Conservative accounting and linear information valuation models

Prior research using the residual income valuation model and linear information models has generally found that estimates of firm value are negatively biased. We argue that this could result from the way in which accounting conservatism effects are reflected in such models. We build on the conservative accounting model of Feltham and Ohlson (1995) and the Dechow, Hutton and Sloan (1999) (DHS) methodology to propose a valuation model that includes a conservatism-correction term, based on the properties of past realizations of residual income and other information. Other information is measured using analyst-forecast-based predictions of residual income. We use data comparable to the DHS sample to compare the bias and inaccuracy of value estimates from our model and from models similar to those used by DHS and Myers (1999). Valuation biases are substantially less negative for our model, but valuation inaccuracy is not markedly reduced

Are analysts' loss functions asymmetric?

Recent research by Gu and Wu (2003) and Basu and Markov (2004) suggests that the well-known optimism bias in analysts? earnings forecasts is attributable to analysts minimizing symmetric, linear loss functions when the distribution of forecast errors is skewed. An alternative explanation for forecast bias is that analysts have asymmetric loss functions. We test this alternative explanation. Theory predicts that if loss functions are asymmetric then forecast error bias depends on forecast error variance, but not necessarily on forecast error skewness. Our results confirm that the ex ante forecast error variance is a significant determinant of forecast error and that, after controlling for variance, the sign of the coefficient on forecast error skewness is opposite to that found in prior research. Our results are consistent with financial analysts having asymmetric loss functions. Further analysis reveals that forecast bias varies systematically across style portfolios formed on book-to-price and market capitalization. These firm characteristics capture systematic variation in forecast error variance and skewness. Within style portfolios, forecast error variance continues to play a dominant role in explaining forecast error.

Are analysts? loss functions asymmetric?

Recent research by Gu and Wu (2003) and Basu and Markov (2004) suggests that the well-known optimism bias in analysts? earnings forecasts is attributable to analysts minimizing symmetric, linear loss functions when the distribution of forecast errors is skewed. An alternative explanation for forecast bias is that analysts have asymmetric loss functions. We test this alternative explanation. Theory predicts that if loss functions are asymmetric then forecast error bias depends on forecast error variance, but not necessarily on forecast error skewness. Our results confirm that the ex ante forecast error variance is a significant determinant of forecast error and that, after controlling for variance, the sign of the coefficient on forecast error skewness is opposite to that found in prior research. Our results are consistent with financial analysts having asymmetric loss functions. Further analysis reveals that forecast bias varies systematically across style portfolios formed on book-to-price and market capitalization. These firm characteristics capture systematic variation in forecast error variance and skewness. Within style portfolios, forecast error variance continues to play a dominant role in explaining forecast error.

General Kerr-NUT-AdS Metrics in All Dimensions

The Kerr-AdS metric in dimension D has cohomogeneity [D/2]; the metric components depend on the radial coordinate r and [D/2] latitude variables \mu_i that are subject to the constraint \sum_i \mu_i^2=1. We find a coordinate reparameterisation in which the \mu_i variables are replaced by [D/2]-1 unconstrained coordinates y_\alpha, and having the remarkable property that the Kerr-AdS metric becomes diagonal in the coordinate differentials dy_\alpha. The coordinates r and y_\alpha now appear in a very symmetrical way in the metric, leading to an immediate generalisation in which we can introduce [D/2]-1 NUT parameters. We find that (D-5)/2 are non-trivial in odd dimensions, whilst (D-2)/2 are non-trivial in even dimensions. This gives the most general Kerr-NUT-AdS metric in $D$ dimensions. We find that in all dimensions D\ge4 there exist discrete symmetries that involve inverting a rotation parameter through the AdS radius. These symmetries imply that Kerr-NUT-AdS metrics with over-rotating parameters are equivalent to under-rotating metrics. We also consider the BPS limit of the Kerr-NUT-AdS metrics, and thereby obtain, in odd dimensions and after Euclideanisation, new families of Einstein-Sasaki metrics.Comment: Latex, 24 pages, minor typos correcte

Rational W W algebras from composite operators

Factoring out the spin $1$ subalgebra of a $W$ algebra leads to a new $W$ structure which can be seen either as a rational finitely generated $W$ algebra or as a polynomial non-linear $W_\infty$ realization.Comment: 11 pages, LATEX, preprint ENSLAPP-AL-429/93 and NORDITA-93/47-

