Forecasts of financial prices, calculated from the present and past values, are never substantially more accurate than the prediction that future prices will equal the most recently observed price. This conclusion has been summarized by two hypotheses. First, the random walk hypothesis, states that daily returns are uncorrelated. Few people believe that this is exactly correct; indeed, the hypothesis has been refuted both for small stock markets [13] and for American commodity futures markets [3]. Second, the weak-form efficient market hypothesis, as defined by Jensen [15], states that investors cannot make profits from any correlation between returns, after deducting all the costs of trading and adjusting for risk. Strict efficiency, is a special case that occurs when prices fully reflect all information available in the past prices [7], [8].

This paper illustrates regression and Kalman filtering methods for estimating the time-varying term structure of volatility expectations revealed by options prices. Short- and long-term expectations are estimated for four currencies using daily PHLX options prices from 1985 to 1989. Throughout this period, there were important differences between shortand long-term expectations. The slope of the term structure changed frequently and there were significant variations in long-term volatility expectations. The expectation estimates can be used to value OTC options, to improve hedging strategies, and to test the hypothesis that the options market overreacts.

Stephen J. Taylor, Brian G. Kingsman, Comment: "An Autoregressive Forecast of the World Sugar Future Option Market", The Journal of Financial and Quantitative Analysis, Vol. 12, No. 5 (Dec., 1977), pp. 883-890

We examine the use of dual class stock in Australian second board firms at the time of going public. This setting provides a more powerful test of claims that departures from the `one-share one-vote' rule are a response to incentive problems created when maximizing firm value requires significant commitments of firm specific human capital. We find, relative to a control group, that dual class firms have a higher proportion of their value determined by the expected realization of growth options rather than assets-in-place. Although our conclusions must be tempered by the qualitative nature of much of the evidence, the value of these growth opportunities appears to be highly dependent on the human capital of the founding shareholders. The absence of substitute governance mechanisms further supports the view that insider control is an efficient organizational arrangement for these firms, as does the absence of longer term differences in performance relative to control firms. While dual class stock clearly entrenches insiders, we identify a variety of mechanisms (contractual, institutional and personal) which help to ensure that if control changes occur then any gains are shared equally by both classes of stockholder.

The development of both brand name reputation and industry specialization by Big 8 auditors is argued to be costly and therefore to increase audit fees. For a sample of 1484 Australian publicly listed companies we estimate audit fee premia for Big 8 auditors. On average, industry specialist Big 8 auditors earn a 34% premium over nonspecialist Big 8 auditors, and the Big 8 brand name premium over non-Big 8 auditors averages around 30%. These results support that industry expertise is a dimension of the demand for higher quality Big 8 audits and a basis for within Big 8 product differentiation.

We examine whether the provision of nonaudit services (NAS) by incumbent auditors is associated with a reduction in the extent to which earnings reflect bad news on a timely basis (that is, news‐based conservatism). Reduced conservatism is expected to occur if relatively high levels of NAS result in reduced auditor independence and, ultimately, lower‐quality auditing. Because client‐specific demand for NAS is expected to vary, our proxy for the auditor‐client economic bond is the extent to which NAS purchases (relative to audit fees) are greater or less than expected. Using several different methods for identifying news‐based conservatism, we consistently find that higher than expected levels of NAS are not associated with reduced conservatism. This result is robust to allowing for endogenous NAS demand, as well as several explicit factors that may be associated with differences in conservatism. Similar conclusions arise from tests that use alternative measures of the economic bond between auditors and their clients, as well as in tests confined to either the Big 6 or non‐Big 6 audit firms. Our results are consistent with factors such as market‐based incentives, the threat of litigation, and alternative governance mechanisms offsetting any expected benefits to the audit firm from reducing its independence. We therefore conclude that recent legislative intervention aimed at restricting the supply of NAS is unlikely to result in increased independence in fact, although independence in appearance may be improved.