The Business Review, Cambridge

Vol. 24 * Number 1 * Summer 2016

The Library of Congress, Washington, DC   *   ISSN 1553 - 5827

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Predicting Innovation Ability by Hofstede’s Cultural Dimensions

Hannes Witte, Jacksonville University, FL

Dr. Gordon W. Arbogast, Jacksonville University, FL

Dr. Jim Mirabella, Jacksonville University, FL



Globalization and the need for technology are two of the main trends businesses are currently facing. Both are also reason for companies to find innovation friendly countries for their subsidiaries. Selecting a location is not trivial and influenced by many diverse factors such as culture. Starting in 1979, Geert Hofstede, a social psychologist in the field of business, used employee surveys to analyze cultures by their components. His now well-known and widely spread work bases on the categorization of cultures by four (later six) different dimensions. The focus of this paper is to investigate if companies can use Hofstede’s cultural dimensions to identify countries with great innovation potential. Therefore, this paper explores the relationship between countries’ scores in each dimension to their number of patent applications per capita. The research also develops the “best” model to help explain the variation in patent applications. This final model is a parsimonious model as it explains differences of innovation ability with an R square of 42% with only two explanatory variables: The Power Distance Index and the Pragmatism Index. The paper concludes with recommendations for further research. This includes measuring the ongoing shifts in cultural features that has been observed as occurring in several of the major countries.  What do international giants like Apple and many urban millennials, challenging their entrepreneurial skills, have in common? Both are increasingly relying on the emergence of innovation. Modern technology turned innovation from a need to an enabler which is highly sought after and more easily accessible than ever. In addition, the impetus of globalization elevates the issue of innovation to yet another level of importance. With decreasing international trade and investment barriers, even smaller companies are quickly enticed to move abroad to become MNE’s (Multi-National Enterprise). Besides selling and producing in other countries, international companies are also building R&D facilities away from their headquarters.  This allows them to immerse themselves into innovative environments, like Mercedes-Benz has increasingly done in Silicon Valley. This allows them to stay on top of the challenges of the digital era (Berman, 2015).  Which region or country should an organization choose for its FDI (Foreign Direct Investment)? This study seeks to evaluate the attractiveness of countries for FDI, measured by their potential to support innovation. It is assumed that especially FDIs in R&D should aim for regions that are rich in intellectual know-how. However, it is sometimes not obvious to what degree various countries support innovative cultures. Therefore, it is important that business leaders have metrics that will help them make such global decisions. One way such a matrix could be constructed is by investigating national cultures and their relationship to business in general. Cultural differences are major factors that must be well understood by businesses (Hill, 2014). How culture can be underestimated was illustrated by Walmart when they attempted to bring their U.S. business strategies to Germany using copy-and-paste tactics (Berfield, 2013).  Geert Hofstede was one of the first psychologists to study the relationship between culture and business on a large scale. David and Arthur Shriberg cite his research and state that Hofstede “is considered by many to be the founder of comparative research that is critical to have an understanding of the leading cultural norms, behaviors and expectations typically held by individuals from different national backgrounds” (Shriberg and Shriberg, 2011). Hofstede’s original cultural classification asserts that four dimensions (masculinity/femininity, uncertainty avoidance, individualism and power distance) are significantly different when viewed across countries. Hofstede studied what he reported were the major dimensions and evaluated them across fifty different countries. He concluded that these dimensions were significant as they tend to affect human thinking in organizations such as business (Hofstede, 1984).  There has been some research that has challenged Hofstede’s initial research. Piepenburg performed such research and provided a critical analysis of Hofstede’s model of cultural dimensions. He specifically focused on to what extent Hofstede’s findings were reliable, valid and applicable to organizations in the 21st century. As part of his research Piepenburg conducted a replication study on masculinity and uncertainty avoidance in Germany and the United Kingdom and reported that the results were different from Hofstede’s findings in 1980. Specifically, he found that the UK is more masculine and has higher uncertainty avoidance than Germany. Piepenburg did admit to his lack of robustness in his paper and recommended further study be conducted before a definitive conclusion is reached on the applicability of Hofstede’s work (Piepenburg, 2011). Others have been more positive in their support of Hofstede’s work. Myers and Tan based much of their  research on the influence of culture on Information Technology concluding “Clearly Hofstede’s work has had a significant influence on management studies in general and IS research in particular” (Myers and Tan 2003). Other researchers have also touted the importance of Hofstede’s work in like manner. Poncini cited the Hofstede work as “highly influential” as it put the emphasis on cross-cultural management and was conducted as a rigorous study (Poncini, 2007). Another example was the work of Jones and Aloni who recently studied this topic.


A Replication of the 2008 U.S. National Report Card Study on Women in Firefighting

