Marc Simpson and Axel Grossmann
To determine the effect that covenants have on the credit ratings assigned by the two major agencies.
Abstract
Purpose
To determine the effect that covenants have on the credit ratings assigned by the two major agencies.
Design/methodology/approach
The authors examine 1,822 bond issues from 1991 to 2018, with a two-stage methodology to account for the endogeneity of the firms' choices and the ordinal nature of the ratings. The authors use Hendry's model selection method to find the best-fitting models from 37 control variables; the final models feature 20–24 orthogonalized variables, all significant at 5% and most at 1%.
Findings
The study’s results suggest that restrictive covenants positively affect ratings, particularly for bonds on the border of junk and investment grade. However, this effect appears to be decreasing with time, suggesting the financial crisis of 2008 has impacted ratings. Additionally, divergent covenant treatment leads to split ratings where the two agencies assign different levels of ratings on the same bonds. The study’s findings provide key insights into the factors that differentiate ratings given by each agency.
Practical implications
Managers must balance the perceived benefits of covenants against the costs, included lower credit ratings.
Originality/value
No other study has examined this issue controlling for both the ordinal nature of the ratings and the endogeneity in the decision to include specific covenants.
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Gary Moore and Marc William Simpson
Using various proxies for the firms' return on equity (ROE) and retention ratios (b) the authors calculate 36 sustainable growth rates, on a rolling basis, for a comprehensive set…
Abstract
Purpose
Using various proxies for the firms' return on equity (ROE) and retention ratios (b) the authors calculate 36 sustainable growth rates, on a rolling basis, for a comprehensive set of firms over a 52-year period. The authors then assess the ability of these different sustainable growth rates to predict the actual, out-of-sample, five-year growth rates of the firms' earnings.
Design/methodology/approach
The authors compare the forecast to determine which method of estimating ROE and b produce the lowest mean-squared-errors and then determine the estimation method that works best for firms with different characteristics and for firms in different industries.
Findings
Overall, using the median ROE of all firms in the market and the 5-year average of the specific firm's retention ratio produces the lowest, statistically significant, forecast errors. Variations are documented based on firm characteristics, including dividend payout, level of ROE and industry.
Practical implications
The findings can guide practitioners in using the best earnings forecasting method.
Originality/value
Financial textbooks seem universally to suggest that one method of estimating the growth rate of a firm's earnings is to calculate the “sustainable growth rate” by multiplying the firm's ROE by the firm's b. At the same time, multiple methods of proxying for both ROE and b have been suggested; therefore, it is an interesting and useful empirical question, which, heretofore, has not been addressed in the literature, as to which estimation of the sustainable growth rate best approximates the actual future growth of the firm's earnings. The findings can guide practitioners in using the best earnings forecasting method.
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Marc W. Simpson and Sanjay Ramchander
This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory…
Abstract
This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory power, however, is contingent on the particular survey question employed and the forecast horizon under consideration. The study finds that the survey question regarding car purchases does especially well in predicting the future direction of exchange rate movements. Furthermore, the results generally indicate that the survey is more useful when making distant (i.e., 12‐month ahead) currency forecast than for making near term (i.e., 3‐month and 6‐month ahead) predictions.
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Hassan R. HassabElnaby, Ahmed Abdel-Maksoud and Amal Said
Decision-making rationality is said to be bounded by managers’ cognitive capabilities. Recent studies indicate that accounting functions evolved to augment the cognitively bounded…
Abstract
Decision-making rationality is said to be bounded by managers’ cognitive capabilities. Recent studies indicate that accounting functions evolved to augment the cognitively bounded human brain in handling complex economic exchanges. The neuroscience discipline suggests that human brains have the ability to implement “automatic” processes of positive versus negative emotional stimuli to make rational decisions. Neuroscientific evidence shows that the activations in the ventral striatum decrease with negative emotional information/motives and increase with positive emotional information/motives. The authors, hence, argue that our understanding of the decision-making rationality in financial and managerial decisions could be enhanced by using a functional neuroimaging approach.
