Risk and Decision Analysis

Empirical studies have documented various approaches in detecting earnings management behaviour. Since the middle 1980s, the accrual approach has become the primary focus in the literature as the accrual is suggested as a desirable vehicle to achieve managerial manipulation and it is less likely to be detected [Journal of Accounting and Economics 18 (1994), 3–42; Journal of Accounting and Public Policy 19(4,5) (2000), 313–345]. However, the accruals approach and its associated varies models in generating a valid measurement of earnings management are often criticized. A long-standing issue lies with the model misspecification where variables that explain non-discretionary accruals have been omitted from the expectation models and so wind up on the residual term, which represents the management manipulation component of discretionary accruals. As a consequence, empirical evidences on earnings management often result in misleading inferences about earnings management behaviour. Given the potential for model misspecification in measuring earnings management, this research aims to examine the validity of alternative earnings management measurement and proposes a new aggregate measure of Principal Component (PC) to be used in detecting earnings management behaviour. The principal components that explain the highest variation among accounting variables are expected to capture earnings management behavior and reveals hidden dynamics of financial reporting without model misspecification constrains.

The performance of the average investor in an asset class lags the average performance of the asset class itself by an average of one percent per year over the past fifteen years, based on net investor mutual fund cash flows. We present a model in which a representative behavioral investor believes next year's returns will exactly match last year's returns and show that this leads to price adjustments on what would otherwise be random walk securities that effectively lower the future return of high performers and raise the future return of poor performers. The average predicted behavioral lag indeed matches the observed lag when asset returns are normally distributed with a mean and standard deviation equivalent to historical fifteen year averages of six percent and eighteen percent, respectively, and when the representative investor increases his allocation by 25% more than the return itself, a prediction for which we document empirical support. In other words, investors chase returns and in doing so create the conditions of their own demise.

The article presents the theoretical and methodological foundations of transformation of the accounting system in the chaotic economy structuring with using a synergistic approach. Characteristic features, functions of the accounting system and accounting principles formed. Basic parameters for the accounting system's synergistic construction identified. Benefits of accounting information in the management of business entities for achieving synergy formulated. The theoretical and methodological foundations of synergetic formation of the informative resource with using the accounting system at the micro- and macro-level for the emergence of the knowledge economy are shown.

In this article we review the financial market development which led to the 2007–2009 financial crisis. We argue that the crisis was not because of derivatives or financial engineering products but because of lack of proper regulatory framework despite the rapid innovations in technology and markets. We explain what has been lacking in the discipline of financial engineering which underlies the technological development and propose the augmentations necessary for the discipline. We finally point to areas where the financial engineering community can make contributions in formulating a new sustainable regulatory framework.

Perceived probabilities do not perfectly correspond to the stated probabilities. Prospect theory suggests that small probabilities are often overestimated, and such overestimation of negative prospects reflects a tendency toward risk aversion. We examine how two types of consumer knowledge, objective and subjective knowledge, influence the perception of a small probability of risk. Subjective knowledge appears to reinforce objective judgment (i.e., being less biased by small probabilities) once consumers are knowledgeable. On the other hand, subjective knowledge could facilitate the tendency to risk aversion (i.e., overestimation of small probabilities of risk), when the regulating force of objective knowledge is low.