Dr. John Griffith, Embry-Riddle Aeronautical University, FL

Dr. James Schultz, Embry-Riddle Aeronautical University, FL

Dr. Ronald Wakeham, Embry-Riddle Aeronautical University, FL

Dr. Marian Schultz, The University of West Florida, FL



Women comprise 51% of the population in the United States (U.S.), but fill only 3.7% of paid firefighting positions.  This study replicates the survey portion the 2008 benchmark study The National Report Card on Women in Firefighting (Hulett, Bendick, Thomas & Moccio, 2008). Using the same survey instrument as the 2008 study, this research examined the perceptions of 141 firefighters from across the U.S. to determine key issues limiting female participation in the fire and emergency service and how results compared to the findings by Hulett et al. in 2008.  Results showed that significantly more women than men felt they were treated differently due to their gender, experienced ill fitting “turn-out” or “bunker gear,” perceived supervisors did not address complaints concerning gender related incidents, and were treated differently due to sexual orientation. In addition, they revealed that there were no formal procedures for race or gender-based complaints.  More women than men felt that promotions were not decided upon fairly and that their gender was a barrier to career development (α=.05).  Another set of findings were that the group of survey takers in this study answered in a statistically similar way to the survey takers in the 2008 The National Report Card on Women in Firefighting survey.  Recommendations include future studies using the 2008 study findings as a benchmark, and the introduction of polices supporting cultural changes in the fire and emergency services.  This research attempted to replicate The National Report Card on Women in Firefighting study (Hulett et al., 2008).  Underrepresentation of females in the fire and emergency services was one of the major issues identified in the 2008 study.  In 1980, the percentage of women firefighters was barely above 0%.  As of 2010, women accounted for approximately 11,100 of 354,000 paid firefighter positions.  This translates to 3.7% of paid firefighter positions in the U.S. (Haynes & Stein, 2014; Newman, 2011; U.S. Census, 2012, U.S. Department of Labor, 2013).  Hulett et al. argued that women should represent approximately 17% of firefighters nationwide after reviewing women of typical firefighter age (between 20 and 49 years old) working full time in one of 184 occupations resembling the firefighting environment.  This perceived gap of 14% amounts to approximately 49,000 female firefighters who could be in the ranks of paid firefighters but are not.  Hulett et al. argued that if nothing changes and the growth rate remains less than 0.2% each year, the percentage of women firefighters will not hit the 17% mark until approximately 2080 (2008, p.2).  An additional set of issues explored were how women perceived they were treated with regard to promotions and sexual harassment incidents and the gap in perceptions between men and women on those topics (Griffith, Schultz, J, Wakeham and Schultz, M, 2015; Hulett et al., 2008; International Association of Women in Fire and Emergency Services [i-women], 1995).  This research was designed to ascertain if any of these previously reported issues had changed in any way within the fire and emergency services since the extensive i-Women (1995) and Report Card (Hulett et al., 2008) surveys.  Demographic changes in the United States have necessitated that organizations employ a more diverse workforce than ever before.  The largest “minority” is the female population.  Fifty-Seven percent of all working age women are in the workforce (U.S. Department of Labor, 2013).  As organizations struggle with decreasing budgets, the hiring decision becomes even more important than in the past.  Recruiting the right people with appropriate knowledge, skills, abilities and attitudes is key to organizational success (Ivancevich, 2010).  More specifically, by replicating the Hulett et al. survey, researchers could determine if perceptions of inequality improved and identify areas that still need attention.  Women comprise 51% of the U.S. population, but only 3.7% of the U.S. firefighters (Pinson, n.d.).  If one accepts the Hulett et al. suggestion that women should be 17% of the firefighting force, then the question to be answered is “why the discrepancy?”  Several searchers from the National Fire Academy examined this issue and determined that this situation is caused by any number of issues to include recruiting, treatment while on the job, perceptions with differences in promotion, and an ingrained culture in the career field (Couch, 2002; Pinson, n.d.; Ross, 2011).  Another troubling issue was that a high percentage of women reported they had been issued ill-fitting equipment (Hulett et al., 2008).  Three previous research studies indicated that difficulty in recruitment, perceptions of unequal treatment on the job, and ill-fitting equipment were major issues in the fire service (Griffith et al., 2015; Hulett, 2008; i-Women, 1995).  In 1995, the International Women in Firefighting and Emergency Services conducted a survey of 551 female firefighters.  The study called Sexual harassment in the Fire Service reported surprising results.  Eighty-eight percent of female firefighters indicated they received some form of sexual harassment ranging from demands for sexual favors to sexually offensive jokes or comments.  Of those women who experienced some form of sexual harassment, 70% indicated the problem was still ongoing (i-Women, 1995). 


Promote Undergraduate Students’ Research Experience through the U.S. – China Collaborative REU Program

Dr. Sha Li, Alabama A & M University, AL

Dr. Derrick Davis, Alabama A & M University, AL

Dr. Lydia Davenport, Alabama A & M University, AL



With the development of the global economy, international collaboration has been more and more emphasized. To develop our students’ capabilities to grow in the globalized environment is ultimately important. Alabama A & M University and Nanjing Forestry University has developed an internationally collaborative REU program (Research Experience for Undergraduates) to training American students in learning how to conduct scientific research in the Chinese academic environment. The study shows that the students’ learning experiences are much more enriched and fruitful as compared to the REU programs conducted on our own campus of Alabama A & M University. This study also found some issues that need to be resolved and provided some suggestions and solutions to the future similar programs so as to improve the international collaborated educational programs between America and China.  President Obama announced a 100,000 Strong Initiative Program in 2010 (The White House, 2011). This Initiative Program is a strategic movement in American education. He encourages American faculty and students to increase their interaction with China in the areas of education especially on science, math, and engineering (McLaren, 2012). The initiative provides the opportunities for the American young scholars, especially the underrepresented and underserved minority undergraduate students to go abroad to learn in a globalized setting, in China in particular. The REU (Research Experience for Undergraduates) program in China is a valuable long term investment that is beneficial for the U.S.-China collaboration in a global economy co-development (McGiffert & Schwarzman, 2014). The Chinese education is strong in math, science, and engineering. The American students are called by the President to catch up so as to be strong in the global economic competition. By the way, the American students could also learn the international interaction skills with Chinese people in the areas of education, science, and related social studies. This program is funded by the National Science Foundation (NSF). The purpose of this REU-in-China Program conducted in Alabama A & M University (AAMU) is to promote research experiences among the diverse undergraduate students of agriculture and environmental sciences across America through a U.S. – China higher education collaborative endeavor. In order to enhance global cooperation and meet the worldwide competition, This REU program is designed to submerge American students in China’s college research setting to physically gain research experiences, cultural understanding, and the ability to collaborate with Chinese scholars in one of China’s higher education institutes.  The REU program is designed based on the experiential learning perspective. According to David Kolb's Theory of Learning, experiential learning involves learning from experiences. (Kolb, 1984; Kolb, Boyatzis, & Mainemelis, 2000).  This type of learning can be defined as "The process whereby knowledge is created through the transformation of experience” (Miettinen, 2000, p. 54).  The experientialists assert that students learn better when practical application of concepts and theories are provided in an authentic learning environment. The students’ active learning could be generated when on-site guidance, or instant help, is provided to meet their learning needs on their specific learning tasks (Pressley & McCormick, 1995). With their personal desire of learning in science areas, students’ motivation of participation on the highly competitive academic tasks could be aroused when their interests and curiosity for the intended content matter are evoked in their learning processes (Johnson & Johnson, 1975). The REU program is designed to incorporate one-on-one individualized learning, cooperative learning, and project-based hands-on learning approaches together for student participants in achieving their learning goals.  This new learning environment in a Chinese cultural setting is another incentive that raises students’ interest and motivation.  Alabama A & M University (AAMU) previously had a three-year REU program on its own campus during 2008 and 2010. The student research projects covered the areas of agriculture, environmental science, biology, animal science, soil science, water quality, etc. But this U.S.-China REU Program is to send American students to China to learn how to conduct research by doing a research project in a Chinese academic environment. In the summer of consecutive years of 2012, 2013, and 2014, about ten students were selected from different colleges across America for the program. The ten students and three or four American AAMU faculty mentors formed a team which were sent to Nanjing Forestry University (NFU) in Nanjing, China to conduct their summer research projects under the supervision of both Chinese faculty mentors/graduate student mentors and American faculty mentors for a period of eight weeks each year. The students not only successfully completed their research projects, but also acquired a rich experience of learning Chinese culture, Chinese language, the ability of working with the Chinese scholars in learning activities, and developed a research partnership with Chinese professionals. We solicited student’s feedback through surveys and open-ended interviews about their experiences and perspectives in this program in the areas of research experience, knowledge and skills gained, faculty-student interaction, life at Nanjing Forestry University, cultural experiences, the impact of the program. We used a method of the mixed data analysis (Creswell, 2001). The mixed research method combines the quantitative and qualitative research methods to do the research.


