US Financial Research Articles

On the conceptual underpinnings of fair value accounting

The metamorphosis of business processes and corporate strategies is rapidly progressing across the globe. The critical role of intangibles in corporate performance is receiving its due recognition. Complex tradeable financial products are flooding financial markets. In attempts to gear up for the challenge of financial reporting in this upstaged environment, standard setters have substantively restructured reporting systems, with 'fair value' being the bedrock thereof. Moving away from the traditional 'revenue/ expense' matching measure of income towards the 'asset/liability' measure together with the adoption of the Hicksian concept of income is clearly discernible in the pronouncements and ongoing projects of the US Financial Accounting Standards Board (hereinafter referred to as FASB) and the International Accounting Standards Board (hereinafter referred to as IASB ). In this article, an attempt is made to analyze the issues that are controversial and equivocal, or those that need further refinement insofar as fair value accounting is concerned.

Dynamic Strategy for Renewal of US Financial Industry

Dynamic Strategy for Renewal of US Financial Industry

Comparability of Company Accounts Using IFRS and US GAAP: Empirical Evidence of European and US Financial Statements

<p><strong>Purpose-</strong>The main objective of this study is to provide a judgment on the comparability of financial statements prepared under IFRS and US-GAAP. We developed two research questions for evaluating comparability within Europe (IFRS) and within the US (US GAAP) and for testing whether comparability is higher or lower when the US companies are included with the European countries.</p><p><strong>Design/Methodology/Approach-</strong>The T index framework was used to summarize the level of comparability for 13 accounting items using data from 250 companies.</p><p><strong>Findings</strong>-Empirical results are mixed. Of 13 accounting items considered, international comparability is significantly lower for 7 items and significantly higher for 4 items when the US companies are included. Furthermore, comparability amongst companies using IFRS is not consistently higher or lower than comparability amongst companies using US GAAP.</p><p><strong>Practical implications</strong>-Answers to the research questions may provide useful suggestions for IASB’s current policy direction towards global accounting standards convergence, and in particular for the IASB-FASB convergence project. The results also have implications for companies or countries considering shifting to IFRS or US GAAP.</p><p><strong>Research limitations/implications</strong>-Lack of comparability within countries, rather than between countries, suggests a need to focus on reducing options within standards rather than on differences between standards or countries.</p><strong>Originality value</strong>-Our empirical results show that in most cases lack of comparability may be driven by options within a standard rather than by explicit differences between standards.

Exchange Rate Regimes and Welfare Losses from Foreign Crises: The Impact of the US Financial Crisis on Mexico

AbstractWe modify the Gali and Monacelli small open economy dynamic stochastic general equilibrium (DSGE) model, calibrate to Mexican data and simulate the impact of the financial crisis on Mexico, under floating and counter factual fixed exchange rates. The floating exchange rate ameliorates welfare losses for Mexico. They are greater under fixed exchange rates because the return paths to equilibrium are more volatile (higher variance) and output, consumption and employment impulse response functions (IRFs) overshoot. Monetary policy, inflation targeting with floating exchange rates, clearly reduced the welfare costs vis‐à‐vis other counter factual policies including consumer price index‐based Taylor rule, domestic inflation Taylor rule and fixed exchange rates.

The symbolic politics of delegation: macroprudential policy and independent regulatory authorities

ABSTRACTThis paper investigates the motivations that led policy-makers to delegate macroprudential authorities to newly created independent systemic regulatory authorities (SRAs). Three case studies are examined: the US Financial Stability Oversight Council, the European Systemic Risk Board and the UK’s Financial Policy Committee. Policy-makers’ motivations are captured by examining the specific institutional features of the newly created SRAs and by tracing the legislative debates that surrounded their creation. The findings of this empirical analysis call into question several of the conventional claims that are used to justify delegation to technocratic agencies from the functionalist and ideational scholarship. Given the limitations of the explanations based on efficiency considerations and socialisation of welfare losses, this paper suggests that the delegation of powers to SRAs was ultimately motivated by what is referred to as the ‘logic of symbolic politics.’ It is argued that the main motivation that emerges from the legislative debates for delegating this important task is that the SRAs provided a quick institutional ‘fix’ to signal to the public that in the wake of the international crisis of 2007–2009, policy-makers were redressing regulatory mistakes made prior to and during the crisis that had caused a severe deterioration of public’s wealth.

