Following a report of a possible seasonal in Australian share prices [Praetz (1973)], a study was made of the behaviour of share returns using different data and methodology to that of the original report. The test included forecasts of the seasonal using Box and Jenkins methods. Although the results indicate some evidence of a seasonal, it is shown that this is not prima facie evidence of market inefficiency. It is suggested that a more likely explanation is related to the structure of the economy, e.g., changing opportunity cost of money through the year.

Auditing, Sampling plan, Materiality, Dollar-Value sampling

William R. Scott, [Discussion of Auditor's Loss Functions Implicit in Consumption-Investment Models]: A Reply, Journal of Accounting Research, Vol. 13, Studies on Statistical Methodology in Auditing (1975), pp. 124-125

Internal control, Internal control system, Decision making, SAS No. 1

In a previous paper,' I demonstrated how the problems faced by the auditor of a firm's published annual financial statements in deciding (1) how much audit evidence to obtain and (2) what set of balance sheet valuation numbers to choose in the light of this audit evidence can be regarded as a problem in Bayesian point estimation. In effect, the auditor was viewed as picking a vector of numbers (the balance sheet) to summarize his posterior probability distribution (i.e., posterior to his audit examination) of those balance sheet parameters for which he is held responsible by the nature of his audit engagement. He does this subject to a loss function whereby he is penalized for discrepancies between the balance sheet numbers so chosen and their subsequent realization. Given the professional nature of the auditor's engagement, it seems reasonable to suggest that this loss function really derives from the various financial statement users. If they rely on the audited statements as inputs into decisions when those statements contain auditor's errors, they will suffer an opportunity loss of expected utility. This raises the question, of course, of who these users are and how financial statement errors operate to cause utility losses. The approach in this paper is to pick a specific, well-defined normative decision problem for which audited financial statements have the potential to be useful and find the loss function that is implicit in it. The problem I have chosen is an individual's consumption-investment

In recent years the expected-utility approach to decision making under risk has gained increasing acceptance among portfolio theorists. On the other hand, the mean-variance (MV) approach of Markowitz [13], which has dominated portfolio theory in the past, continues to enjoy great popularity. In MV theory, the investor is assumed to rank his preferences for risky returns solely in terms of their means and variances, with higher means and lower variances, being preferred. Tobin [20] showed that MV theory is consistent with expected utility theory in the special case of joint-normally distributed asset returns. The MV approach enjoys a ready acceptance among practitioners, and requires only modest informational and computational inputs. Perhaps its most attractive feature is its ability to decompose the overall portfolio problem into a sequence of much simpler problems: first, the “efficient” set of portfolios (which minimize variance for any given mean return) is calculated, and then the investor chooses one of the efficient portfolios in a manner consistent with his personal preferences. This efficient set is the same for all investors having the same mean-variance-covariance estimates of risky-asset returns, and can, in principle, be determined once and for all using parametric quadratic programming [12, 22] Despite these real advantages, the MV theory embodies certain problems of principle in the case of nonnormally distributed asset returns, and this fact has led to increasing emphasis on the presumably more rational expected-utility theory.

Journal Article Functional Separability and Partial Elasticities of Substitution Get access R. Robert Russell R. Robert Russell University of California, San Diego Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 42, Issue 1, January 1975, Pages 79–85, https://doi.org/10.2307/2296821 Published: 01 January 1975

Most textbooks in finance are apparently embarrassed by the Modigliani-Miller (MM) theorem on capital structure. The intense controversy it has provoked in academic circles over the past sixteen years makes it hard to ignore, and yet many textbook writers seem to be unable to distill anything from it that might be of interest to their readers. A typical example might begin by laying out the economist's conventional perfect market assumptions and showing that the theorem may be derived deductively from these assumptions. It is then observed that markets are not perfect and it is implied that perfect market theorems, while perhaps interesting to ivory-tower academics, are of no use to a businessman who has to act in imperfect real-world markets. (For example, Weston and Brigham [16], in their appendix to Chapter 11, on p. 339 state: “Given their assumptions, their theoretical arguments were quite correct. However, their assumptions have been questioned extensively, and very few authorities today accept the MM position.”) We are then returned rather uneasily to the traditional world of U-shaped cost of capital curves, in which managers are required to examine such holy relics as financial break-even charts (Van Home [15, p. 231]) or to exercise judgment about the stockholders' utility preferences (Weston and Brigham [16, p. 258]) in order to make their debt/equity decision.

Accounting information, Comparative judgement, Numerical information, Decision making