The binary classification of firms into profits or losses represents a powerful heuristic. The li... more The binary classification of firms into profits or losses represents a powerful heuristic. The literature that has examined the impact on the firm of this earnings heuristic has focused on the earnings management actions of small profit firms. The impact of this earnings heuristic on the actions of firms reporting accounting losses and the decision-making effects the heuristic may have other than earnings management have not been examined. In this study we hypothesize that reporting an accounting loss acts as a heuristic trigger for firms to exercise the abandonment option and discard unproductive investments. The results are consistent with the hypothesis. We find that there is a sharp and economically significant discontinuity around zero in the level of investment in labor between small profit and small loss firms. The discontinuity is due to loss firms having a lower-than-expected level of investment in labor, given their economic fundamentals. Further tests show that this discontinuity is due to the exercise of the abandonment option. We find that firms switching from a profit to a loss cut labor to a greater extent than other firms with similar changes in earnings that do not pass the loss threshold. Taken together the results are consistent with the accounting loss heuristic acting as a major disciplinary or incentive altering event that resolves agency problems.
We examine the performance and portfolio characteristics of actively managed equity funds impacte... more We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that post-replacement, previously poor performing funds experience improved returns. However this improved performance is not attributable to superior stock selection skill, but due to mean reversion in returns. We also find these new managers decrease their reliance on momentum strategies and decrease the portfolio's concentration, which then leads to a reduced tracking error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover. † Corresponding author.
ABSTRACT Recent research has documented that firms that miss the earnings benchmark of reporting ... more ABSTRACT Recent research has documented that firms that miss the earnings benchmark of reporting a profit have a higher cost of debt and has found mixed evidence of negative share-price consequences. This leads us to hypothesize that reporting a loss, due to its use as heuristic rather than economic fundamentals, has an impact both on the decision to raise external finance and the choice between debt versus equity financing. The results are consistent with the hypothesis. We find that there is a sharp and economically-significant discontinuity around the zero-earnings threshold in the level of both equity and debt issues. Firms reporting small losses have significantly lower levels of debt and equity issues than firms reporting small profits. We also find that the loss heuristic has an impact on the debt-equity choice. The loss heuristic has a greater impact on debt relative to equity issuance resulting in loss firms issuing less debt relative to equity. Taken together the results are consistent with the profit versus loss heuristic having an impact on the security-issue decision that is incremental to the traditional theories.
ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristi... more ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristic. In this study we hypothesize that the profit versus loss heuristic has an impact on the decision to raise external finance. The results are consistent with the hypothesis. We find that there is a sharp and economically significant discontinuity around the zero earnings threshold in the level of external finance raised between small profit and small loss firms. The discontinuity is due to loss firms having a lower level of external finance. Taken together the results are consistent with the profit versus loss heuristic having an impact on capital structure and the security issue decision that is incremental to the traditional theories.
ABSTRACT We use a large panel of Australian audit market data to shed light on the determinants o... more ABSTRACT We use a large panel of Australian audit market data to shed light on the determinants of audit market structure. The panel spans nearly 50 years, and begins before the emergence of the Big 4 in Australia. Over this period, the size distribution of companies becomes increasingly dominated by a small number of large, complex entities. We argue that this caused a structural shift in the demand for audit services and necessitated investments by auditors in endogenous sunk costs (Sutton, 1991), which led to the emergence of a small set of increasingly dominant audit firms. We provide evidence consistent with these ideas. The results have implications for the current regulatory debate on audit market concentration and the role of the Big 4.
This study examines whether active investment managers profit over the short-term or hold static ... more This study examines whether active investment managers profit over the short-term or hold static positions (i.e. interpreting) in stocks surrounding public earnings announcements. We utilize a database comprising the daily transactions of institutional equity managers to quantify both the returns generated and the types of trading behavior exhibited by institutions surrounding earnings releases. We also examine whether managers are rational in constructing their trading strategies, and find evidence of irrationality based on portfolio weights. Whilst overweight managers appear to behave rationally, under-weight managers do not.
... Matthew Pinnuck, Department of Accounting and Business Information Systems, The University of... more ... Matthew Pinnuck, Department of Accounting and Business Information Systems, The University of Melbourne, Melbourne, Australia. ... This standard did not require the recognition and measurement of share-based payments due to the opposition to ED 127C (Coulton and Taylor ...
