Interest in the question of adequate corporate disclosure has never been greater than in recent years. Among the factors contributing to this increase in interest are the postwar trend of corporations to develop into the more complex conglomerates, the growing participation of institutional investors and the rising role of the financial analysts. The institutional investors, financial analysts, other shareholder groups, employees, credit grantors, professional organisations, Securities and Exchange Commissions, as well as others, are interested in disclosure on a more disaggregative basis by corporations to meet their diverse and sometimes overlapping needs for information. The rationale of adequate corporate disclosure is examined from the viewpoints of these different parties at interest. A related consideration is the accounting problem of materiality. It is suggested that an explicit guideline would provide a common approach in the interpretation and application of the materiality concept, thereby ensuring that a more consistent disclosure practice is followed. Unlike the interested external parties, who are only concerned with the informational aspect of corporate disclosure, management, however, must also consider its motivational, competitive, legal and cost implications. As would be expected, the general reaction of corporate management is one of opposition to more extensive disclosure. In the light of the foregoing considerations, a structure of factors relevant to estimate the present net worth of the estimated future benefits of and future costs of full corporate disclosure is presented, using as a model the technique of the value concept. / Business, Sauder School of / Graduate

For years, researchers have examined financial data in corporate earnings announcements and their influence on market participants. More recently, a body of research has been developing recognizing the impact of narrative disclosures and managers’ deliberate language choices. However, no prior studies have investigated those language choices of managers which are likely unintentional in composing such narratives; language choices which—as previous research has revealed—escape conscious access. Using an empirically-grounded model which systematically classifies different predicates, I examined whether managers use systematic patterns of language when construing the earnings press release in a likely unintentional effort to channel or direct readers’ attention. I found that managers write positive information using a more concrete construal than negative information. Additionally, I used experimental data to examine whether these systematic differences lead to different perceptions of the company and its value as an investment alternative. Nonprofessional investors performed an analysis of an earnings press release where I manipulated the valence of the narrative as positive or negative and the construal of the narrative as abstract or concrete. I found that these manipulations had an interactive influence on investment decisions. Specifically, investors were least likely to invest when a negatively valenced narrative was written concretely. I also found that the influence of the narrative on the investment decision was direct and not the result of the narrative influencing the investors’ focus of attention on the accompanying financial statements. Additionally, I tested whether the investor judgments were due to intentional cognitive effects and found that the influence of the narrative on the investment decision was not conscious on the part of the investor. Lastly, I conducted an analysis of archival data to examine the relationship between managers’ language use in forward-looking statements of the earnings press release and future firm performance and the extent to which the market responds to these linguistic clues. Results from the analysis suggest that construal is predictive of future firm performance and the market is incorporating this into pricing for firms that meet or beat earnings expectations.

Hedge funds feature special compensation structure compared to traditional investments. Previous studies mainly focus on the provisions and incentive structure of hedge fund contract, such as 2/20, hurdle rates, and high-water mark. The first essay develops an algorithm to empirically estimate the monthly fees, fund flows and gross asset values of individual hedge funds. We find that management fee is a major component in the dollar amount of hedge fund total fees, and fund flow is more important in determining the change in fund size compared to net returns, especially when fund is shrinking in size. We also find that best paid hedge funds concentrate in the largest hedge fund quintile. Large funds tend to perform better, earn more, and rely less on management fee for their managers' compensation. Further, we find that fund flow is an important determinant of hedge fund managerial incentives. Together with the "visible" hands of hedge fund management, i.e. the provisions of hedge fund incentive contracts, the "invisible" hands – fund flows enable investors to effectively impact hedge fund managerial compensation and incentives. The second essay studies the relation between return smoothing and managerial incentives of hedge funds. We use gross returns to estimate both unconditional and conditional return smoothing models. While unconditional return smoothing is a proxy of illiquidity, conditional return smoothing is related to intentional return smoothing and may be used as a first screen for hedge fund fraud. We find that return smoothing is significantly underestimated using net returns, especially for the graveyard funds. We also find that managerial incentives are positively associated with both types of return smoothing. While managers of more illiquid funds tend to earn more incentive fees, funds featuring conditional return smoothing underperform other funds and do not earn more incentive fees on average. Finally, we find that failed hedge funds feature more illiquidity and conditional return smoothing. The third essay explores the difference between the gross-of-fee and net-of-fee hedge fund performance, by investigating the difference in distribution, factor exposures and alphas between gross returns and net returns. We find that gross returns are distributed significantly differently from net returns. The gross-of-fee alphas are higher than the net-of-fee alphas by about 4% per year on average. We also find positive relation between hedge fund performance and fund size, fund flows, and managerial incentives, which holds for both gross-of-fee performance and net-of-fee performance. Our findings suggest that it is necessary to examine the gross-of-fee performance of hedge funds separately from the net-of-fee performance, which may give us a clearer picture of the risk structure and performance of hedge fund portfolios.