Expected-loss-based Accounting for Impairment of Financial Instruments: The FASB and IASB Proposals 2009–2016

The financial and banking crisis of the late 2000s prompted claims that the incurred-loss method for the recognition of credit losses had caused undesirable delay in the recognition of credit-loss impairment. In the wake of the crisis, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) worked towards the development of expected-loss-based methods of accounting for credit-loss impairment. Their work included an ultimately unsuccessful attempt to develop a converged FASB/IASB standard on credit-loss impairment. The FASB and IASB eventually developed their own separate expected-loss models to be included, respectively, in a 2016 FASB standard and in the IASB’s 2014 final version of IFRS 9 Financial Instruments. The failure to achieve convergence on an issue of such high profile and materiality has generated some controversy, and it is claimed that it will impose significant costs on the preparers and users of the financial statements of banks. This paper examines the various sets of expected-loss-based proposals issued separately or jointly since 2009 by the FASB and the IASB. It describes and compares key features of the different approaches eventually developed by the two standard setters, referring to issues that arose in arriving at practically workable solutions and to issues that may have impeded FASB/IASB convergence. It also provides information indicative of the possible effect of differences between the two approaches.

The Unit of Account in Financial Reporting: A Set of Conceptual Framework Problems

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) are currently engaged in a joint project to develop an international conceptual framework for financial reporting. One part of this project is an attempt to address a financial reporting problem referred to by the boards as the unit of account issue. The boards propose to address the unit of account as a separate issue within their conceptual framework project.This paper describes the unit of account issue as a pervasive aggregation/disaggregation problem in financial reporting. It is argued that the unit of account problem is embedded within, and arises from, a number of other unresolved problems with the existing concepts in the boards’ current frameworks. Therefore, the unit of account is a set of problems rather than a single one that can be dealt with as a standalone issue.The paper identifies ten conceptual problems in the boards’ existing frameworks, and concludes with a discussion of the manner in which these problems contribute to the vexed nature of the unit of account issue.

On the Linkages between India VIX and US Financial Stress Index

The present study is the first of its kind accounting for linkages among India VIX and US financial stress index by employing vector autoregression model (VAR), Granger causality test, generalized impulse response functions, variance decomposition analysis (VDA) and Diebold and Yilmaz’s (2009) spillover index highlighting the impact of cross market variations on each other. The span of monthly data ranges from 2009 to 2015, particularly after the global financial crisis. The results report a unidirectional causality running from the US financial stress to the Indian equity market implied volatility. When a shock is subject to the US financial stress, then the response of implied volatility in the Indian equity market is positive initially, approaching zero after a few months. On an average, 32% of the variations are accounted by cross market shocks whereas rest of the variations are as a result of own market shocks. The contribution of the US financial stress to forecasted error variances in the Indian equity market implied volatility increases over a period of 10 months to 25% approximately. The results have strong implications for the Indian equity market investors.

The Impact of US Financial Uncertainty Shocks on Emerging Market Economies: An International Credit Channel

I document that US financial uncertainty shocks, measured by an unexpected increase in VIX, have a substantial impact on the output of emerging market economies (EMEs) without material impact on US output during the last two decades. To understand this puzzling phenomenon, I propose an international credit channel - an outcome of financial frictions - as a propagation mechanism of US financial uncertainty shocks to EMEs. I augment a boom-bust cycle model of EMEs by Schneider and Tornell (2004) portfolio choice model of constrained international investors. As international investors pull their money from EMEs - to satisfy their Value-at-Risk constraints - in response to uncertainty shocks, borrowing costs increase and domestic credit falls as a consequence of credit market imperfections in EMEs. Higher borrowing costs, in turn, lead to a fall in investment that causes a real depreciation via currency mismatch and a decline in total output through sectoral linkages. The results of 18 EMEs from structural VARs, which are carefully identified using the equilibrium model, confirm the prediction of the model.

