Accounting standards, Uniformity, Auditing

Forecasting, Box Jenkins method, Earnings forecasts, EPS

In recent years, there has been an increased emphasis on the forecasting of accounting earnings using the Box-Jenkins method of forecasting via autoregressive integrated moving average (ARIMA) models.' Generally, however, these models are univariate by definition and do not provide for the statistical modeling of events which occur outside of the earnings series. The purpose of this study is to explore the impact of this limitation by employing a more general approach which incorporates market and industry index data into the forecast model. One reason for exploring this more general approach is that Financial analysts have long recognized that economy-wide and industry-wide factors affect the financial numbers of individual firms. Index models enable quantification of the effects of these factors. Such quantification can be important when assessing financial trends in a firm and forecasting financial variables (Foster [1978, p. 155]; see also Brown and Ball [1967] for further motivation for index models). This objective can be achieved through the use of the single-input transfer-function method developed by Box and Jenkins [1970]. The transfer function provides a more generalized form of the ARIMA model by incorporating an additional predictor variable, in addition to past earnings, in the form of a market or industry price index. Section 1 contains a brief discussion of the transfer function and

This study compares the dividend policies of independently owned and bank holding company-affiliated commercial banks. The hypothesis tested is that there exists a significant, positive relationship between the amount of cash dividends paid by a bank and its affiliation with a holding company. The issue is an important one because the distribution of earnings as dividends obviously reduces a bank's ability to generate capital internally, and retained earnings have been the chief source of growth in bank equity capital. For some time the bank supervisory authorities have been concerned over the relative decline in importance of capital in the balance sheet of the average bank, such funds permitting banks to absorb unexpected losses and weather periods of financial crises. Capital adequacy is thus a major consideration in the regulators' assessment of bank dividend policy. Prior research has shown that the banking subsidiaries of bank holding companies have maintained lower capital in relation to assets than have other banks despite achieving greater profitability. Since a bank's capital position is usually positively correlated with its earnings, this implies that affiliated banks have been more generous in paying dividends. Indeed, the statistical evidence of this study indicates that the banking subsidiaries of holding companies paid significantly higher dividends than other banks over the four–year period from 1973 through 1976. Whether or not this has resulted in these firms maintaining less than “adequate†capital is a question that goes far beyond the scope of this paper, but which ultimately must be considered.

The well known Sharpe-Lintner-Mossin capital asset pricing model (CAPM) assumes the existence of stability in the price level so that the market price of risk (MPR) measured in nominal terms is the same for all risky assets in an equilibrium market. Friend, Landskroner and Losq [5, hereafter F-L-L] have recently shown that CAPM measured in nominal terms understates the MPR if an uncertain inflation is expected and if a covariance between the rate of return on the market and the rate of inflation is positive (p. 1287).

Much attention in the theory of revealed preference has been devoted to the problem of demand functions generated from continuous utility functions. First Samuelson (1938), the originator of the theory of revealed preference, presented assumptions for P2+. Later Houthakker (1950) developed this model of consumer's behaviour for the n-dimensional case. A gap in Houthakker's proof has been recently closed by B. Stigum (1973). Uzawa (1960) presented a different version of Houthakker's theorem. His conditions AI-AIV and the Strong Axiom of Revealed Preference establish the existence of an upper semicontinuous utility function generating the given demand function. Uzawa's query whether these conditions guarantee the existence of a continuous utility function was answered in the negative by a counterexample of Hurwicz and Richter (1971). At approximately the same time E. Gordon (1971) published an article in the Review of Economic Studies where he tried to demonstrate that the axioms AI-AIV and the Strong Axiom do imply the existence of a continuous utility function. Unfortunately the proof of his Proposition 3 (p. 327) contains an error which led to this wrong conclusion. The purpose of this paper is to correct Gordon's theorem by adding conditions which are essentially due to Stigum. We will see that supporting hyperplanes play an important part in the method of the proof. The correction of Gordon's proof, based on results of Uzawa, turns out to be another method to prove Houthakker's theorem.

Lawrence D. Brown, John S. Hughes, Michael S. Rozeff, James H. Vanderweide, Expectations Data and the Predictive Value of Interim Reporting: A Comment, Journal of Accounting Research, Vol. 18, No. 1 (Spring, 1980), pp. 278-288

Performance evaluation systems, Control system, Investigation region, Moral hazard