Journal of Business Finance <html_ent glyph="@amp;" ascii="&"/> Accounting, 2006
This study examines the extent to which seasonal variation arises across calendar months in the p... more This study examines the extent to which seasonal variation arises across calendar months in the performance of active Australian equity managers. While it is well documented that there is seasonality in equity market returns, it is unknown whether calendar month variation in managed fund performance exists. Employing a unique database of monthly stock holdings, we find evidence consistent with systematic variation in the risk-adjusted performance of active investment managers over the calendar year. Specifically, we find fund performance is higher in the months when corporate earnings are announced. We also document that the performance of fund managers is lower in the months preceding the tax year-end. Finally, we report evidence that investment manager performance is greater than normal in December, possibly due to both window dressing and the Christmas holiday effect. These findings have important implications for investors attempting to exploit anomalies in fund returns by timing their entry and exit points from active equity funds.
Our aim is to provide insight into the usefulness of accounting earnings for measuring the econom... more Our aim is to provide insight into the usefulness of accounting earnings for measuring the economic performance of local governments across Australia. Specifically, we explore whether (i) accrual accounting provides useful information, and (ii) earnings of local governments are conservative. We find that accrual accounting by local governments provides useful information as measured by the ability to predict one-year-ahead operating cash-flows. We find no conservatism in the financial reports of the average local government. This, we posit, is due to a lower level of demand for high-quality accrual-based financial reports from these entities. Consistent with this argument, both the quality of accruals and the degree of conservatism increase for local governments for which we predict a demand for higher-quality financial reporting.
International Journal of Accounting Information Systems, 2010
... Colin Ferguson a , Corresponding Author Contact Information , E-mail The Corresponding Author... more ... Colin Ferguson a , Corresponding Author Contact Information , E-mail The Corresponding Author , Frank Finn b , Jason Hall b and Matt Pinnuck ... a number of different types of corporate events such as asset acquisitions ([Asquith, 1983], [Agrawal et al., 1992], [Loughran and Vijh ...
We examine the performance and portfolio characteristics of actively managed equity funds impacte... more We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that, post-replacement, previously poor performing funds experience improved returns. However, this improved performance is not attributable to superior stock selection skill. We also find these new managers decrease the fund's reliance on momentum strategies and decrease the portfolio's concentration, which then leads to a reduced tracking-error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover.
ABSTRACT This paper examines the extent to which the profit versus loss heuristic directly affect... more ABSTRACT This paper examines the extent to which the profit versus loss heuristic directly affects debt issuance decisions. We hypothesize that reporting a loss and its use as a heuristic rather than firms’ economic fundamentals has an impact both on the decision to raise external debt finance and on the choice between debt and equity financing. The results are consistent with the hypothesis. We find that there is a sharp and economically-significant discontinuity around the zero-earnings threshold in the level of debt issues. Firms reporting small losses issue significantly less debt than firms reporting small profits. We also find that the loss heuristic has an impact on the choice between debt and equity in that loss firms issue less debt relative to equity. Taken together the results are consistent with the notion that profit versus loss heuristic impacts the debt issuance decision and provide explanations that add to those offered by the traditional theories.
ABSTRACT We investigate the risk-return characteristics of merger arbitrage in the Australian mar... more ABSTRACT We investigate the risk-return characteristics of merger arbitrage in the Australian market for corporate control, whereby hedge fund managers acquire companies subject to a takeover offer. On average, a strategy of buying target companies and short-selling bidders making scrip offers would have generated an annual return of 30 per cent from 1985-2008, excluding transaction costs, compared to the return on the broader market of 12 per cent. However, performance is not market neutral, being positively associated with market returns during downturns and inversely related to market movements during rising markets. The payoffs to this strategy are analogous to a short straddle, whereby the investor is short a call and put option at the same exercise price. These results are consistent with large-sample evidence from the United States and the United Kingdom and have not previously been documented in Australia, in which prior evidence is based only on cash deals during the 1990’s.