Active Learning Strategies in Accounting

Dr. Denise de la Rosa, Grand Valley State University, MI

Dennis C. Stovall, Grand Valley State University, MI



When determining the best way to teach accounting students, considering all the different ways they can be taught is an important factor. This paper discusses the many styles, specifically active learning strategies in which collegiate level accounting classes can be taught to enhance the students’ success. Active learning strategies are those that are focused on learning approaches where the teaching emphasis of the professor is centered on the student and how he or she learns. In the text the benefits of active learning over passive learning are also discussed. Though some constraints do apply biased on the individual student’s preferences overall the strategies discussed can be used to enrich accounting students learning.  The way in which students learn has gained a significant amount attention in the modern world. As a result, many colleges and universities devote plenty of time researching the methods and strategies they can use, to provide effective learning experiences to their students. Active learning strategies are learning approaches that can be defined as methods in which the teaching emphasis is centered on the student. Colleges and universities try to develop new learning methods and strategies that will be the most effective by tailoring them to a certain student populations. For instance, students who are majoring in business may prefer to study in a way that is different from how their peers that major in engineering do. Also, how an individual learns can vary vastly from each student biased on their personal preferences. This paper will cover the learning strategies that can be used to enhance students learning experiences primarily in accounting classes. When it comes to active learning in accounting classes, the spotlight has moved from the traditional lecture format to a more active and team learning format. This change has occurred mainly due to the Accounting Education Change Commission’s pronouncement encouraging universities to use effective methods in the teaching process and the effort of many accounting departments to incorporate the American Institute of Certified Public Accountant (AICPA) personal competencies in student learning.  According to Saunders and Christopher, the main objectives of student involvement in the learning process consist of: The student should be an active participant in the learning process; The student should be taught to identify and solve unstructured problems that require use of multiple information sources. The student should learn by doing: The student should learn to work in groups; The students should be taught the creative use of technology. All the above objectives are directly link to active learning, enabling students to achieve a deeper level of learning. The most common active learning methods are discussion, seminars, case studies, project based learning and problem based learning (Carter, Hogan). Discussion can be considered as a method that goes well with the traditional lecture format. This is because the teacher usually gives a brief lecture for part of the class and leaves the remainder of class time for discussion. In this case, small discussion groups of students can be organized with the professor facilitating the discussion. This learning strategy will work well in accounting classes since the teacher can lecture on important topics in a certain chapter and open up the class to work on chapter problems and discuss the answers. As a result, students learn to work in groups and get an opportunity to learn from each other. These discussions benefit students by providing reflection on what they have learned during lecture, providing students an opportunity to present their ideas, stimulating student thinking and developing teacher-student relationship. Communication is a necessity in many accounting careers. Discussion will allow students to work on their communication skills in a class setting, these skills can later be applied in a professional setting. The professor can chose to grade participation in the discussion to help motivate all students to contribute. The grade given does not need to be based on whether the answer is correct but it should correspond with the students’ effort to contribute in the discussion. Through frequent discussion students can become more comfortable contributing (Dallimore, Hertenstein, Platt, 2010).  Seminars help students’ to develop public speaking skills. In this method, the student will present their research findings on a topic that is determined by the teacher. Presentations can be done by students individually or as a group. This learning strategy is very relevant in an accounting class since each student can research about different accounting standards and present them to the class. This allows other students to learn a variety of topics from their peers. When this strategy is implemented in an accounting class it stimulates group learning and improves the ability to synthesize topics. When it comes to case studies, the teacher develops a scenario where the student will have to develop activities and present their solutions, which improve the student’s critical thinking ability. At the same time, it stimulates students to apply knowledge of real life situations and develop their leadership and problem solving skills. Different situations that have occurred in the accounting industry can be used as case studies or a foundation for ones.


Exploring the Gap between Millennials’ Pay Preferences and Compensation Practices

