ADVANCES IN QUANTITATIVE ANALYSIS OF FINANCE AND ACCOUNTING Volume 4 dito Cheng-Fe ADVANCES IN QUANTITATIVE ANALYSIS OF FINANCE AND ACCOUNTING Advances in Quantitative Analysis of Finance and Accounting Editorial Board Cheng F. Lee Mike J. Alderson James S. Ang K. R. Balachandran Thomas C. Chiang Thomas W. Epps Thomas J. Frecka Robert R. Grauer Puneet Handa Der-An Hsu Prem C. Jain Jevons C. Lee Wayne Y. Lee Scott C. Linn Gerald J. Lobo Yaw Mensah Thomas H. Noe Oded Palmon Louis O. Scott Andrew J. Senchak David Smith K. C. John Wei William W.S.Wei Chunchi Wu Uzi Yaari Rutgers University, USA University of St. Louis, USA Florida State University, USA New York University, USA Drexel University, USA University of Virginia, USA University of Notre Dame, USA Simon Fraser University, Canada University of Iowa, USA University of Wisconsin, Milwaukee, USA Georgetown University, USA Tulane University, USA Kent State University, USA University of Oklahoma, USA University of Houston, USA Rutgers University, USA Tulane University, USA Rutgers University, USA Morgan Stanley Dean Witter, USA University of Texas, Austin, USA Iowa State University, USA Hong Kong Technical University, Hong Kong Temple University, USA Syracuse University, USA Rutgers University, USA ADVANCES IN QUANTITATIVE ANALYSIS OF FINANCE AND ACCOUNTING Editor Cheng-Few Lee Rutgers University, USA YJ? World Scientific NEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TAIPEI • CHENNAI Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ADVANCES IN QUANTITATIVE ANALYSIS OF FINANCE AND ACCOUNTING Advances in Quantitative Analysis of Finance and Accounting — Vol. 4 Copyright © 2006 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. ISBN 981-270-021-8 Typeset by Stallion Press Email: enquiries@stallionpress.com Printed in Singapore by World Scientific Printers (S) Pte Ltd Preface to Volume 4 Advances in Quantitative Analysis of Finance and Accounting is an annual publication designed to disseminate developments in the quantitative analy- sis of finance and accounting. The publication is a forum for statistical and quantitative analyses of issues in finance and accounting as well as applica- tions of quantitative methods to problems in financial management, financial accounting, and business management. The objective is to promote interaction between academic research in finance and accounting and applied research in the financial community and the accounting profession. The papers in this volume cover a wide range of topics, including earnings management, management compensation, option theory and application, debt management and interest rate theory, and portfolio diversification. In this volume, there are 14 papers, seven of them apply accounting information to earnings management and management compensation: 1. Firm Performance and Compensation-Based Stock Trading by Corporate Execu- tives; 2. Management Compensation, Debt Contract, and Earnings Manage- ment Strategy; 3. Estimated Operating Cash Flow, Reported Cash Flow from Operating Activities, and Financial Distress; 4. Earnings Surprise and the Relative Information Content of Short Interest; 5. Group Types and Earn- ings Management; 6. The Tendency of Firm Managers to Avoid Small Losses; 7. Beating or Meeting Earnings-Based Target Performance in CEOs' Annual Cash Bonuses. Two of the remaining seven papers are related to option theory and appli- cation: 1. Real Option Based Equity Valuation Models: An Empirical Analysis; 2. The Shift Function for the Extended Vasicek Model. Three of the remaining five papers are related to debt management and interest rate theory: I. Risky Debt-Maturity Choice under Information Asymmetry; 2. A Bayesian Approach for Testing the Debt Signaling Hypothesis in a Transitional Market: Perspec- tives from Egypt; 3. Taking Positive Interest Rates Seriously. The remaining two papers are related to portfolio diversification: 1. Do Winners Perform Better Than Losers? A Stochastic Dominance Approach; 2. Corporate Diversification and the Price-Earnings Association. [...]