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Journal of Applied Research in Accounting and Finance

Vol 4 (2) December 2009


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The Survival of Exchange-listed Hedge Funds by Greg Gregoriou, Francois-Serge Lhabitant and Fabrice Rouah

This paper attempts to determine whether exchange-listed hedge funds experience longer lifetimes than non-listed funds, even after factors known to affect survival, such as size and performance, are considered. The Kaplan-Meier estimator is used to compare survival times of listed and non-listed funds. The Cox proportional hazards model is used to make the same comparison, but by controlling for additional factors. The accelerated failure time (AFT) regression model is used to estimate the median survival time of hedge funds, based on values of explanatory variables. Listed hedge funds tend to be larger and adopt more conservative investment strategies than non-listed funds. Listed funds tend to survive roughly two years longer on average than non-listed funds, and this difference in longevity is persistent even after controlling for factors known to affect survival. Finally, we find that the failure rate of listed funds is substantially lower than that of non-listed funds, but only during the first five years of life.

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From Servant to Master: The Financial Sector and the Financial Crisis by Michael Lim Mah-Hui

The roots of the present financial crisis can be traced to the significant structural changes in the United States economy and its financial system after the 1960s. Paramount among these is the growth of the financial sector and its overshadowing of the real economy. With a slowdown in long-term growth rates, the United States progressively became a debt-driven economy, evidenced by debt explosion in all sectors, particularly the financial sector and household sectors. This is related to the increasing imbalance in wealth and income distribution that produces under-consumption for the vast majority and excess savings for a small minority. Under-consumption by the former is 'solved' through debt assumption, while excess savings for the latter is 'solved' through financial innovations to enhance profits and yields for investors. Changes in the financial industry in terms of heightened speculative and Ponzi financing resulted in greater fragility and instability in the financial system. Consequently, what has become known as a 'Minsky moment' arrived in 2007/8. The financial sector and financial instruments such as derivatives, instead of deriving from and serving the real economy, have become the drivers of the real economy.

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The Financial Statement Effects of Proposed Changes to the Accounting for Deferred Acquisition Costs in the Insurance Industry by Charles W Mulford and Andrew Parkhurst

The Financial Accounting Standards Board (FASB) is currently evaluating proposed changes to the manner in which insurance companies account for, and currently capitalise, the costs of selling and initiating insurance contracts. Our study examines the potential effects of these proposed changes on total assets, shareholders' equity, financial leverage and pre-tax income. We include a total of 28 companies with market caps in excess of $3 billion in our sample and use information provided in their 2008 and 2007 10-K annual filings to the Securities and Exchange Commission (SEC). We find that as a result of capitalisation, companies hold on average 4.41 per cent of total assets and 32.65 per cent of shareholders' equity in the form of deferred acquisition costs. If the firms in our sample were forced to write off their deferred acquisition costs, the accompanying reduction in shareholders' equity would increase their average ratio of liabilities to shareholders' equity, a common balance sheet measure of financial leverage, from 9.88 to 63.91. Such an increase in leverage could potentially hurt their credit ratings and put pressure on the firms to raise equity. We also find that pre-tax income would be impacted by the proposed changes. Depending on amounts capitalised relative to amounts amortised, some firms would see declines in pre-tax income of 20 per cent or more, while others would see similar increases. Investors and accounting regulators, including the FASB and the International Accounting Standards Board (IASB), will want to take note of these findings.

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