MSc ACCOUNTING AND FINANCE RESEARCH METHODS BST153 ASSESSED COURSEWORK 2017-18 The coursework for the module consists of one piece of work comprising up to 4,000 words that aims to test your understanding of underlying principles of quantitative research in the social sciences, with a particular emphasis on accounting and finance contexts. The coursework will contribute 100% of the total mark for the module. The coursework requires you to perform and present regression analysis of data, accompanied by a commentary that explains the tests performed, the interpretation of these tests in the context of accounting and finance, and a brief critical evaluation of the method used. The deadline for submission of your assignment is 8th January 2018 2pm. The assignment should be submitted electronically to the Learning Central. The submission portal will become active approximately about 4 weeks before the deadline. The assessed coursework must be entirely your own work. Severe penalties will be imposed on students who are found guilty of plagiarism. You are referred to your module catalogue for further details about referencing. In addition, in an attempt to prevent plagiarism, you will be provided with a unique data set for the assignment. Details of where you can find your data are provided overleaf. Bibliography & Referencing: You are required to consult academic journal articles of good quality1 and textbooks, where appropriate. Please remember to reference your sources using an appropriate citation system (such as Harvard style). Essays will lose marks for poor referencing. Guidance and tutorials for the Harvard referencing style can be found online: https://ilrb.cf.ac.uk/citingreferences/tutorial/index.html 1 For the rankings of accounting and finance journals, please refer to the ABS list: http://www.kfs.edu.eg/com/pdf/20820152253917.pdfDATA There are two empirical parts to the assignment, which test your understanding of quantitative research methods. The first empirical part is a test of the Capital Asset Pricing Model (CAPM) and Fama-French three-factor asset pricing models using returns of a portfolio including US stocks from a particular industry. The second empirical part is an examination of firm characteristics that may affect audit fees, using a unique sample of UK firms. The data for the assignment can be found at S:/Teaching/Research Methods. Your unique data allocation can be found in the file S:/Teaching/Research Methods/Coursework – Data Allocation 17-18.xls. The data allocation spreadsheet shows you precisely which data you should use for your assignment. For Part 1, you are allocated a specific industry stock portfolio to investigate. The industry classification follows Fama-French 49-industry classification.2 The time series data (monthly) of industry portfolio returns are found in the spreadsheet S:/Teaching/Research Methods/Coursework – Industry Portfolios 17-18.xls. For part 2, you are allocated a random cross-sectional data sample of 5,000 firms. Your specific data set for investigating audit fees in part 2 can be found at S:/Teaching/Research Methods/AUDITx.csv. PART 1: TEST OF CAPM The spreadsheet S:/Teaching/Research Methods/Coursework – Pricing Factors 17- 18.xls contains the monthly market (mkt_rf), size (smb), book-to-market (hml) and momentum (umd) asset pricing factors for US stocks from July 1975 (1975m7) to June 2016 (2016m6). It also contains the monthly returns of six portfolios3 sorted by size and book-to-market ratios (B/M) for any additional analysis if possible. (Note: all the pricing factors and industry portfolios are already in returns, they are not prices!) REQUIRED: Use these asset pricing factors to test the validity of the Capital Asset Pricing Model (CAPM) for your industry portfolio returns. Write a detailed commentary to explain the regression models, hypothesis testing, diagnostic tests and analysis of residuals that you are using and interpret your findings. Your commentary should include the following: 2 For more details about industry classification, please see: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html 3 For more details about how these portfolios are formed, please refer to: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html(a) An explanation of the theories and models being tested with reference to the literature, (b) A statement of coefficient values under the null hypotheses, (c) Summary statistics and correlation matrix, (d) Presentation of regression results, (e) Interpretation of hypothesis testing on coefficients, (f) Diagnostic tests to evaluate the goodness of fit of your regression model, (g) Analysis of residuals to explain the possible bias, demonstrate how these potential bias may be corrected, and discuss any differences in results after adjusting for the bias. (h) Any other data, tests, or information that you feel are interesting and relevant. ESSENTIAL READINGS: A very good literature review on the CAPM (this assignment is related to the time series regression test of CAPM): 1. Fama, E. F., and French, K. R., (2004). The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives 18, 25-46. Two seminal papers of the Fama and French three-factor model: 2. Fama, E. F. and French, K. R. (1992). The cross-section of expected stock returns. Journal of Finance 47, 427-465. 