The Knowledge Effect: Excess Returns of Highly Innovative Companies

In this paper, we identify the Knowledge Effect, the tendency of stocks of highly innovative companies to experience excess returns. It results from investors’ systematic errors in evaluating companies that invest large sums of money in producing knowledge. The origins of the Knowledge Effect can be traced to two factors: 1. A surge in the pace of knowledge production catalyzed by the release of the first commercially available semiconductor in 1971. Due to the cumulative nature of knowledge, this acceleration has resulted in an exponential increase in humankind’s total knowledge. 2. A mandate by the US Financial Accounting Standards Board in 1974 which ruled that companies must expense knowledge investments in the period incurred. This deprived investors of relevant financial information on corporate knowledge spending at the dawn of this massive surge in the pace of knowledge production.The Knowledge Effect is grounded in academic literature. It was first discovered in a series of studies in the 1990s where NYU’s Baruch Lev analyzed 20 years of financial data and discovered an association between a firm’s level of knowledge capital and its subsequent stock performance. Further research advanced the findings, and in 2005, Lev proved the existence of a market inefficiency attributable to missing information about corporate knowledge investments. This phenomenon leads highly innovative companies to deliver persistent abnormal returns.Gavekal Capital captures the Knowledge Effect using a proprietary process designed to overcome the informational shortcomings of traditional financial statements. Our methodology capitalizes corporate knowledge investments, measures firm performance on a knowledge-adjusted basis, and selects investments on the basis of knowledge intensity.

Income Gains and Month-to-Month Income Volatility: Household Evidence from the Us Financial Diaries

The US Financial Diaries track the daily finances of low and moderate-income households over a year. The households faced substantial swings in income from month to month. On average, they experienced 2.7 months when income fell more than 25 percent below average, and 2.7 months when income was more than 25 percent above average. The volatility is summarized by an average coefficient of variation of monthly income (within year, averaged across households) of 39 percent. The CV is greatest (55 percent) for households below the poverty line, but the CV remained relatively high (33-35 percent) and steady for households with income from 100 percent of the poverty line up to 300 percent. Thus, in the non-poor sample, greater income did not imply notably greater income stability.

Compliance and determinants of US-listed foreign firms’ 20-F filings under the new Securities and Exchange Commission accelerated deadline

Purpose – The purpose of this paper is to investigate the impact of the US Securities and Exchange Commission (SEC) accelerated deadline on foreign firms, and the 20-F filing practices and factors relating to the filing lags. Design/methodology/approach – The authors identified 338 firms that file 20-F reports with the SEC during the period of 2010 and 2011. The authors then used multivariate regressions to examine the effects of the shortened deadline on foreign firms’ filing practices and the factors associated with these practices. In the regression models, the authors also control for other firm characteristics that have shown to affect the filing lags of US firms such as firm performance, size, mergers and restructures, audit firm, compliance with internal control requirements under Sarbanes Oxley Act, internal control weaknesses, going concern audit opinion and operating complexity. Findings – Based on a sample of 338 US-listed foreign firms, the results indicate that there is a significant reduction in the filing lags and a change in their distribution for fiscal year 2011, as compared to the preceding year, and as intended by the SEC. The authors also find that 20-F filing lags are negatively related to the use of International Financial Reporting Standards (IFRS) or US-GAAP in 20-F reports and use of the English language in foreign firms’ home countries. Practical implications – The findings of this paper are of interest to accounting regulatory bodies including the SEC, US Financial Accounting Standards Board and the International Accounting Standards Board by showing that registrants respond positively to regulations intending to promote timeliness of accounting disclosures and reporting, although many firms may oppose them in the due process stage. Originality/value – The authors contribute to the extant literature by providing new evidence that 20-F filing lags are negatively related to the use of IFRS or US-GAAP in 20-F reports, and the use of English language in foreign firms’ home countries.

On the Implications of Fair Value Based Merger Accounting

Accounting for business combinations appeared formally for the first time in statute books in the United States in 1970 when Accounting Principles Board (APB) promulgated Opinion No. 16 (Business Combinations) and Opinion No. 17 (Intangible Assets). The US Financial Accounting Standards Board (FASB hereinafter) subsequently issued SFAS 141(R) and SFAS 160. This paper attempts to analyze merger accounting in the context of the aforesaid standards and related provisions as they stand en presnti underscoring the role therein of fair value accounting and measurements. Additionally, a critical evaluation of the pooling & purchase methods of merger accounting is presented in an effort to explain the relative aversion of accounting bodies to the pooling method. Contextual SFAS, IFRS and Indian standards on business combinations that mandate the use of the acquisition method are also elaborated.

The Impact of the US Financial Crisis on How Students Pay for College

The 2008 failure of major financial institutions in the United States may have dramatic ramifications on American students and whether/where they attend college. Several sources of funding may be at risk, including potential decreases in federal financial aid, the tightening of private loan availability, lowered home values impinging on equity-based lending, and stock market losses in college-fund savings. Public institutions, whose tuition is much lower than private or for-profit institutions, may see an increase in enrollment.

The US Financial Crisis and Corporate Dividend Reactions: For Better or for Worse?