Dr. Lovorka Galetic, Professor, University of Zagreb, Croatia

Dr. Ivana Nacinovic Braje, University of Zagreb, Croatia

Dr. Maja Klindzic, University of Zagreb, Croatia



From an organisational perspective the aim of the reward system is to attract, motivate and retain high performing employees. Pay systems that are incompatible with employee pay preferences can create direct or indirect costs for the organisation. Organizations might be able to increase their attractiveness without affecting labour costs by adapting company compensation practices to employee pay preferences. This study investigated compensation preferences of 249 students in Croatia. Research results indicate that besides high base pay, benefits were clearly identified as a preferred compensation tool by millennials'. Research results can be used by managers in developing or modifying reward plans for this generation.  Compensation is a key element of the employment relationship and, in addition to being the single greatest operating cost for many organizations,  it has been advocated as a tool for enhancing organizational performance and sustained competitiveness (Milkovich & Newman, 2008). Due to high impact of compensation management on overall firm performance (Stajkovic & Luthans, 2001, Hansen, 1997, Jenkins et al. 1998), we recognized the need to research it in detail among Croatian companies.  Organisations have choices about methods of pay. Although the list of compensation dimensions is pretty exhaustive, Milkovich & Newman (2008) argue that strategic compensation dimensions include external competitiveness (e.g., pay level), internal pay structure (e.g., pay hierarchy), employee contributions (e.g., individual vs. group contribution), benefits (e.g., flexible vs. fixed), and alternatives to traditional pay systems (e.g. pay-at-risk or skill-based pay). Based on these strategic dimensions, each organisation will shape its own reward strategy that will guide employees towards fulfilment of companies’ objectives. However, as argued by Kerr & Slocum (1987), reward strategy is defined purely from organisation’s perspective where company interests may take precedence over those of the employees.  Compensation systems may act as signalling devices to job seekers by providing information not only about work expectations but also organization's culture: philosophy, values, and practices (Cable & Judge, 1994). Adopted reward strategy is thus a way to distinguish an organisation from other employers in the labour market (Turban & Keon, 1993, Cable & Judge, 1994).  Employees’ affective reactions to both amounts of pay received and administration of pay delivery include pay satisfaction, pay justice and pay preferences (Heneman & Judge, 2000). Congruence between the implemented pay system and employee pay preferences, meaning pay system characteristics that tend to (dis)satisfy the individual, can have an effect on employee pay satisfaction. Consequentially, this can influence both broader performance indicators and employee retention, in terms of turnover intentions, absenteeism, and voluntary turnover (Heneman & Judge, 2000, Williams, McDaniel & Nguyen, 2006). For example, it has been reported that organisational loyalty is being threatened by employees’ dissatisfaction with their pay and methods used to determine pay (LeBlanc & Mulvey, 1998). Employees' predispositions toward particular compensation variables may affect their reactions even in case they are dissatisfied with overall organizational compensation procedures. In addition, employees are likely to compare features of a particular preferred compensation package component with those of similar firms in the labour market rather than evaluating packages in absolute terms (Shaw & Schaubroeck, 2003) Pay systems that are incompatible with employee pay preferences can be costly for organisations (Brown, 2001). If organizations knew the pay preferences of their ideal applicants, it might be possible to increase their attractiveness without affecting labour costs (Cable & Judge, 1994).  Despite the importance of employee pay preferences, there has been very little research on this issue (Cable & Judge, 1994, Heneman & Judge, 2000). Turban & Keon (1993) found that college students expressed a strong preference for a merit pay system as opposed to tenure based systems. Bretz and Judge (1994) found that job applicants preferred individual merit pay as compared to team based or tenure-based reward systems, as well as existing employees preferring rewards that focus on the individual rather than team or unit performance (LeBlanc & Mulvey, 1998). Cable and Judge (1994) found that individuals expressed preferences for individual versus group based pay, fixed versus contingent pay, flexible versus rigid benefits and organisations that were perceived to offer high pay levels. Brown (2001) found positive relationship between the level of perceived job security and the support for merit pay, eventhough good promotional possibilities are associated with lower level of merit pay support. Although some of these findings are dated, and as Scott et al. (2015) state employees may have very different pay preferences from employees even a decade ago, more recent studies mostly confirm preference for variable pay (e.g. Lee, Iijima & Reade, 2011). Most recent research by Scott et al. (2015) showed that older respondents with higher education and more dependents had a stronger preference for variable pay than respondents who were younger, less educated and had fewer dependents. Variations in pay preferences have been attributed to value patterns inherent in socio-cultural groups (Hofstede 1980, Chiang & Birtch, 2006, Scott et al., 2015), individual dispositions, e.g. individual measures of motivation, competitiveness, work-related attitudes such as commitment and organizational citizenship behaviour (Clugston, Howell & Dorfman, 2000, Lee, Iijima & Reade, 2011), individual consumption behaviour (Shaw & Schaubroeck, 2003), employee demographics and characteristics (gender, age, education, work experience, position, annual pay, number of dependents; Mamman, Sulaiman & Fadel, 1996, Scott et al., 2015), organisational factors (e.g. industry/occupation, Mamman, Sulaiman & Fadel, 1996). Trade unions membership has also been found to influence pay preferences since unionists have been found to be less supportive of incentive pay schemes (Koys, Keaveny & Allen, 1989).


A Comparative Study Between the UK and the USA House Price Indicators Before and During the Financial Crisis of 2007-2009

Dr. Abdelhafid Benamraoui, University of Westminster, UK



Although many studies investigated the house price movements’ indicators in different markets, the existing literature has less focus on comparing the housing market behaviour before and during the financial crisis of 2007 to 2009. This study uses two major housing markets, the UK and the USA, to test the correlation between average house price changes and economic fundamentals, which have significant impact on each of the two mortgage markets. Multiple regression analysis shows that most indicators, including interest rates and earnings, behave analogously in the pre- and during the financial crisis. However, the directions of relationship for some of the parameters have changed when the market is in crisis, especially in the case of loans extended to house purchase and consumer price index.  The housing market experienced a steady growth before the recent financial crisis as house prices reached one of their highest levels in history. This, however, has changed after 2007 under the impact of subprime mortgage crises. The sudden downturn in financial markets has attracted the interest of many scholars who focussed on issues such as the causes of the crisis, the factors behind the spread of the crisis, and the impact of the crisis on different financial market segments. Some studies also specifically focussed on the impact of the financial crisis on the housing market (i.e. Dodd and Mills, 2008; Yener, 2009; Bagliano and Morana, 2010; Duca et al., 2010; Demyanyk and Van Hemert, 2011; Goetzmann et al., 2012; Wang and Zhang, 2014; Grimes and Hyland, 2015; Immergluck, 2015).  The studies addressing the effect of financial crisis on the housing market, however, tend to revolve around one market and also not looking at the behaviour of economic fundamentals driving house prices both before and during the crisis period. The research investigations also do not capture the effect of different types of mortgages rates on house prices in the two time frames. This has motivated our study to find further empirical evidence on the relationship between economic fundamentals and house prices in the two major global mortgage markets, the USA and the UK, prior and during the recent financial crisis of 2007 to 2009.  The paper builds on previous empirical tests between house prices and economic fundamentals. The literature shows that different approaches were used to investigate the factors driving house price movements. Among these approaches indices are widely used to measure housing activity and trend. For example, Himmelberg et al. (2005) construct an index by comparing the imputed rent with the actual rent, which is then used to find if houses are highly priced. McCarthy and Peach (2004) note that it is highly complex to create a housing index for different states or regions in the USA because selling of properties is not carried out in a centralized market. Therefore, they decided to apply asset pricing model instead to capture the effect of interest rate on house price movements in the USA.  The most widely technique used by scholars to examine the housing market activity is the standard stock-flow model, which aims at finding the equilibrium point between the supply of and demand for housing. The model takes into consideration that the supply of housing is mainly dependent on expected rate of return from investment in properties, increase in home prices, housing stock, cost of home construction and price of land. Whereas, the demand for housing is driven by housing stock, price, level of interest rates, income of households and cost of owning a house (Poterba, 1984; Riddel, 2000). In this research paper multivariate regression analysis is used as a technique to capture the factors driving the house price movements in the UK and the USA. The method enables to weight the impact of each factor on the house price over a period of time and to assess the direction of relationship between the dependent and independent variables considered in the model. The indicators are measured independently and in groups to see the full impact of the variables on house prices before and during the financial crisis.  The rest of the research paper is organized as follows. In section two we discuss the main differences between the UK and the USA mortgage markets’ characteristics. Section three outlines the factors exerting an impact on house prices. Research methodology and data are discussed in section four. Study results and findings are presented in section five. Section six concludes the paper. This section aims at identifying the main factors driving house prices by referring to studies and theories that underpin the movement in the housing market. The variables used in the multiple regression analysis are generated based on these theories and various empirical studies carried out on house price movements. Only relevant indicators of house prices are used for the period under consideration in order to improve the reliability of the study results.