Decision-making rationality has been focal in debt covenant violation and earnings management research. The contracting theory predicts a relationship between managers’ decisions and the proximity of violating debt covenants. However, no prior research has investigated brain activities associated with the evaluation of debt covenant violation and earnings management. Meanwhile, in another strand of research, there is an extensive prior literature concerning the consequences of managers’ decisions and the use of accounting information in relation to their evaluative style, i.e., supervisory style. The authors argue that the relationship between the proximity to debt covenants violation and earnings management incentives is contingent upon managers’ supervisory style. However, no previous research has examined the impact of the supervisory style on earnings management in the context of the proximity to debt covenants violation and other earnings management incentives.
In this research note, we argue that neuroaccounting could be relied on to examine the relationship between the proximity to debt covenants and earnings management, contingent upon managers’ supervisory style, by capturing brain activities. The adoption of the neuroscience functional neuroimaging approach in this field should contribute to the understanding of managers’ behaviors and provide implications for research and practitioners. The goal of this research note is to provide a new avenue for future research in this field.
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Abdus Sattar ChaPudhry and Makeswary Periasamy
MARC records and online policy documents of selected libraries were reviewed to study the approaches taken by libraries worldwide to catalogue electronic journals. In general…
Abstract
MARC records and online policy documents of selected libraries were reviewed to study the approaches taken by libraries worldwide to catalogue electronic journals. In general, libraries catalogue those electronic journals that are subscribed by them on priority basis. Most of them annotate the e‐journal to the print record, some prefer to catalogue them separately, while the majority of the libraries adopt both approaches. While most of the libraries studied prefer full record, cataloguing e‐journals separately with a brief record (at least containing MARC fields 245, 500, and 856) that identifies and locates the resource seems to be the best practice.
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From this issue onwards all major articles appearing in VINE will include an abstract, and I hope that this will be of use to many readers. I am greatly indebted to Gordon Hynd…
Abstract
From this issue onwards all major articles appearing in VINE will include an abstract, and I hope that this will be of use to many readers. I am greatly indebted to Gordon Hynd, Information/Research Assistant in Perth and Kinross District Council's Planning Department for agreeing to undertake the task of preparing the abstracts, often from copy of enormous illegibility and at very short notice.
Caryl McAllister and A. Stratton McAllister
This paper discusses some of the characteristics of online cataloging systems. Two basic types of interaction with a cataloging system are distinguished:
VINE is a Very Informal Newsletter produced three times a year by the Information Officer for Library Automation and financed by the British Library Research & Development…
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VINE is a Very Informal Newsletter produced three times a year by the Information Officer for Library Automation and financed by the British Library Research & Development Department. It is issued free of charge on request to interested librarians, systems staff and library college lecturers. VINE'S objective is to provice an up‐to‐date picture of work being done in U.K. library automation which has not been reported elsewhere.
VINE is produced at least four times a year with the object of providing up‐to‐date news of work being done in the automation of library housekeeping processes, principally in the…
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VINE is produced at least four times a year with the object of providing up‐to‐date news of work being done in the automation of library housekeeping processes, principally in the UK. It is edited and substantially written by Tony McSean, Information Officer for Library Automation based in Southampton University Library and supported by a grant from the British Library Research and Development Department. Copyright for VINE articles rests with the British Library Board, but opinions expressed in VINE do not necessarily reflect the views and policies of the British Library. The subscription to VINE is £17 per annum and the period runs from January to December.
VINE is produced at least four times a year with the object of providing up‐to‐date news of work being done in the automation of library housekeeping processes, principally in the…
Abstract
VINE is produced at least four times a year with the object of providing up‐to‐date news of work being done in the automation of library housekeeping processes, principally in the UK. It is edited and substantially written by the Information Officer for Library Automation based in Southampton University Library and supported by a grant from the British Library Research and Development Department. Copyright for VINE articles rests with the British Library Board, but opinions expressed in VINE do not necessarily reflect the views and policies of the British Library. The subscription for VINE is £17 per annum and the period runs from January to December.