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This paper presents the author's opinion on the article Cost of Capital, Strategic Disclosures and Accounting Choice by M. B. Gietzmann and J. Ireland in the 2005 issue of the Journal of Business Finance & Accounting. In this paper it is argued that aggressive accounting is synonymous with positive discretionary accruals, for example, one such discretionary accrual is depreciation, whereby under depreciation will boost earnings and overstate the book value. The authors go to a great deal of care in identifying a suitable proxy. Their proxy is certainly timely with a lead-time of up to nine months ahead of financial statements. In general there is little evidence that values obtained from the implied cost of capital model are related to the more traditional methods of dividend growth models or the Capital Asset Pricing Model. There remains the possibility that firms that manipulate earnings are just poor quality firms and the market punishes them with a high cost of capital. A strength of the method chosen for the cost of capital is that it makes use of publicly available consensus forecasts of analysts, that is, the forecasts of next two or three years' earnings and the forecast of long-term growth.

Our purpose here is to assess whether the innate properties of the double entry bookkeeping system are such that financial ratios, calculated from the balance sheet summary measures implied by it, will be generated by distributional forms with non-convergent moments. Our analysis begins with a brief summary of some important analytical properties of the debt and equity components of the double entry bookkeeping system. We then use these to determine the time series and distributional properties of the debt to equity ratio itself. Our analysis shows that even when the evolution of balance sheet summary measures like debt and equity can be described by ‘well behaved’ distributional processes, there is a distinct possibility that ratios derived from them will evolve in terms of distributional forms with non-convergent moments. We argue that this has serious implications for parameter estimation as well as the integrity of the regression and/or discriminant procedures which underscore bankruptcy and financial distress prediction models based on financial ratios derived from the double entry bookkeeping system. [ABSTRACT FROM AUTHOR]

We state an Aggregation Theorem which shows that the recursion value of equity is functionally proportional to its adaptation value. Since the recursion value of equity is equal to its book value plus the expected present value of its abnormal earnings, it follows that the adaptation value of equity can normally be determined by a process of simple quadrature. We demonstrate the application of the Aggregation Theorem using two stochastic processes. The first uses the linear information dynamics of the Ohlson (1995) model. The second uses linear information dynamics based on the Cox, Ingersoll and Ross (1985)‘square root’ process. Both these processes lead to closed form expressions for the adaptation and overall market value of equity. There are, however, many other processes which are compatible with the Aggregation Theorem. These all show that the market value of equity will be a highly convex function of its recursion value. The empirical evidence we report for UK companies largely supports the convexity hypothesis. [ABSTRACT FROM AUTHOR]

Presents a discussion on the study paper "Performance of UK Investment Trusts: 1980-1994," by Kenbata Bangassa. Reason for the out-performance of market share; Expansion of the difference between the expected discrete return and the continuous return; Observations on the forecasts available to fund managers; Problems with the weakness of the forecasting ability.

This paper re-examines the methods of stochastic dominance and mean-variance analysis for the selection of risky investments. It takes as its starting point the paper by Gandhi and Saunders in the Spring 1981 issue of this journal in which they argued for the superiority of stochastic dominance analysis. In this paper the countercase is put forward for the use of mean-variance analysis. It is argued that while naive application of mean-variance criteria to the ranking of projects in isolation might lead to erroneous decisions, in the presence of reasonably sized capital markets rules based on mean-variance analysis still remain a more practical tool. [ABSTRACT FROM AUTHOR]

Opinion. Focuses on a model of econometric and inadequacies procedures in data. Reference to the paper by Tippett and Warnock; In depth look at the model; Information on the contents of the paper.

The article presents a model, which considers the interactions of corporation tax, Advance Corporation Tax (ACT) and Capital Gains Tax (CGT) and their impact on corporate behavior in Great Britain. It tries to apply techniques used to model the US system in analyzing the impact of UK taxes on the gearing and dividend decisions. The taxes considered, Advance Corporation Tax (ACT) and Capital Gains Tax (CGT) are both characterized by a body of legislation, which has been introduced piecemeal. The legislation is also criticized as having been hastily drafted, with insufficient consideration of its long-term impact. The approach adopted is based on the model developed by researcher H. DeAngelo and R.W. Masulis (DM). The DM model investigates the implications for corporate gearing decisions of the existence of corporate tax shield substitutes for debt. DM points out that there are tax-deductible items other than debt interest, which are not directly related to a company's cash outflows. A company's net cash earnings might therefore be too low to utilize all available tax relieves.