Profitability of Traditional Banking in Croatia

Dr. Alen Stojanovic, University of Zagreb, Croatia

Dr. Vlado Leko, University of Zagreb, Croatia

Dr. Jaksa Kristo, University of Zagreb, Croatia



A banking system cannot be properly assessed out of context of the overall financial and economic system in which it operates. A stable and successful banking system is a precondition for efficient mobilisation and allocation of savings to profitable projects, and as a result, stable growth of the overall economy. Otherwise, an unstable and inefficient banking system is not able to fulfil its fundamental tasks and functions, but as a rule results in production and investment decrease, decline in living standards and decrease in economic growth. This paper reviews the sustainability of the traditional banking activities in Croatia, taking into account the current economic surroundings, market environment, regulatory requirements and other important factors of banks’ performance. The findings of this analysis may also be of use to many other countries because the problems and questions to which this paper is trying to give answer to are of universal and global character. Contemporary financial systems are determined by dynamic economic, social and political circumstances, regulatory changes, internationalisation, new technological solutions, and many other important changes. Nowadays, an overall and strong competition in a financial market contributes to the introduction of new financial services, price competitiveness, and development of the overall financial and thereby economic system. Traditional banking methods and business techniques change, go through the process of restructuring, redefining and adapting to a new environment. Contemporary banks strive to expand their business outside the usual borders and classic business schemes. They change their business philosophy and policy, enter non-banking financial operations, and even found non-banking financial institutions themselves. Thus banks start to conduct all financial services, which turns them into universal or "full service" financial institutions. All abovementioned is also easily perceived in the altered balance sheet structure, income statement, profitability ratios, efficiency and performance of banks in general. However, not all banks go through this “transition” period with equal success. The dynamics and efficiency of despecialization strategy is a result not only of particular bank management competence, but a number of other factors. These are, for example, general state of economy, market potentials and demands, the role and presence of the government on a financial market, regulatory restrictions still present in many countries, tendency toward financial innovations of a society as a whole, as well as numerous particularities of economic, social, cultural and historical heritage. In any case, contemporary banking is characterized not only by additional business possibilities and sources of income, but also by additional risks and costs. The objective of this paper is to analyse profitability and sustainability of traditional, dominantly loan and deposit banking business model, for the past 10 years on the example of the Republic of Croatia. This paper presents a theoretical frame and selected newer interpretations of the basic determinants, especially regulation, structure of funding sources and assets, as well as income statement, and their influence on the profitability of banks in Croatia. This paper aims to determine sustainability of new market and regulatory requirements not only in the context of total costs of banking intermediation, but also in the demanded profitability for stockholders. The results of this research could contribute to ever-still limited perceptions of the actual factors of banks’ profitability, especially in smaller, bank-based and transition financial systems like Croatian.  Although profit is the primary business objective of every profit-motivated business entity, profitability and efficiency of banks, regarding the common positive and negative externalities of their business, it is the concern not only of the banks’ management and stockholders, but also of the broadest public, including regulatory and supervisory institutions, investment analysts, profession and science representatives, as well as their clients. Therefore, the desire for profitability is considered to be a legitimate demand of owners, but under the condition of fulfilling other basic principles of banking such as liquidity, solvency, safety, business efficiency, etc. For these reasons the importance of quality or income sustainability in a longer period is being emphasised for some time now, precisely because long-term profitability is usually considered to be a basic prerequisite for bank stability. Determinates of banks’ profitability may be divided into two fundamental groups: factors typical of an individual bank (internal factors) and factors of environment (external factors). Internal factors are considered to be the ones which are, to the maximum extent, results of decisions made by the management, such as assets and liabilities structure, off-balance-sheet activities volume, credit policy, certain risks exposure, the costs and income structure. The factors of environment are all which are not under the direct influence of bank management. For this purpose, the most frequently mentioned are economic cycles, inflation, exchange rates, market interest rates, level of concentration in the market, ownership structure, technological progress and, of course, regulation.  Basically, researches on banks’ profitability may be divided into two groups: researches which analyse banks’ profitability in one country and the ones doing that on an international level. Most of the researches which analyse profitability of banks carried out so far are mainly focused on the banking system of the US, which is not surprising considering the exceptional availability of relevant data sources, for example, Berger et al. (1987), Neely and Wheelock (1997), Angbazo (1997). Several researches also had been carried out in other countries, for example, Barajas et al. (1999), Afanasieff et al. (2002), Spathis, et al. (2002), Naceur (2003), Berger (1995), and Frame and Kamerschen (1997). The second group of researches is trying to set determinants of banks’ profitability on a sample of several countries.


Multiobjective Evolutionary Algorithms (MOEAs) Based on Decomposition: A Promising Area of Artificial Intelligence

Dr. Konstantinos Metaxiotis, DSS laboratory, Dept. of Informatics, University of Piraeus, Greece

Konstantinos Liagkouras, DSS laboratory, Dept. of Informatics, University of Piraeus, Greece



Multiobjective evolutionary algorithms (MOEAs) based on decomposition provide a reliable alternative to Pareto-based approaches. MOEAs based on decomposition, decompose a multiobjective optimization problem (MOP) into a number of single objective optimization problems with the assistance of linear or nonlinear aggregation methods. This paper examines two of the most well-known MOEAs based on decomposition, namely the MOEA/D and the MOEA/D-DRA. The performance assessment is carried out with the assistance of the ZDT family of test functions. The relevant results indicate that the MOEA/D-DRA performs better in terms of Hypervolume but at the expense of the Spread of solutions across the Pareto front.  In Multiobjective optimization it is not possible to find a single optimal solution, as this category of problems require the simultaneously optimization of several often conflicting objectives (Liagkouras and Metaxiotis, 2014), (Liagkouras and Metaxiotis, 2015), (Liagkouras and Metaxiotis, 2013). Instead, the specially designed algorithms for optimizing multiobjective problems try to find a set of points known as the Pareto optimal set (Metaxiotis  and Liagkouras, 2014), (Liagkouras and Metaxiotis, 2015). The set of points that belong to the Pareto optimal set, share a common property, that there is not feasible solution which improves one component of the objective function vector without deteriorating at least one of the remaining ones.  Most MOEAs are Pareto dominance based, meaning that the fitness of each solution at each generation is determined by its Pareto dominance relations with other solutions in the population.  A number of MOEAs make use of a linear or nonlinear aggregating function that combines the two or more objectives into a single scalar value, and in which the weights are varied in order to generate different nondominated solutions. The weights are called trade-off coefficients. The resulting approximation of the PF from such an aggregation technique can be decomposed into a number of single objective optimization problems. The Multiobjective Evolutionary Algorithm based on Decomposition (MOEA/D) (Zhang and Li, 2007) and the MOEA/D with Dynamical Resource Allocation (MOEA/D-DRA) (Zhang, Liu, and Li, 2009) are using the decomposition principle as described above. The remainder of the paper is organized as follows. In section 2, a description of the MOEA/D and MOEA/D-DRA is given. The performance metrics are discussed in section 3. In section 4 are presented the experimental results for the two algorithms with the assistance of the Zitzler-Deb-Thiele's (ZDT) set of test functions for two performance metrics. Finally, section 5 analyses the results and concludes the paper. As we explained in the introductory section of this study, the MOEA/D uses a decomposition mechanism for converting the problem of approximation of the PF into a number of scalar optimization problems. Formally, a m-objective minimization problem can be described as: where  QUOTE   is a m-dimentional objective vector,   QUOTE  is the i-th objective to be minimized and x is a decision vector. The multiobjective problem in Eq. 2 is decomposed into a number of single-objective problems defined by a scalarizing function with different weight vectors. We consider the weighted sum and the weighted Tchebycheff as used in Zhang and Li (2007).  The weighted sum is to be minimized in its application to the multiobjective minimization problem.  Under certain mild conditions, in each Pareto optimal point , there exists a weight vector, λ such that  QUOTE  is the optimal solution of Eq.4, where each optimal solution of Eq.4 is a Pareto optimal solution of the objective function i.e. min  QUOTE  . Thus, by solving a set of single objective optimization problems defined by the Tchebycheff with different weight vectors allows the user to obtain different Pareto optimal solutions.  In MOEA/D as introduced by (Zhang and Li, 2007), all the sub problems are treated equally and receive about the same amount of computational effort. However, a more recent study (Zhang, Liu, and Li, 2009) assigns different levels of computational effort in each sub problem based on the different level of difficulty in obtaining the solution. In particular, the new version of MOEA/D with a dynamical resource allocation (MOEA/D-DRA) computes a utility parameter πi for each of the sub problems i, allowing computational effort to be distributed based on their utilities. 


