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Ebook Evidence from goodwill non-impairments on the effects of using unverifiable estimates in financial reporting

Submitted by puput on Sat, 05/08/2010 - 02:48

SFAS 142 requires managers to use estimates of their firms‘ discounted future values to determine goodwill write-offs. Such estimates are different from the discretion historically afforded in financial reporting in that they are ex post unverifiable. For example, under the standard, a manager of a single reporting-unit firm can avoid a goodwill write-off despite market indications to the contrary by generating a hypothetical firm value that exceeds the firm‘s liquid market value. Ex post, if the firm value used to justify non-impairment is not realized, the manager can claim it was due to factors outside her control (e.g., macroeconomic conditions). It is difficult to verify or falsify such a claim in a court of law (the claim cannot be objectively characterized as true or false, Ollman v. Evans, 750 F.2d 970, D.C. Cir., 1984). By promulgating SFAS 142, standard setters must implicitly assume that managers will, on average, use unverifiable discretion to convey private information on future cash flows. In contrast, agency theory predicts managers will, on average, use unverifiable discretion opportunistically. We test these alternate predictions in the paper.

We investigate managers‘ implementation of the goodwill impairment test in SFAS 142 in a sample of firms with market indications of goodwill impairment. We examine whether the goodwill non-impairment is associated with managers‘ private information on future cash flows (as standard setters likely expect) and/or with agency based motives. We do not find evidence to confirm the private information argument, but we do find evidence consistent with the agency argument.

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Ebook Business Groups’ Outward FDI: A Managerial Resources Perspective

Submitted by wulan on Wed, 04/28/2010 - 07:06

Foreign direct investment (FDI) originating from emerging economies raises new questions for international business research agendas (Luo and Tung, 2007; Gammeltoft, 2008; Athreye and Kapur 2009). In particular, these businesses appear to develop patterns of FDI that are different from multinationals from mature market economies (Matthew, 2006; Yiu, Lau and Bruton, 2007; Enright, 2007; Ramamurti and Singh, 2009; Yang et al., 2009.). This suggests reassessing the question of what determines the international scope of firms. In particular, how do resources available to businesses in emerging economies shape their path of internationalization?

Outward FDI is undertaken by firms aiming to exploit their resources and capabilities overseas (Dunning, 1993), or to acquire complementary resources (Lall 1983, Tolentino, 1993). The resources they can potentially exploit abroad depend on their own history of resource accumulation. Firms develop resources and capabilities in an evolutionary pattern conditioned by their context of operation (Nelson and Winter, 1992; Aldrich, 1999). Hence, the resources that firms can potentially exploit when investing abroad are an outcome of past interactions with their home context, especially in the case of firms originating from emerging economies (Yiu, Lau and Bruton, 2007; Elango and Pattnaik, 2007; Barnard, 2008). Hence, in this article, we argue that outward FDI from emerging economies ought to be explained by the resources of firms shaped by this environment.

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Ebook Liquidity Hoarding and Interbank Market Spreads: The Role of Counterparty Risk

Submitted by puput on Sat, 06/12/2010 - 06:36

Interbank markets play a key role in banks liquidity management and the transmission of monetary policy. They provide benchmark rates for the pricing of fixed&income securities throughout the economy (e.g. LIBOR). In normal times, interbank markets are among the most liquid in the financial sector. Since August 2007, however, the functioning of interbank markets has become severely impaired around the world. As the financial crisis deepened in September 2008, liquidity in the interbank market has further dried up as banks preferred hoarding cash instead of lending it out even at short maturities. Central banks massive injections of liquidity did little to restart interbank lending. The failure of the interbank market to redistribute liquidity has become a key feature of the 2007&09 crisis (see, for example, Allen and Carletti, 2008, and Brunnermeier, 2009).

Figure 1 illustrates the unprecedented extent of the turbulence. It plots the spread between the three&month unsecured rate and the overnight index swap in three monthsntime, a standard measure of interbank market tensions (red line), and the amounts of excess reserves banks hold with the European Central Bank (light and dark blue bars). A notable feature is the build up of tensions in the interbank market. Until August 9, 2007, the unsecured euro interbank market is characterized by a very low spread, around five basis points, and infinitesimal amounts of excess reserves with the European Central Bank (ECB). In normal times, banks prefer to lend out excess cash since the interest rate on excess reserves is punitive relative to rates available in interbank markets. The turmoil phase between August 9, 2007 and the last weekend of September 2008 is characterized by a significantly higher spread, yet excess reserves remain virtually nil. As of September 28, 2008, the spread increases even further to a maximum of 186 basis points. But the distinguishing feature of this crisis phase is a dramatic increase in excess reserves. Banks are hoarding liquidity. At the same time, the average daily volume in the overnight unsecured interbank market halved. A similar pattern of three distinct phases can be observed in the spread for the United States (Figure 2).

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