In this study, we examine the factors that contribute to the financial performance of clubs in th... more In this study, we examine the factors that contribute to the financial performance of clubs in the Australian Football League over the period from 1993 to 2002. Primarily, we examine the association between the on-field football success of clubs and their level of off-field financial performance. We find that match attendance is positively related to both short-term and long-term success of football clubs and also to the uncertainty as to the match outcome (i.e. the expected closeness of the match). We also find that club membership is highly persistent and is positively related to both the past football success of the club and the marketing expense incurred. Finally, we find that there is a significant association between the level of marketing revenue and the level of on-field success in the prior 2 years. Australian Rules Football is a national sport and maintains a position as the leading spectator sport throughout Australia. Accordingly, the significance of professional team sports generally, and of AFL operations in particular, makes understanding the factors affecting the financial performance of AFL clubs important for a variety of stakeholders (see also .
Recent studies of fund manager performance find evidence of outperformance. However limited resea... more Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers' superior information. We document an increased occurrence of buy-sell trade sequences around good-news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good-news earnings announcements and being 'short-term profiteers'. We find no evidence that fund managers have private information about forthcoming bad-news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad-news earnings announcements only to subsequently sell during announcements.
ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristi... more ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristic. The literature that has examined the impact on the firm of this earnings heuristic has focused on the earnings management actions of small profit firms. The impact of this earnings heuristic on the actions of firms reporting accounting losses and the decision making effects the heuristic may have other than earnings management have not been examined. In this study we hypothesize that reporting an accounting loss acts as a heuristic trigger for firms to exercise the abandonment option and discard unproductive investments. The results are consistent with the hypothesis. We find that there is a sharp and economically significant discontinuity around zero in the level of investment in labor between small profit and small loss firms. The discontinuity is due to loss firms having a lower than expected level of investment in labor given their economic fundamentals. Further tests show that this discontinuity is due to the exercise of the abandonment option. We find that firms switching from a profit to a loss cut labor to a greater extent than other firms with similar changes in earnings that do not pass the loss threshold. Taken together the results are consistent with the accounting loss heuristic acting as a major disciplinary or incentive altering event that resolves agency problems.
The binary classification of firms into profits or losses represents a powerful heuristic. The li... more The binary classification of firms into profits or losses represents a powerful heuristic. The literature that has examined the impact on the firm of this earnings heuristic has focused on the earnings management actions of small profit firms. The impact of this earnings heuristic on the actions of firms reporting accounting losses and the decision-making effects the heuristic may have other than earnings management have not been examined. In this study we hypothesize that reporting an accounting loss acts as a heuristic trigger for firms to exercise the abandonment option and discard unproductive investments. The results are consistent with the hypothesis. We find that there is a sharp and economically significant discontinuity around zero in the level of investment in labor between small profit and small loss firms. The discontinuity is due to loss firms having a lower-than-expected level of investment in labor, given their economic fundamentals. Further tests show that this discontinuity is due to the exercise of the abandonment option. We find that firms switching from a profit to a loss cut labor to a greater extent than other firms with similar changes in earnings that do not pass the loss threshold. Taken together the results are consistent with the accounting loss heuristic acting as a major disciplinary or incentive altering event that resolves agency problems.
We examine the performance and portfolio characteristics of actively managed equity funds impacte... more We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that post-replacement, previously poor performing funds experience improved returns. However this improved performance is not attributable to superior stock selection skill, but due to mean reversion in returns. We also find these new managers decrease their reliance on momentum strategies and decrease the portfolio's concentration, which then leads to a reduced tracking error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover. † Corresponding author.
ABSTRACT Recent research has documented that firms that miss the earnings benchmark of reporting ... more ABSTRACT Recent research has documented that firms that miss the earnings benchmark of reporting a profit have a higher cost of debt and has found mixed evidence of negative share-price consequences. This leads us to hypothesize that reporting a loss, due to its use as heuristic rather than economic fundamentals, has an impact both on the decision to raise external finance and the choice between debt versus equity financing. The results are consistent with the hypothesis. We find that there is a sharp and economically-significant discontinuity around the zero-earnings threshold in the level of both equity and debt issues. Firms reporting small losses have significantly lower levels of debt and equity issues than firms reporting small profits. We also find that the loss heuristic has an impact on the debt-equity choice. The loss heuristic has a greater impact on debt relative to equity issuance resulting in loss firms issuing less debt relative to equity. Taken together the results are consistent with the profit versus loss heuristic having an impact on the security-issue decision that is incremental to the traditional theories.
ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristi... more ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristic. In this study we hypothesize that the profit versus loss heuristic has an impact on the decision to raise external finance. The results are consistent with the hypothesis. We find that there is a sharp and economically significant discontinuity around the zero earnings threshold in the level of external finance raised between small profit and small loss firms. The discontinuity is due to loss firms having a lower level of external finance. Taken together the results are consistent with the profit versus loss heuristic having an impact on capital structure and the security issue decision that is incremental to the traditional theories.
ABSTRACT We use a large panel of Australian audit market data to shed light on the determinants o... more ABSTRACT We use a large panel of Australian audit market data to shed light on the determinants of audit market structure. The panel spans nearly 50 years, and begins before the emergence of the Big 4 in Australia. Over this period, the size distribution of companies becomes increasingly dominated by a small number of large, complex entities. We argue that this caused a structural shift in the demand for audit services and necessitated investments by auditors in endogenous sunk costs (Sutton, 1991), which led to the emergence of a small set of increasingly dominant audit firms. We provide evidence consistent with these ideas. The results have implications for the current regulatory debate on audit market concentration and the role of the Big 4.
This study examines whether active investment managers profit over the short-term or hold static ... more This study examines whether active investment managers profit over the short-term or hold static positions (i.e. interpreting) in stocks surrounding public earnings announcements. We utilize a database comprising the daily transactions of institutional equity managers to quantify both the returns generated and the types of trading behavior exhibited by institutions surrounding earnings releases. We also examine whether managers are rational in constructing their trading strategies, and find evidence of irrationality based on portfolio weights. Whilst overweight managers appear to behave rationally, under-weight managers do not.
... Matthew Pinnuck, Department of Accounting and Business Information Systems, The University of... more ... Matthew Pinnuck, Department of Accounting and Business Information Systems, The University of Melbourne, Melbourne, Australia. ... This standard did not require the recognition and measurement of share-based payments due to the opposition to ED 127C (Coulton and Taylor ...
Journal of Business Finance <html_ent glyph="@amp;" ascii="&"/> Accounting, 2006
This study examines the extent to which seasonal variation arises across calendar months in the p... more This study examines the extent to which seasonal variation arises across calendar months in the performance of active Australian equity managers. While it is well documented that there is seasonality in equity market returns, it is unknown whether calendar month variation in managed fund performance exists. Employing a unique database of monthly stock holdings, we find evidence consistent with systematic variation in the risk-adjusted performance of active investment managers over the calendar year. Specifically, we find fund performance is higher in the months when corporate earnings are announced. We also document that the performance of fund managers is lower in the months preceding the tax year-end. Finally, we report evidence that investment manager performance is greater than normal in December, possibly due to both window dressing and the Christmas holiday effect. These findings have important implications for investors attempting to exploit anomalies in fund returns by timing their entry and exit points from active equity funds.
Our aim is to provide insight into the usefulness of accounting earnings for measuring the econom... more Our aim is to provide insight into the usefulness of accounting earnings for measuring the economic performance of local governments across Australia. Specifically, we explore whether (i) accrual accounting provides useful information, and (ii) earnings of local governments are conservative. We find that accrual accounting by local governments provides useful information as measured by the ability to predict one-year-ahead operating cash-flows. We find no conservatism in the financial reports of the average local government. This, we posit, is due to a lower level of demand for high-quality accrual-based financial reports from these entities. Consistent with this argument, both the quality of accruals and the degree of conservatism increase for local governments for which we predict a demand for higher-quality financial reporting.
International Journal of Accounting Information Systems, 2010
... Colin Ferguson a , Corresponding Author Contact Information , E-mail The Corresponding Author... more ... Colin Ferguson a , Corresponding Author Contact Information , E-mail The Corresponding Author , Frank Finn b , Jason Hall b and Matt Pinnuck ... a number of different types of corporate events such as asset acquisitions ([Asquith, 1983], [Agrawal et al., 1992], [Loughran and Vijh ...