Disadvantages of Template Analysis of Creditworthiness of Firms in Banking

Dr. Ugur Ozarslan, Ide Training &Consulting, Maltepe University, Istanbul



This paper examines the differentiations between the template financial analysis and the supported financial analysis with the working styles of firms.  The credit evaluation process is one of the most important factors in banking. Credit institutions and banks should give credit. Bankers bring together counterparts who have excess funds and the firms which are in need of funds. Money collected by banks has to be placed as credit. The highest priority target of banks is to minimize the amount of bad loans, because it is quite difficult to compensate for the results of bad loan. The margin of interest between the cost of deposit and the loan interest is very low because of high competition.  A wrong credit appraisal causes either a bad loan or profit loss of the bank. If a Credit analysis is made, without using the right credit techniques or without defining the precise funds needed by a company, it causes a wrong credit decision. On the other hand, if a bank doesn’t open a credit line to a company because of a wrong appraisal, it means profit loss for the bank. Both of these situations are considered as failure in banking. Credit evaluation study must be taken into consideration in wide perspectives.  In this study, all of these perspectives will not be discussed, but the disadvantages of template analysis, which is considered by banks as the easiest way to review a balance sheet, will be examined in detail. Template analysis in credit evaluation means that financial statements taken from a company are analyzed directly using several ratios. In these kinds of studies, the real fund needed by the company is not taken into consideration. Many credit evaluation officers use this method, however, some credit officers use some advanced assessment tools by adjusting some figures on a trial balance sheet of a company, then decide whether the company is credible or not.  Despite their knowledge of many aspects of lending, graduate loan officers often do not know what exact steps must be taken when a borrower request a loan (Sathye, Bartle,Vincent, Boffey, 2003).  In fact, credit analysis without understanding the asset conversion cycle of the company results in wrong decisions related to companies’ creditworthiness. It is not possible to understand the doubtful receivables only by looking at a balance sheet but we must also know the average real sale maturity of companies.  At the same time, we do not understand the real inventories carried by firms by only examining the balance sheet of firms. We need to understand the asset conversion cycle. Accounts receivable can be divided into age categories matching the periods used for the credit sale. Refining measures to improve performance measurement of the accounts receivable collection function (Leitch P. and Lamminmaki D. 2009). The quality of the receivables asset is an excellent barometer of customer service. It is feedback the customer willingly and quickly gives. It is tempting to call it a free quality control measurement system, except it is not free. The firm does not have to pay customers for the feedback, but it does incur costs in remediating the problems (Salek J.G.  2005).  Accounting is based upon accrual concepts that report revenues as earned and expenses as incurred, rather than when received and paid (Walter L.M, Skousen C.J. 2009). A firm cannot assign reserves deliberately for doubtful receivables in order to show a healthy balance sheet for credibility.  In order to diagnose doubtful receivables in real terms, weighted average real sale maturity should be known. Discrepancy between real sale maturity and receivables turnover rate from financial statements reflects some problems. In other words, if the receivable turnover rate from financial statements is found significantly lower than the rate that it must be according to its working style shows that some delayed receivables have already occurred.  Another significant matter i:e Value Added Tax (VAT) must be considered if it is being applied. As sales figures do not include VAT in income statement, trade receivables in balance sheet include VAT. In this regard, when this ratio is calculated, VAT must be eliminated from average receivables in the balance sheet. If any country doesn’t apply VAT or if any product doesn’t include VAT, this procedure cannot be applied.  It is concluded as 60 days. Both situations are the same. One of them is stated as days and the other as turnover. The values (real sale maturity) taken from the company must match the values of receivables turnover ratio from the financial statements of the company. If the receivable turnover ratio is significantly lower than the ratio found according to the working style of the firm, it shows that there are some delayed receivables.  If we don’t make this analysis and if the firm has not reserved any provision for doubtful receivables (as company is not obligated to do so), it is not possible to find out delayed receivables.  One of the important factors here, is which type of receivables must be taken in to account as in Average receivables or outstanding receivables. If the real weighted selling maturity of the firm is higher than 45 days, then average receivables must be taken into account, otherwise the outstanding amount must be considered for calculations. This is because if the selling maturity of the firm is longer than 45 days (e.g. 90 days) and if the firm sold goods excessively in November, we can assume that the firm has delayed receivables. However, if we take the average of 2 years, this effect can be minimized. On the other hand, if the firm sells goods at 30 days maturity in November, then we can understand from the balance sheet that this sale is doubtful or delayed.  This kind of analysis can be made for many items of a balance sheet. It definitely gives the correct results using the working style of the firm in order to control or analyze inventories as well.  These inventories are predominantly held by enterprises which are highly seasonal in nature. They are meant to provide flexibility to the enterprise against variations in purchasing, production, or sales from seasonal factors (Charyu H.B. 2006).