... market value of equity and various accounting numbers reported in the financial statements For example, Landsman (1986), Barth (1991), and Shevlin (1991) examine the role of balance sheet measures in equity valuation Other studies such as Ball and Brown (1968), Barth, Beaver, and Landsman (1992), Collins and Kothari (1989), and Collins, Maydew, and Weiss (1997) examine an alternative income statement approach... 516-877 -46 18 Fax: 516-877 -46 07 Email: yang@adelphi.edu Chapter 13 Ben-Hsien Bao School of Accounting and Finance Hong Kong Polytechnic University, Hong Kong Tel.: 852-2766-7078 Email: afbhbao@inet.polyu.edu.hk xvi List of Contributors Da-Hsien Bao Accounting and Finance Department College of Business Rowan University New Jersey, USA Tel: 856-256 -45 00 Ext 3031 Email: bao@rowan.edu Chapter 14 Enlin Pan... Best Department of Accounting and Finance University of West Georgia Carrollton, GA 30118, USA Tel.: 678-839 -48 12 Email: rbest@westga.edu Chapter 7 Min-Jeng Shiue Department of Accounting National Taipei University, Taiwan Tel: 886-2-2502 -46 54 Ext 1 841 2 Fax: 886-2-2506-0730 Email: smj@mail.ntpu.edu.tw Chan-Jane Lin Department of Accounting National Taiwan University 1 Roosevelt Rd Sec 4 Taipei, Taiwan... Department of Business Management National Sun Yat-sen University 70 Lien-hai Rd Kaohsiung 8 04, Taiwan, R.O.C Tel.: 886-7-52 546 61 Fax: 886-7-52 546 62 Email: vwliu@mail.nsysu.edu.tw Chapter 4 Sheen Liu Williamson College of Business Administration Youngstown State University Youngstown, OH 44 5 04, USA Tel.: 330- 941 -7 149 Fax: 330- 941 - 145 9 Email: sheenxliu@yahoo.com Chunchi Wu Lee Kong Chian School of Business Singapore... ggpam@mail.npust.edu.tw xiv List of Contributors Chapter 10 Wing-Keung Wong Department of Economics National University of Singapore 1 Arts Link, Singapore 117570 Tel: 65-68 74- 60 14 Fax: 65-6775-2 646 Email: ecswwk@nus.edu.sg Howard E Thompson Department of Finance, Investment and Banking University of Wisconsin-Madison 975 University Avenue Madison, WI 53706, USA Tel: 608-831- 245 6 Fax: 608-262-6378 Email:... total common equity interest in the company, including common stock outstanding adjusted for treasury stocks, capital surplus, and retained earnings (COMPUSTAT item number A60; mnemonic CEQ) (3) The number of common shares outstanding at the year end, excluding treasury stocks and scrip (COMPUSTAT item number A25; mnemonic CSHO) (4) The income before extraordinary items and discontinued operations available... used in this study using Park's test (see Gujarati, 1992) and found no evidence of heteroscedasticity The results of our tests indicate an R2 of 0.00 and a f-value of 0.00 for the variables (Xit) and (Bit), an indication of homoscedasticity 5.3 Results from Model 1 Firms in the full sample were ranked according to accounting profitability (Xjt/Bit-\), the proxy for firm efficiency (q), and separated into... X Wei School of Accounting and Finance The Hong Kong Polytechnic University Hung Horn, Hong Kong Tel.: 852-2766-7056 Fax: 852-2330-9 845 Email: afweix@inte.polyu.edu.hk Ying-Foon Chow Department of Finance Chinese University of Hong Kong Shatin, New Territories Hong Kong Tel.: 852-2609-7638 Fax: 852-2603-6586 Email: yfchow@baf.msmail.cuhk.edu.hk Chapter 11 Shyan Yuan Lee Department of Finance National... is convex in both earnings and book value, and that the relative explanatory power of earnings and book value vary with accounting profitability Collins, Pincus, and Xie (1999) supplement the basic earnings capitalization model with book value in order to address the loss firm anomaly With their revised model, they show that the anomalous results disappear and that the earnings coefficient of the basic... observed by Collins, Pincus, and Xie (1999) in that book value appears to be a correlated omitted variable in Model 3, leading to an upward bias in the coefficient of earnings (y) A comparison of the results of Models 1 and 4 for the growth firms shows that Model 4 also has a noticeably lower explanatory power than does Model 1, even though it has two terms in place of the book value in Model 1 In addition, . ADVANCES IN QUANTITATIVE ANALYSIS OF FINANCE AND ACCOUNTING Volume 4 dito Cheng-Fe ADVANCES IN QUANTITATIVE ANALYSIS OF FINANCE AND ACCOUNTING. enquiries@stallionpress.com Printed in Singapore by World Scientific Printers (S) Pte Ltd Preface to Volume 4 Advances in Quantitative Analysis of Finance and Accounting is