We examine how changes in dividend policy in 2008 as the financial crisis was unfolding influenced firm risk-adjusted returns in the following years. Our sample consists of NYSE- and NASDAQ-traded firms that paid dividends in 2007. We divide these firms into four groups based on their dividend policy in 2008. We find that firms that decreased or eliminated dividends in 2008 had higher risk-adjusted returns in following years. This finding suggests that the firms that quickly reacted to the deteriorating economic conditions by cutting dividends and preserving cash were able to better weather the incoming financial crises.

Monopoly versus Competition in Setting Accounting Standards

Financial accounting standards are set by organizations granted a significant degree of monopoly power by various governments. While there has been considerable debate on the merits of national (e.g., US Financial Accounting Standards Board (FASB)) versus international (International Accounting Standards Board (IASB)) monopolies, little attention has been paid to the merits of using competing standard‐setting organizations (SSOs) for setting accounting standards. We compare the standard‐setting processes of the FASB/IASB to the processes of four technology‐oriented SSOs to assess the role of competition. We also provide a case study of monopoly and competitive standards in telephony. Both telephony and accounting yield some gains from coordination, and similar arguments are used (under the labels of comparability and consistency of accounting) in debates about granting a monopoly to their respective SSOs. Our results show that a group of volunteers competing with the government‐sanctioned monopoly of International Telecommunications Union transformed the telephone industry. Thanks to this standards competition, we enjoy free video internet calling and massive cost savings. Implications for accounting standard setting are discussed.

The US finance wage premium before and after the financial crisis: a decomposition exercise

Does the recent financial crisis change the wage structures of the US finance and nonfinance sectors? In this article, we study the wage gap between workers in these two sectors between 1990 and 2011. Using data from the Current Population Survey, we find that the finance wage premium increased over time and only dropped modestly during the crisis. Using the Oaxaca–Blinder method to decompose the wage gap into ‘explained’ and ‘unexplained’ parts, we also find that the wage gap was entirely driven by unexplained factors.

Minimizing a 'Key Cause' of the 2008 Financial Crisis: Governance Failure

The US Financial Crisis Inquiry Commission Report stated: “dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.” The Lehman Brothers liquidator’s report and other sources explain the systemic deficiencies in the dominant centralized system of corporate governance. Evidence is provided that: (a) Stakeholders possessed knowledge of both systemic and firm specific risks; (b) Centralized governance denied stakeholders engagement to identify and mitigate risks. This leads to the hypothesis that decentralized governance described as “network” governance, provides a basis to reduce the “key cause” of firm and regulatory failure. The hypothesis is supported by system science that has identified the impossibility of reliably regulating complexity without a requisite variety of communication and control channels. We recommend that regulators introduce network governance to provide a requisite variety of stakeholder boards as co-regulators of large complex firms.

Optimal Portfolio Allocation among REITs, Stocks, and Long-Term Bonds: An Empirical Analysis of US Financial Markets

Using mean-variance utility function analysis with various degrees of risk aversion, this research examines the impact of Real Estate Investment Trusts (REITs) in creating optimal portfolios. It also examines and develops a sensitivity analysis for differential risk premiums in REIT stocks and the effect in determining an optimal portfolio mix by applying mean variance analysis. When the combined risk premium of REITs and stocks is 1.5%, we find investors with risk aversion between 1 and 6 are better off investing almost entirely in REITs, short selling the bond and investing very little in stocks. Investors can benefit in the same way even when the risk premium of REITs and stock is fixed at 2.0% with risk aversion equal to between 1 and 9. However, when the risk premium of REITs and stock is fixed at 2.5%, the investor’s risk aversion factor is irrelevant, and it suggests investors should short sell the bond and invest mostly in REITs. The marginal effect of changes in (portfolio returns) rR on the optimal portfolio weights in REITs is observed to have a sharp decline when risk aversion is increased. However, the impact of that change in the REIT-Stock correlation is non-existent as the optimal weight in REITs is increased. In addition, there is little obvious change when the risk aversion is increased. Therefore, the change of weights in REITs in the optimal portfolio is more significant than the correlation between REITs and stock performance. Results also indicate that the investor should consider how to maximize their return using various levels of risk aversion and not by using the correlation between stock and REITs.

The politics of accounting standard-setting: A review of empirical research

We provide an overview of the empirical literature on the politics of accounting standard-setting, focusing on the US Financial Accounting Standards Board (FASB). Although it is clear from casual observation that politics sometimes plays a first-order role in the determination of accounting standards, we argue that more can be done to improve our understanding of this important topic. Based on our review, we outline what we see to be a number of potentially fruitful directions for future research.