Creating Taxpayer Awareness in the 21st Century. Just Culture

Ramon Bonell Colmenero, Professor, The Real Centro Universitario Escorial-María Cristina, Spain

and Tax Law Adviser



This article's main objective is to encourage a development of tax consciousness. It aims to provide conceptual schemes on fiscal responsibility and to help incorporate it as a right of citizenship to the taxpayer. The article provides tools to form critical and committed for 21st century citizens. The relevant factor to educate citizens in this civic conscience if we want to maintain the “Welfare state”.  By contributing to the system, the national tax system receives funds to carry out social policies approved by the Spanish national budget, the Autonomous Communities and the Municipal Entities each year. These are decisions that in the best of cases have been presented in the political programs of the candidates before the elections and have had the support of citizens through the different mechanisms of democratic participation.  We have gone from the citizen-soldier of the 19th century to the citizen-worker in the 20th century to the current citizen of the 21st century, who is not only a consumer but an authentically contributing taxpayer who defrays the national budget with his economic and contributive capacity.  Paying taxes is a reality that has transcendence towards and for the Welfare state that we want. Making citizens conscious of the importance of contributing is the ethical and moral reason that conflates both dimensions.  It is necessary to install policies of transparency, control and coordination between all of the public entities, carrying out actions that lead the way towards giving citizens information along with legal and contributive training, with the goal of them obtaining consciousness. Nowadays it is taxes that mark the economic life of any country as well as the actions of the government and the decisions that economic leaders, professionals and citizens make.  One must take conceptual schemes into account when thinking about fiscal responsibility that aid in forming a consciousness pertaining to the tax system founded upon values and the exercise of a participative citizenship with solidarity and commitment.  Having contributive consciousness means having citizens who have a deep knowledge of the obligation and duties participating in the sustainment of public spending through their contributions around the tax system.  Citizens go from being unconsciously incompetent of contributing to being conscious of the incompetence to understanding taxes and the current fiscal system, to searching for a consciously competent knowledge of the tax system, when today’s society expects them to be unconsciously competent, through learning to learn, with the civic and tributary education. (2)  The process of assimilation of this knowledge is reached the very moment that we assume we are competent in contributing, that we have economic capacity and that we need to contribute. Going from DNA, authenticity, differentiation, the notoriety of genetic, cultural and experiential knowledge to DNR, going from what we expect and know, to surprises, and to be surprised and being able to prove the added value, with the action of relearning to contribute, to demand a receipt, to pay the corresponding value added tax.  Assuming ones responsibility, foreseeing the consequences, we being with the ius puniendi: Criminal law (with penalties that deprive one of liberty). Administrative penalties law. The starting point is considering the ius puniendi of the State from the perspective of Administrative and Criminal Law:  Behaviors:  Offence; Infringement. After the STC 3/1981 and STS 17/1981, we have gone, in the assumption of the judicial and tributary relationship, from the retainer who had a reward for collection, to considering it a crime when the taxpayer doesn’t retain what he should have retained.  We must keep in mind that the short-term trend is to bring the Penal Code and Tax law closer together in the fight against fraud. We can see this in the processing of the draft law, which modifies the Organic Law of 10/1995 of 23 November of the Penal Code, which involves a technical review of the offense of punishable insolvency that established a clear separation between the behavior of obstruction or frustration of the execution, which had traditionally been referred to the crime of concealment of assets, and the crimes of insolvency or bankruptcy. These groups of crimes are now beginning to be regulated by different chapters. Besides concealment of assets, two new offenses are included amongst the set of crimes of frustration, which completes the protection through criminal law of enforcement procedures, and thereby of credit (which are common in comparative law). Firstly, concealment of assets is characteristic of a judicial or administrative enforcement procedure, along with the unauthorized use of goods seized by authorities. The new articles 257 et seq: The criminal code now severely regulates new offenses, such as the frustration of execution and punishable insolvency. The NCP mimics rules that are already in the LGT on frustration of execution and concealment of assets, which are modified and their criminal behaviours are classified in a more broad manner. Offenses such as misuse of embargoed goods, or not providing the Administration truthful information and deceitful hiding of information on the financial situation of the debtor. (3)


Creativity in Technology – Are Technology Startup’s More Creative than Large Technological Firms?

Antonio Caldas Neto, Stetson University, FL

Dr. Joseph M. Woodside, Stetson University, FL



Startups are generally referred to as being more innovative and creative than larger traditional firms. Many successful technology based startups with stocks listed either in the NYSE or NASDAQ, became so prosperous that they grew into large companies over the last 20 years, facing the challenge of keeping the innovation momentum to survive. The purpose of this research report is to compare the innovation drivers present in tech/Internet based startups and a selection of prominent companies of the same business segment that reached one billion dollars in revenue and had continued success levels after their IPO’s. We’ve selected Google Inc., Facebook Inc., Twitter Inc., LinkedIn Co. and Yahoo Inc., as references for the “Large Tech” group and conducted text analytics on annual reports to identify the frequencies of innovation concepts within this group.  Worldwide markets are currently experiencing volatility and companies face increasing stakeholder pressures.  During previous periods of financial crisis and recession, companies experienced significant IT cut-backs, though nearly two-thirds of CIOs identified IT staffing as a limiting factor in deploying new and innovate technologies.  In the lean business environments of today, ongoing short-term requirements absorb the majority of the bandwidth from executives, managers, and professional workers.  Organizations are too busy responding to immediate customers, that limited time is spent towards improvements within the organization, thereby restraining organizational evolution.  When spending constraints and alternative investments are evaluated, competition for resources is high.  Organizations then often choose to make minor incremental investments vs. major investments in a few innovative areas, leading to slow progress and limited value delivery (Woodside, 2013).  Despite the challenges, leading companies continue to dedicate funding for innovation. This past year IT teams placed an increased importance on creativity and innovation. With IT becoming more dynamic and the field continually changing, the ability to adapt is surpassing the importance of traditional technical skills hiring methods. Due to budget and resource constraints, CIOs are seeking out creative and innovative candidates to help with cost saving opportunities. An added bonus is that these same traits also increase employee satisfaction. While the importance of creativity and innovation is clear, the link between the two and the creativity practices that lead to innovation within the organization are limited in their management practice (Courtemanche, 2015).  The diffusion of innovation (DOI) theory explains how an idea, product, or service is adopted through a system over time.  This adoption of innovation occurs at different rates within people or those within an organization ranging from early innovators to late laggards (Rogers, 1962). Companies are seeking creative individuals to speed the diffusion of innovation and develop innovators earlier on the curve.  This paper seeks to define the practices and management implications for increasing innovation through increased company creativity.  This research follows a qualitative design science approach with problem relevance, construct and artifact development, and design analysis and evaluation with a contributory conclusion section.  As pointed and defined by Thiel and Masters (2014), a startup is the “largest group of people you can convince of a plan to build a different future”. Typically is hard to develop new things in bigger organizations but is even harder to do it by yourself. Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk. The practices identified within this study, though, provide a clearer framework to compare and understand how and where the large successful tech companies managed to keep the innovation drive after their startup phases. Amabile and Khaire (2008) conducted a two-day colloquium at Harvard Business School, inviting business leaders from companies whose success depends on creativity in several business segments. The primary result was a collection of 13 leadership practices or constructs that well managed innovative organizations apply in their operations, and can be used as benchmark to compare and understand how innovation functions in tech startups and large organizations: This is the ability to spark contributions to innovation from all ranks in the company. Participants of the colloquium identified that innovations initiated in the lower ranks had a greater success rate than top-down ideas generated by high ranking executives. Innovative organizations create collaboration between multifunctional teams across internal boundaries. The research notes that although past breakthroughs sometimes have come from a single genius, the reality today is that most innovations draw on many contributions from several professionals.  Innovation is more likely when people of different disciplines, backgrounds, and areas of expertise share their thinking. Sometimes the complexity of a problem demands complexity, other times the application one field’s methods or habits of mind to another field’s problem produces the breakthrough.  For example Google and Facebook are criticized for their lack of diversity, with Google's Senior Vice President of People Operations acknowledging the need to work on diversity. In gender diversity LinkedIn and Yahoo outperform Facebook, Twitter and Google, with the second set of companies employing over twice the number of men. Limited ethnic diversity showed similarly across companies.  Companies were ranked overall based on  overall gender diversity, overall ethnic diversity, gender diversity of the leadership team, ethnic diversity of the leadership team and gender diversity among technical workers.  LinkedIn scored best followed by Yahoo, Facebook, Google, and Twitter in that order (Mangalindan, 2014).  This practice refers to the ability that some organizations have to organize the different steps of the innovation cycle, recognizing that each stage requires different skill sets, leadership needs and technology support.  Google Creative Lab is a creative think tank based on a simple concept of putting the right people together and eliminate the worries of revenue generation, sales, and any remaining administrative challenges.  This allows the team to freely discover new concepts and ideas in a creative process (Ryan, 2013). 


