reviewed that can practically increase the daily rounds played by 20%. Research on golfers' attitudes indicates there are two segments of players with different attitudes toward waiting and acceptability of paying a premium fee for a guaranteed fast game of golf. Implications for golf course managers are offered.

Cost-effectiveness analysis of weekday and weeknight or weekend shifts for assessment of appendicitis

Assessment of appendicitis during a weeknight or weekend shift (after-hours period, AHP) might be more costly and less effective than its assessment on a weekday shift (standard hours period, SHP) because of increased costs (staff premium fees) and perforation risk (longer delays and less experience of fellows). The objectives were to compare the costs and effectiveness of assessing children with suspected appendicitis who required a laparotomy and had US or CT after-hours with those of assessing children during standard hours, and to evaluate the importance of diagnostic imaging (DI) within the overall costs. We retrospectively microcosted resource use within six areas of a tertiary hospital (emergency [ED], diagnostic imaging (DI), surgery, wards, transport, and pathology) in a tertiary hospital. About 41 children (1.8-17 years) in the AHP and 35 (2.9-16 years) in the SHP were evaluated. Work shift effectiveness was measured with a histological score that assessed the severity of appendicitis (non-perforated appendicitis: scores 1-3; perforated appendicitis: score 4). The SHP was less costly and more effective regardless of whether the calculation included US or CT costs only. For a salary-based fee schedule, 733 US dollars were saved per case of perforated appendicitis averted in the SHP. For a fee-for-service payment schedule, 847 dollars were saved. Within the overall budget, the highest costs were those incurred on the ward for both shifts. The average cost per patient in DI ranged from 2 to 5% of the total costs in both shifts. Most perforation cases were found in the AHP (31.7%, AHP vs. 17.1%, SHP), which resulted in higher ward costs for patients in the AHP. A higher proportion of severe cases was seen in the AHP, which led to its higher costs. As a result, the SHP dominated the AHP, being less costly and more effective regardless of the fee schedule applied. The DI costs contributed little to the overall cost of the assessment of appendicitis.

A Reexamination of Behavior in Experimental Audit Markets: The Effects of Moral Reasoning and Economic Incentives on Auditor Reporting and Fees*

AbstractThis study uses experimental markets to investigate how moral reasoning influences auditor reporting under different levels of economic incentives. In each multiperiod market, auditor subjects could either (1) misreport low observed outcomes as high and thereby reap economic advantages at the expense of third‐party investors, or (2) truthfully report low observed outcomes as low but thereby forgo the economic advantages of misreporting. We extend the Calegari, Schatzberg, and Sevcik 1998 experimental‐markets setting to incorporate moral reasoning, and test hypotheses based on the economic model of Magee and Tseng 1990 and the neo‐Kohlbergian moral reasoning framework of Rest, Narvaez, Bebeau, and Thoma 1999. We document a significant effect of moral reasoning on auditor behavior. Specifically, we find that misreporting and premium fees are more likely with higher than with lower moral reasoning subjects, and the moral reasoning effect diminishes as economic penalties increase in the market. These findings provide valuable insights for specifying the determinants of auditor misreporting, the observable behaviors that signal its existence, and the institutions that can prevent its occurrence in the market. We conclude that the relation between moral reasoning and behavior is more complex than commonly assumed in the accounting literature, and identify directions for future research.