Research Lab

This study investigates the determinants of the expected stock-price volatility assumption that firms use in estimating ESO values and thus option expense. We find that, consistent with the guidance of FAS 123, firms use both historical and implied volatility in deriving the expected volatility parameter. We also find, however, that the importance of each of the two variables in explaining disclosed volatility relates inversely to their values, which results in a reduction in expected volatility and thus option value.

The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comment from standard setters on issues related to financial reporting. This paper summarizes the Committee's response to the Financial Accounting Standards Board’s (FASB) exposure draft, "Accounting for Uncertain Tax Positions: An Interpretation of FASB Statement No. 109."

Standard valuation methods do not lend themselves to bank holding companies. Banks create value through the types of assets and liabilities they create (e.g., lending and deposit taking relationships). Bank income streams reflect heterogeneous sources of income which differ in their margins of profitability and persistence.

Ernst & Young hosted this 2007 roundtable with the goal of providing a better understanding of the challenges and best practices of using valuation analysis to support executive decisions. Panelists included Richard Ruback of the Harvard Business School, Trevor Harris of Morgan Stanley, Aileen Stockburger of Johnson & Johnson, Dino Mauricio of General Electric, Christian Roch of BNP Paribas, Ken Meyers of Siemens Corporation, and Charles Kantor of Lehman Brothers. Jeff Green of Ernst & Young moderated.

This paper studies the application of fair value accounting in bank holding companies in the United States with the purpose of evaluating the effects of expanding fair value accounting in the banking industry.

Recent deliberations by both the International Accounting Standards Board (IASB) and the Financial Accounting Standard Board (FASB) in the United States have focused on how fair values of assets and liabilities should be measured. The issue of when, rather than how, fair value measurement should be applied is still far from resolved, however.

This chapter provides an overview of modeling and computational issues associated with portfolio credit risk. We consider the problem of calculating the loss distribution in a portfolio of assets exposed to credit risk, such as corporate bonds or bank loans. We also discuss the pricing of portfolio credit derivatives, such as basket default swaps and collateralized debt obligations. A portfolio view of credit risk requires capturing dependence between the assets in the portfolio; we discuss models of dependence and associated computational techniques.

We consider stock markets in 20 countries to investigate whether the accrual anomaly (Sloan 1996), characterized by U.S. stock prices overweighting the role of accrual persistence, is a local manifestation of a global phenomenon. We explore whether the occurrence of the anomaly is related to country differences in accounting and institutional structures, and examine alternative explanations for its occurrence. We find stock prices overweight accruals in general, with accruals overweighting occurring in countries with a common law relative to a code law tradition.

Records of 793,794 employees eligible to participate in 647 defined contribution pension plans are studied. About 71% of them choose to participate in the plans, and of the participants, 12% choose to contribute the maximum allowed, $10,500.