Value Relevance of Earnings, Book Value, Revenue, and R&D

Dr. Lianzan Xu, William Paterson University of New Jersey, NJ

Dr. Francis Cai, William Paterson University of New Jersey, NJ



This paper examines the valuation of the high-tech industries, especially those high-tech loss firms, during the 1990-1999 pre-2000 market melt-down and from 2000 to 2012 after the melt-down. We find evidence, within the high-tech sector, of the anomalous relation between negative earnings and stock prices as reported by earlier research. We also find evidence demonstrating the persistence of the anomalous price-earnings relation after adding book value of equity in the model. Within the high-tech sector, our test results reject the claim that the abnormal price-earnings relation is due to model misspecification (missing value relevant variables) and inclusion of book value into the valuation model eliminates the abnormal relation. Our empirical test results demonstrate that sales revenues and R&D expenses, instead of earnings and book value, are highly value relevant in the valuation of high-tech firms, especially loss-making firms, both before and after year 2000 market crash.  This study explores the abnormal price-earnings relation for the high-tech sector and the relevance of revenues, book value, and R&D expenses in the valuation of high-tech industry, especially those loss firms. The negative price-earnings relation for loss-making firms raises questions about the validity of the assumption of a positive and homogeneous relation between price and earnings, as expressed by the simple earnings capitalization model (Jan and Ou 1995; Burgstahler and Dichev 1997). A significant negative coefficient on earnings means that the more negative a firm’s earnings is, the higher its stock prices, which makes no economic sense. We examine this abnormal price-earnings relation and the role of book value in loss firm valuation within the high-tech sector. Consistent with our hypothesis, we find evidence for both the pre-2000 stock market meltdown of the 90s and post-2000 years up to 2012 that the abnormal price-earnings relation exists for not just the loss-making high-tech firms alone, but all high-tech firms in general. We also find evidence that the inclusion of book value in the regression model does not eliminate the abnormal price-earnings relation in the high-tech sector, contrary to the finding of Collins et al (1999). It suggests that the role of book value in stock valuation, especially loss firm valuation, is not universal. At least for high-tech sector, earnings are not value relevant. The value relevance of book value is limited, if significant at all.  We further examine the relevance of revenues and R&D expenses in the valuation of high-tech industry. Revenue is believed to be harder to "manage." R&D expenses must be fully expensed, according to SFAS #2. Evidence from our empirical tests indicates that both revenues and R&D expense are value relevant for high-tech firms, suggesting that the market rewards investment in R&D and regard the accounting losses as transitory if high-tech loss firms have large expenditures for R&D.  This study adds to the current literature of loss firm valuation by focusing on the high-tech sector, and examines the value relevance of earnings, book value, revenues and R&D expenses. The remaining part of the paper is as follows. Section II is a literature review. Section III describes the sample selection and data. Section IV and V report and discuss the test results on the anomalous negative price-earnings relation and the value relevance of book value, sales and R&D expenses. Section VI is a summary and conclusion.  The negative price-earnings relation for firms that report losses, as documented by Jan and Ou (1995), raises questions about the validity of the assumption of a positive and homogeneous relation between price and earnings, as expressed by the simple earnings capitalization model. A negative coefficient on earnings for loss firms means that the bigger is a firm’s loss, the higher is its stock price. Hayn (1995) suggests that the price-earnings relation may not be homogeneous and losses are regarded by the market as transitory. Collins et al. (1999) find evidence that including book value of equity in the simple earnings capitalization model eliminates the negative relation. They argue that book value of equity is a proxy for expected normal future earnings, which is especially important for loss firms regarding valuation.  For the high-tech industry, current earnings may be hardly value relevant, so is book value of equity. Hayn (1995) argues that for high-tech growth industries, earnings may not be a proxy of future operating potentials. Current earnings may be distorted by expensing large R&D and intangibles that renders current earnings irrelevant to firms’ valuation. By the same token, book value of equity may not be as value relevant, either. High-tech companies do not often have substantial book value because of the big investment in intangibles and R&D, the latter of which must be fully expensed. The role of book value of equity will be substantially reduced, in regard to high-tech firm valuation.  What will be value relevant financial variables for high-tech industries? One promising candidate is sales. Sales are much harder to "manage." The explosion in high tech stocks forced investors to look for ways to value companies with lots of potential, but no earnings. Davis (2002) investigates the market's response to revenue and revenue announcements and whether the value relevance of revenue differs when Internet firms report grossed-up or barter revenue. His results indicate that revenue announcements are highly associated with 3-day market returns and provide information incremental to that contained in earnings announcements. Callen et al. (2008) find empirical evidence that revenues of loss firms are value relevant whereas their earnings are not value relevant. Chandra and Ro (2008) examine the role of revenues in valuing firms beyond earnings and find that the role of revenues is pervasive and greater and the role of earning is smaller in general, and their finding is not limited to any specific industry or extreme earnings news or loss situations.

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