We examine the performance and portfolio characteristics of actively managed equity funds impacte... more We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that, post-replacement, previously poor performing funds experience improved returns. However, this improved performance is not attributable to superior stock selection skill. We also find these new managers decrease the fund's reliance on momentum strategies and decrease the portfolio's concentration, which then leads to a reduced tracking-error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover.
ABSTRACT This paper examines the extent to which the profit versus loss heuristic directly affect... more ABSTRACT This paper examines the extent to which the profit versus loss heuristic directly affects debt issuance decisions. We hypothesize that reporting a loss and its use as a heuristic rather than firms’ economic fundamentals has an impact both on the decision to raise external debt finance and on the choice between debt and equity financing. The results are consistent with the hypothesis. We find that there is a sharp and economically-significant discontinuity around the zero-earnings threshold in the level of debt issues. Firms reporting small losses issue significantly less debt than firms reporting small profits. We also find that the loss heuristic has an impact on the choice between debt and equity in that loss firms issue less debt relative to equity. Taken together the results are consistent with the notion that profit versus loss heuristic impacts the debt issuance decision and provide explanations that add to those offered by the traditional theories.
ABSTRACT We investigate the risk-return characteristics of merger arbitrage in the Australian mar... more ABSTRACT We investigate the risk-return characteristics of merger arbitrage in the Australian market for corporate control, whereby hedge fund managers acquire companies subject to a takeover offer. On average, a strategy of buying target companies and short-selling bidders making scrip offers would have generated an annual return of 30 per cent from 1985-2008, excluding transaction costs, compared to the return on the broader market of 12 per cent. However, performance is not market neutral, being positively associated with market returns during downturns and inversely related to market movements during rising markets. The payoffs to this strategy are analogous to a short straddle, whereby the investor is short a call and put option at the same exercise price. These results are consistent with large-sample evidence from the United States and the United Kingdom and have not previously been documented in Australia, in which prior evidence is based only on cash deals during the 1990’s.
In this study, we examine the factors that contribute to the financial performance of clubs in th... more In this study, we examine the factors that contribute to the financial performance of clubs in the Australian Football League over the period from 1993 to 2002. Primarily, we examine the association between the on-field football success of clubs and their level of off-field financial performance. We find that match attendance is positively related to both short-term and long-term success of football clubs and also to the uncertainty as to the match outcome (i.e. the expected closeness of the match). We also find that club membership is highly persistent and is positively related to both the past football success of the club and the marketing expense incurred. Finally, we find that there is a significant association between the level of marketing revenue and the level of on-field success in the prior 2 years. Australian Rules Football is a national sport and maintains a position as the leading spectator sport throughout Australia. Accordingly, the significance of professional team sports generally, and of AFL operations in particular, makes understanding the factors affecting the financial performance of AFL clubs important for a variety of stakeholders (see also .
Recent studies of fund manager performance find evidence of outperformance. However limited resea... more Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers' superior information. We document an increased occurrence of buy-sell trade sequences around good-news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good-news earnings announcements and being 'short-term profiteers'. We find no evidence that fund managers have private information about forthcoming bad-news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad-news earnings announcements only to subsequently sell during announcements.
ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristi... more ABSTRACT The binary classification of firms into profits or losses represents a powerful heuristic. The literature that has examined the impact on the firm of this earnings heuristic has focused on the earnings management actions of small profit firms. The impact of this earnings heuristic on the actions of firms reporting accounting losses and the decision making effects the heuristic may have other than earnings management have not been examined. In this study we hypothesize that reporting an accounting loss acts as a heuristic trigger for firms to exercise the abandonment option and discard unproductive investments. The results are consistent with the hypothesis. We find that there is a sharp and economically significant discontinuity around zero in the level of investment in labor between small profit and small loss firms. The discontinuity is due to loss firms having a lower than expected level of investment in labor given their economic fundamentals. Further tests show that this discontinuity is due to the exercise of the abandonment option. We find that firms switching from a profit to a loss cut labor to a greater extent than other firms with similar changes in earnings that do not pass the loss threshold. Taken together the results are consistent with the accounting loss heuristic acting as a major disciplinary or incentive altering event that resolves agency problems.
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Papers by Matt Pinnuck