Month: March 2006

Benefits

Some interstin’ ideas thrown about in class today. Nothing really to do with accounting so you can read on! Hehe, Wusses!

First thing was the imapct that working for big firms, and tertiary and secondary education has on a persons identity. Particular focus was the work environment. The question raised was: Why do people work so hard, and do so much overtime?

The simple response is ambition, money, and peer group pressure.
The complex response is that people define themselves within a working context. People evaluate themselves in regards to their performance at work, given a particular work environment.

This plays down into society, especially materiality. In the context of an accounting firm, Life success is subtly played out as partnership, but the fast car, the beautiful wife, big house, sexy boat and blonde mistress (Sorry its a fact majority of partners are male!) are all part of the picture painted, and accepted by workers. There is more to this simply saying success is measured in terms of money, its a influence that runs deeper then the hip pocket and often gets to people without them noticing.

This can be extended even more into politics… I just forget what the link is. More on this topic soon.

Variability

Just read and covered an interesting article by Kothari, Laguerre and Leone which analysed the relative degree of uncertainty of future earnings attributeable to current R&D investment, compared to current Capital expenditure.

The key finding was that R&D investments generate more uncertain future earnings then other capital expenditure. Not that surprising really. However, considering the majority of studies focus on the impact of investments on share price or return, its a little unusual.

Risk plays a large part in the buy/sell/hold decision of investors, and the uncertainty of earnings plays a large part in determining the riskyness of a project or prospective investment.

Does Risk play a part in evaluation? Do we consider risk when we consider the value of an item, or is it a completely seperate factor? I believe it is interrelated.
If a company is not providing a satisfactory return for its inherrent risk, a rational investor will sell his/her shares in that company.

How could I incorporate a similar analysis of a major accounting cost driver or cost centre intot eh evaluation of a company. Just as an aside, are investors really concerned with the inherent risk of the company they are invested in or the risk that they are missing a better alternative investment. (ie. cost of capital or opportunity cost)?

What’s in a theory?

Crazy smart people win prestigious prizes for coming up with amazing theories… so what’s in a theory? What is it about theories that gets so many people worked up, frenzied and excited?

“A Theory is a coherent set of propositions used as principles of explanation for a class of phenomena, assumed to hold throughout a broad range of specific instances”

What does that mean? I dunno, sounds more like the definition of a paradigm to me! Read Kuhns “The structure of scientific revolutions”. Its actually interesting. Explains how irrational scientists really are!

Anyway, my guess is the purpose of a theory is to provide a foundation from which it is possible to predict when phenomena will occur, understand why phenomena occur and what they are.

Apparently we all use theories everyday. If you look out the window, and its cloudy, what do you think? Hmm, maybe its going to be cold. I guess thats a theory of kinds, but iof you put it like this; its an argument right?

(Argument 1)
Its cloudy today.
Its cold when its cloudy.
Therefore today will be cold.

2 propositions and a conclusion. Looks like an argument, smells like an argument, it is an argument. So are arguments and theories the same? I doubt it. Maybe theories don’t have conclusions? Maybe when you actually make the prediction, it becomes an argument. That would make sense, because we know from my posts last year that their is a difference between arguments and explanations, and that difference is?

An argument makes a claim, an explanation does not make a claim. Ok, so a theory is just the propositions behind an explanation, with alternative conclusions depending on the phenomena that is observed?

(Explanation 1)
Its Sunny today
Its cold when its cloudy
that’s why it is warm today.

Notice the subtle difference. Good. Yes I’m schitzophrenic. Hi me! Your sexy! No – you are! oh shush, your making me blush! Your girlfriends hot. Why thankyou!

Same premises, different observation, but we used the same theory (albeit the first example was an argument) in the background to determine the conclusion. So despite my best efforts, the theory remains an implicit thing within these examples… The theory is essentially the background method, framework or thinking used to arrive at the conclusion given an observation(phenomena) and set of premises.

Thesis ideas Beta V3.07

Most of these come from the Eli Bartov research seminar:

1. Comparison of probability a firm is likely to inflate earnings if they have independent directors or not. Probability to inflate earnings would be determined by doing a Jones cross sectional analysis of Total Accruals. (USA based as not enough data in Australia)

2. Do comapnies show a preference to manipulate earnings by managing accruals, after the departure of independent directors from the board? (Thanks P. Wells)

3. Is the variance of earnings from cashflow for companies in a given industry a predictor of… shareprice?/Risk?/Poor governance?