3. Fama, E. F. and French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3-56. PART 2: DETERMINANTS OF AUDIT FEES Your spreadsheet (AUDITx.csv) contains a random sample of a cross section of 5,000 UK firms. For each firm, you have been provided with the following variables: (a) log of audit fee (logafee); (b) log of sales (logsal); (c) log of total assets (logta); (d) number of subsidiaries (nsubs); (e) exports divided by sales (expsales); (f) total liabilities divided by total assets (gearing) (tlta); (g) return on total assets (retta); (h) current assets divided by current liabilities (cacl); (i) a dummy variable to indicate if the firm’s audit is performed by one of the big four auditors (big4).REQUIRED: Use the data on the variables listed above to investigate whether firm characteristics explain the cost of audit. Write a detailed commentary to explain the regression models, hypothesis testing, diagnostic tests and analysis of residuals that you are using and interpret your findings. Your commentary should include the following: (a) An explanation of how and why these variables could explain audit fees, (b) A statement of coefficient values under null hypotheses, (c) Summary statistics and correlation matrix, (d) Presentation of regression results (e) Interpretation of hypothesis testing on coefficients, (f) Diagnostic tests to verify the validity of your regression model, (g) Analysis of residuals (no need check autocorrelation as this is cross-sectional data), (h) Any other information or tests that you feel are relevant. ESSENTIAL READINGS: 1. Clatworthy, M. A. and Peel, M. J. (2007). The effect of corporate status on external audit fees: Evidence from the UK. Journal of Business Finance and Accounting, 34, 169-201. 2. Chan, P., Ezzamel, M. and Gwilliam, D., (1993). Determinants of Audit Fees for Quoted UK Companies. Journal of Business Finance & Accounting, Vol. 20, No. 6, pp. 765-786. PART 3: A CRITICAL EVALUATION OF THE METHOD USED (1,000 WORDS) Finally, you are required to critically compare quantitative research methods (i.e., OLS regressions) with qualitative research methods (e.g., case study, interviews, etc.), in terms of validity, reliability, and generalizability. Before the evaluation, you must first define these three concepts with reference to the relevant literature on research methods. You may also explain whether and how qualitative research methods may be applied in accounting and finance research to address the limitations of quantitative methods. You may also explain briefly the philosophical stances behind these research methods. Part 3 should not exceed 1,000 words. [Important note: This part is not about the assumptions and limitations of the classical linear regression model.]OTHER REQUIREMENTS: ï‚· Use Times New Roman, font size 12. ï‚· No indentation for the first paragraph of each section, then indent from the second paragraph onwards. ï‚· 1.5 or double line spacing. ï‚· Make sure there are no typos (you will lose marks for obvious typos, e.g., CAMP instead of CAPM). ï‚· Writing an Abstract is not necessary. ï‚· Put tables and figures (if any) in the main text. COVER SHEET: Please ensure you attach a cover sheet to your assignment. The cover sheet should contain the following information: your student number, module code, module title, date submitted, and word count. The template of the cover sheet will be uploaded to Learning Central. You are free to choose the title for this essay. FREQUENT ASKED QUESTIONS: Q: How many words should be allocated for each part? A: There are no strict requirements. My advice would be Part 1 – 1500, Part 2 – 1500, and Part 3 – 1000 words. Do make sure you cover Parts 1 and 2 equally. Q: How many references should I use? A: Again, there are no strict requirements. It is always good to have more references and readings to support your arguments. Also, make sure that references appearing in the bibliography are the ones you have cited in the main text. You may risk losing marks for having references that are not used in the main text. Q: Can I use bullet points or numbered lists for presenting my results? A: No, you should avoid using bullet points or lists in this essay for two reasons. First, bullet points give an impression that it is a powerpoint presentation instead of an essay. Second, they hurt the flow of an essay. Q: Can I go over/below the suggested word count? A: You should limit your word count to be within 3500-4500. Going over or below this range risks losing marks. Q: I don’t know how to interpret and write-up the test results. How do I know more about that? A: You should check out research methods textbooks. Also read journal articles in accounting and finance, and learn empirical results are interpreted and explained by other researchers, as well as how they structure their hypotheses.