Taxation has permeated several areas of financial research including capital structure, dividend policy, mergers and acquisitions, asset allocation and investment policy. This paper consists of three essays that examine matters of taxation with respect to various investment instruments. The first paper looks at the relationship between after-tax mutual fund returns and the various mutual fund characteristics that affect those returns. Dickson and Shoven (1993) showed how capital gain realizations can significantly reduce after tax returns. Despite this finding, Bergstresser and Poterba (2002) provide evidence to show that some investors prefer not to postpone capital-gain realization. They document that funds that don't pass through capital gain distributions, and thus increase their embedded capital gains, experience smaller gross cash inflows and gross cash outflows, ceteris paribus, than funds without large capital gain overhangs. Barclay, Pearson and Weisbach (1998) present a model in which these unrealized gains in the funds portfolio increase expected future taxable distributions, and thus increase the present value of a new investor's tax liability. This paper, in part, is an extension of these works. It seeks to determine what factors trigger these future taxable distributions. The second paper shows how the calculation, as required by the SEC, of after-tax returns distorts after tax returns for mutual funds that make the I.R.C. section 853 election. It also shows that all rational fund managers should make the I.R.C. section 853 election. It examines the characteristics of funds that make the 853 election and shows that, ceteris paribus, electing funds produce superior, after tax returns. The third paper examines the impact of regulation on after tax returns. Traditionally, the SEC has promulgated regulations that limit hedge fund investing to wealthy, sophisticated investors. Recently, however, the market's desire for hedge fund exposure for the average investor has prompted lawmakers to pursue more stringent regulation of hedge funds. One goal of this regulation is to bring more parity between mutual funds and hedge funds. The purpose of this paper is to review the various legal and tax regulations that impact hedge fund and mutual fund returns and to suggest strategies to implement current regulations in such as was as to make hedge funds as tax efficient as other types of investments with similar return patterns.

This study develops and tests a model of sequential information use that considers the interactive effects of commitment to a prior decision, task importance and information sequence on the data attended to in an audit judgment task. Auditors' conservatism, the tendency to weight negative cues more heavily than positive cues, serves as a central component of the model. In addition, the model is used to show that both primary and recency in data use can occur due to the interaction of these factors. To test the model audit professionals evaluated the level of control risk present in the inventory cycle of a hypothetical company. Subjects either received no information on which to form an early belief, or were induced to form a commitment to a positive or negative initial belief. Task importance was manipulated by varying the level of inherent risk. The information sequence was manipulated by changing the order in which positive and negative evidence was presented. In addition to assessing control risk, each subject listed the information that was relevant to forming the assessment. One hundred twenty auditors participated from six large international accounting firms. In general, the model's predictions were supported by the findings. As predicted, auditors exhibited a strong general bias towards negative information. Risk assessments were most negative, and negative evidence was attended to most, when auditors were committed to a negative initial belief, task importance was high, and the initial control test results were negative. Both primacy and recency were observed, with the model correctly predicting such information use in ten of the twelve cases investigated. The strongest recency tendencies occurred with no prior commitment and low task importance. This study demonstrates the complex nature of the belief-updating process by illustrating the effects of various task characteristics on the process. It also identities factors that may account for conflicting findings of primacy and recency in prior studies. The results also emphasize the importance of incorporating the effects of task and environmental characteristics into a model of audit judgment.

Includes bibliographical references. / The packaging industry in South Africa is a large and diversified one. To classify all the applications would be well nigh impossible. Flexible packaging forms a very important part of the packaging industry and is itself divided into three basic groups, namely, the suppliers of basic materials, the converters and the product manufacturers who produce their own flexible packages. This thesis is concerned with the most prominent of these groups, namely the converters, that is, with those firms who convert basic materials into various forms of flexible packages, for product manufacturers. Flexible packages are now considered an integral part of the finished product and with the extensive application of flexible packaging for a very wide range of consumer products, they form part of the cost structure of these consumer products. The cost of flexible packaging is dependent upon a number of factors, such as the cost of the many different types of raw materials supplied to the converters and the cost of the highly specialised labour used. However the ability of converters to control costs, that is, to keep production costs within acceptable, limits is the most important factor. The effective control of costs is to a large degree dependent upon the successful application of management accounting techniques. This thesis attempts, as its prime object, to evaluate the use of such techniques in helping to achieve an effective control of costs in the converting firms.