Variant N=(1,1) Supergravity and (Minkowski)_4 x S^2 Vacua

We construct the fermionic sector and supersymmetry transformation rules of a variant N=(1,1) supergravity theory obtained by generalized Kaluza-Klein reduction from seven dimensions. We show that this model admits both (Minkowski)_4 x S^2 and (Minkowski)_3 x S^3 vacua. We perform a consistent Kaluza-Klein reduction on S^2 and obtain D=4, N=2 supergravity coupled to a vector multiplet, which can be consistently truncated to give rise to D=4, N=1 supergravity with a chiral multiplet.Comment: Latex, 17 pages. Version appearing in Classical and Quantum Gravit

The determinants of the UK Big Firms Premium

Our study attempts to determine whether, and if so why, the large auditing firms are able to earn a premium on their audit work in the UK. We start by confirming the apparent existence of a Big Firm premium during the period 1985-2002. We examine industry specialisation, non audit service fee and monopoly pricing explanations for the premium. The results of our tests of industry specialisation are mixed. There is little evidence that this premium is associated with industry specialisation when specialists are defined at the national level. Significant premium are observed if specialisation is defined at the city level, particularly if the auditor is the industry leader. However, when appropriate allowance is made for endogeneity, by modelling both audit and non-audit fees in a simultaneous equations framework, the Big Firm premium disappears. We find evidence to suggest that non audit fees earned by auditors from their audit clients are positively related to the size of the audit size and vice versa. Finally, when the sample is stratified by the size of audit client, we find no systematic evidence of anti-competitive pricing

UK evidence of auditor brand name and industry specialisation

First draftThere is considerable empirical evidence that after controlling for factors known to affect the level of audit fees, the large international firms earn an audit fee premium. In this paper, we estimate a Big Six premium of 10% to 23% for a large sample of UK clients. Recent studies contend that the development of brand name and industry specialisation reputations is costly and the Big Six firms can expect a return from this investment. We find evidence consistent with brand name returns across most sub-samples of clients. However, the audit fees charged by the Big Six firms are not significantly higher than the fees charged by their non Big Six counterparts for the smallest quartile of clients. An explanation for this finding is that the demand for a firm with a brand name 'bottoms out' below a critical size because of the extra cost. The audit fees charged by the Big Six firms are not significantly higher for the sub-sample where industry specialisation is defined by the size of the non audit fee. An explanation for this result is that there may be an inter-relationship between the pricing of audit and non audit services. Unlike the prior literature, we find scant evidence of returns to industry specialisation. We believe that returns to specialisation are insignificant because the UK Big Six firms are large enough to be considered specialists across all markets

Importance of relative humidity in the oxidative ageing of organic aerosols: case study of the ozonolysis of maleic acid aerosol

Many important atmospheric aerosol processes depend on the chemical composition of the aerosol, e.g. water uptake and particle cloud interactions. Atmospheric ageing processes, such as oxidation reactions, significantly and continuously change the chemical composition of aerosol particles throughout their lifetime. These ageing processes are often poorly understood. In this study we utilize an aerosol flow tube set up and an ultra-high resolution mass spectrometer to explore the effect of relative humidity (RH) in the range of <5–90% on the ozonolysis of maleic acid aerosol which is employed as model organic aerosol system. Due to the slow reaction kinetics relatively high ozone concentrations of 160–200 ppm were used to achieve an appreciable degree of oxidation of maleic acid. The effect of oxidative ageing on the hygroscopicity of maleic acid particles is also investigated using an electrodynamic balance and thermodynamic modelling. RH has a profound effect on the oxidation of maleic acid particles. Very little oxidation is observed at RH < 50% and the only observed reaction products are glyoxylic acid and formic acid. In comparison, when RH > 50% there are about 15 oxidation products identified. This increased oxidation was observed even when the particles were exposed to high humidities long after a low RH ozonolysis reaction. This result might have negative implications for the use of water as an extraction solvent for the analysis of oxidized organic aerosols. These humidity-dependent differences in the composition of the ozonolyzed aerosol demonstrate that water is both a key reactant in the oxidation scheme and a determinant of particle phase and hence diffusivity. The measured chemical composition of the processed aerosol is used to model the hygroscopic growth, which compares favourably with water uptake results from the electrodynamic balance measurements. A reaction mechanism is presented which takes into account the RH dependent observations. This study emphasises the importance of studying the combined effects of several atmospheric parameters such as oxidants and RH to accurately describe the complex oxidation scheme of organic aerosols