On two random search problems

The paper is concerned with static search on a finite set. An unknown subset of cardinality k of the finite set is to be found by testing its subsets. We investigate two problems: in the first, the number of common elements of the tested and the unknown subset is given; in the second, only the information whether the tested and the unknown subset are disjoint or not is given. Both problems correspond to problems on false coins. If the unknown subset is taken from the family of k-element sets with uniform distribution, we determine the minimum of the lengths of the strategies that find the unknown element with small error probability. The strategies are constructed by probabilistic means.     

Some issues related to the topological aggregation of preferences

This paper deals with the topological approach to social choice theory initiated by Chichilnisky. We study several issues concerning the existence and uniqueness of Chichilnisky rules defined on preference spaces. We show that on topological vector spaces the only additive, anonymous, and unanimous aggregation n-rule is the convex mean. We study the case of infinite agents and show that an infinite Chichilnisky rule might be considered as the limit of rules for finitely many agents. Finally, we show that under some restrictions on the preference space, the existence of a Chichilnisky rule for every finite case implies the existence of a weak Chichilnisky rule for the infinite case.     

Covariance structure analysis via specification searches

Iterative model modification (specification searches) has become common practice in applications of covariance structure modeling techniques. The present analysis examines the reliability of a method for carrying out specification searches based on Lagrange multiplier and Wald tests. Results are compared to specification searches performed by means of likelihood ratio tests. Our findings indicate that neither of both methods is significantly superior to the other and that even in connection with very large samples, results from these search procedures can be relied upon only under favorable conditions. The authors therefore suggest the application of specification searches in a more restricted framework in which the parameters in that part of the model that is not subject to the search procedure are fixed. It is demonstrated that this concept enhances the likelihood of success of specification searches significantly.     

Audit committee and internal audit and the quality of earnings: empirical evidence from Spanish companies

Corporate scandals and failures such as Enron, WorldCom, etc. were highly catastrophic and had a terrible effect on stakeholders. The pressure of globalisation and the intense competition have lead to organisations encouraging good corporate governance. Organisations have to promote transparency and accountability of financial information. As Gramling et al. (J Account Lit 23:194–244, 2004) argued there are four important mechanisms of corporate governance include boards of directors, audit committees (among others) and internal and external audit functions. However, this paper will focus on the relationship between two corporate governance mechanisms (audit committee and internal audit function). Thus, our purpose is to analyse the relation between characteristics of the audit committee and internal audit function and earnings management measured as abnormal accruals to test the quality of financial statements. We hypothesise that the association between the effectiveness of the audit committee and the presence of an internal audit function and its relationship with this committee would indicate less opportunity for management to manipulate earnings. Using a sample of 108 non-financial Spanish companies that traded on the Madrid Stock Exchange between 2003 and 2006 (432 observations), we have found that the size and number of meetings of the audit committee had a significant negative association with earnings manipulations. Also, our results suggest that a negative relation between having an internal audit function and earnings management.     

Cost‐Benefit Analysis for Optimization of Risk Protection Under Budget Constraints

Cost‐benefit analysis (CBA) is commonly applied as a tool for deciding on risk protection. With CBA, one can identify risk mitigation strategies that lead to an optimal tradeoff between the costs of the mitigation measures and the achieved risk reduction. In practical applications of CBA, the strategies are typically evaluated through efficiency indicators such as the benefit‐cost ratio (BCR) and the marginal cost (MC) criterion. In many of these applications, the BCR is not consistently defined, which, as we demonstrate in this article, can lead to the identification of suboptimal solutions. This is of particular relevance when the overall budget for risk reduction measures is limited and an optimal allocation of resources among different subsystems is necessary. We show that this problem can be formulated as a hierarchical decision problem, where the general rules and decisions on the available budget are made at a central level (e.g., central government agency, top management), whereas the decisions on the specific measures are made at the subsystem level (e.g., local communities, company division). It is shown that the MC criterion provides optimal solutions in such hierarchical optimization. Since most practical applications only include a discrete set of possible risk protection measures, the MC criterion is extended to this situation. The findings are illustrated through a hypothetical numerical example. This study was prepared as part of our work on the optimal management of natural hazard risks, but its conclusions also apply to other fields of risk management.