The strictly regulated environment within which corporate accounting practice evolves, has traditionally paid little attention to the owner-managed corporation and the specific information needs of its owners. The literature, as well as recent corporate law amendments, though, hints strongly that owner-managed entities have different financial reporting priorities than their publicly accountable counterparts. This difference in financial reporting priorities calls for rethinking at the most fundamental level of financial reporting, i.e. accrual versus cash-basis financial reporting. This implies that the debate about the extent of sophistication that should be built into the accrual-basis model can only be conducted sensibly after the primary debate of accrual versus cash-basis, is resolved satisfactorily. The question as to whether measurement and recognition criteria within an accrual-basis model should be relaxed is therefore part of the secondary debate. The basic research question relates to the usefulness to owner-managers of cash-basis accounting compared to accrual-basis accounting. This thesis reports on the responses of 243 practising members of the South African Institute of Professional Accountants (SAIPA) regarding owner-manager needs and preferences regarding financial accounting recording and reporting practices. Semi- structured interviews were conducted with owner-managers to verify the understanding of the practitioners regarding owner-manager needs and preferences. The results showed and explained an apparent paradox: owner-managers have a strong cash focus in the way they understand and use financial information, but nevertheless prefer accrual-basis annual financial statements. The unresolved challenge identified by this study is to design a financial report which could better bridge the gap between accrual-basis and cash-basis accounting than the conventional statement of cash flow.

Includes bibliographical references (leaves 93-102).

Bibliography: leaves 66-70. / Hyperinflation, as defined in IAS 29, was identified in Zimbabwe in November 1999. Accordingly, the standard, and its General Price Level adjustments, was adopted for financial years beginning on 1st January 2000. However, there has been much resistance to the implementation of the standard, which is considered to require the provision of costly, meaningless information that is not used by anyone in the investment process. This study attempts to determine the use and perceived usefulness of IAS 29 in Zimbabwe and to identify the significant problems and weaknesses in the restatement process that have caused this. The study found both the use and perceived usefulness of IAS 29 General Price Level information to be extremely low. The major reason cited for this was the lack of user understanding. The other major problems related to the perception of inconsistent methods and assumptions in the restatement process, as well as the use of the CIP, accused of being manipulated by government, as the basis of restatement. These issues need to be addressed by the Institute of Chartered Accountants, in consultation with the other accounting regulatory bodies, before the use and perceived usefulness of the IAS 29 General Price Level information can improve. Further, the study indicates that, whilst the preparers of financial information are extremely undecided as to the manner in which the accounting regulatory bodies in Zimbabwe should proceed, the analysts using such information are very much in favour of retaining the disclosure of inflation adjusted figures in some form, until such time as the inherent usefulness of the information is either proved or disproved.

In the past two decades considerable research in finance and accounting has focused on the forecasting of accounting earnings. Financial practitioners and academics alike have long been interested in predicting corporate earnings. Exploration of the topic has provided a handsome livelihood to professionals in the investment community and has established many a scholarly reputation. This study develops an earnings prediction model that uses non-earnings accounting information in publicly available annual financial statements to predict future earnings changes. Although the relevance of non-earnings financial statement information to future earnings has been established, only Stober (1992) has examined whether non-earnings financial statement information explains additional aspects of the variability of future earnings beyond those predicted by competing sources of earnings expectations, e.g. analysts' earnings forecasts. In this study, we evaluate our earnings forecast, called a financial statement analysis forecast, relative to financial analysts' and share price-based forecasts both in terms of the accuracy of their prediction of earnings growth, and in terms of the contemporaneous association between unexpected earnings, measured using the alternative forecast sources, and security returns during the forecast year. Further this study examines the complementarity of the financial statement analysis forecast to financial analysts' forecasts in various contexts, i.e. prior performance, earnings uncertainty and firm size in predicting earnings and in measuring market earnings expectations. Finally, this study evaluates whether a financial statement analysis forecast is useful in developing a composite model for predicting earnings. The empirical results indicate that financial statement analysis forecasts complement financial analysts' and price-based forecasts in earnings predictions and security valuation. Further analysis on the potential complementarity of financial statement analysis forecasts to financial analysts' forecasts shows that the unique variation in financial statement analysis forecasts is relevant to earnings prediction and market associations in the various contexts mentioned above. Finally, this study provides evidence that indicates current developed earnings forecasts can be utilized in developing an earnings composite model that performs better than any single forecast source.