fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

supply chain information in analyst reports on publicly traded companies abstract analyst reports are an important source of secondary data on companies for understanding a company s performance in the recent past and for getting guidance on its future performance we therefore analyzed the text of 1028 equity analyst reports of 145 fortune 500 global companies not including services sectors like it or banking published between 2009 and 2011 for supply chain related information we found that nearly three fifths of these reports contained supply chain information pertaining to inbound process or outbound aspects of the supply chain of the company at the report level there are significant industry effects for supply chain related content in analyst reports on the other hand aggregating information at the company level it appears that analysts focus on a particular supply chain aspect for a company as well as its sector furthermore logistic regression analysis suggests a link between the supply chain information provided when this is positive in orientation and the buy sell hold recommendation of the analyst regarding the company s stock

forecast accuracy of individual analysts in nine industries the purpose of this paper is to investigate whether financial analysts with superior earnings forecasting ability can be distinguished on the basis of ex post forecast accuracy i explore the question by estimating and comparing average accuracy across individuals and by considering whether the observed distribution of analyst forecast accuracies differs from the distribution expected if their relative performances each year were purely random overall i do not find systematic differences in forecast accuracy across individuals financial press coverage suggests there are superior financial analysts for example institutional investor s annual all american research team includes analysts rated by money managers as superior on a variety of criteria including earnings forecasting ability to pick stocks and the quality of written reports clearly financial analyst services other than forecast accuracy are valued by their clients i focus on only one activity earnings forecasting for two reasons first forecast data are available quantitative and can be evaluated against observable earnings outcomes services such as insightful well written research reports are harder to evaluate quantitatively second academic use of analyst forecasts as earnings expectations data in capital markets empir

central bank transparency and cross border banking abstract we analyze the effect of central bank transparency on cross border bank activities based on a panel gravity model for cross border bank claims for 21 home and 47 destination countries from 1998 to 2010 we find strong empirical evidence that a rise in central bank transparency in the destination country on average increases cross border claims using interaction models we find that the positive effect of central bank transparency on cross border claims is only significant if the central bank is politically independent and operates in a stable economic environment central bank transparency and credibility are thus considered complements by banks investing abroad

intertemporal cost allocation and managerial investment incentives a theory explaining the use of economic value added as a performance measure this paper provides a formal analysis of how managerial investment incentives are affected by alternative allocation rules when managerial compensation is based on accounting measures of income that include allocations for investment expenditures the main result is that there exists a unique allocation rule that always induces the manager to choose the efficient investment level the income measure created by this allocation rule is usually referred to as residual income or economic value added

underreaction to industry wide earnings and the post forecast revision drift we test whether the post forecast revision drift is mainly attributable to investors underreaction to industry wide earnings news conveyed by analysts forecast revisions we find a large drift associated with industry wide earnings news but no drift associated with firm specific earnings news consistent with the functional fixation hypothesis we provide evidence that the post forecast revision drift is driven by investors underreaction to the higher persistence of industry wide earnings although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

weather variations and international trade in this paper i investigate the effect of weather variations in the exporter and importer countries separately as well as a the difference between weather variations in both countries on bilateral trade flows the analysis is done at the country sectoral and product levels worldwide and over the 1992 2014 period i find a negative effect of temperature variations in the exporter country and in the difference between exporter and importer countries on bilateral trade at the country level at the product level both negative and positive effects arise but the negative effect of temperature dominates the temperature effects are on the agricultural and manufacturing sectors especially in the textile and metals sectors i show that possible channels are the impact of temperature on output and labour productivity the negative impacts are larger in exporter countries that are closer to the equator that have lower quality of institutions and that export to more remote countries if countries are able to adapt to climate change the long term effects of temperature variations should be lower than the contemporaneous effect nevertheless my results on the long term effects analysis do not support this hypothesis suggesting no or very low adaptation moreover the negative effect of temperature is persistent and cumulative through several years after the temperature shock concerning precipitation variation effects they are found mainly at the product level with the positive effect dominating for the affected products

an analysis of the recommendations of the superstar money managers at barron s annual roundtable the authors examine the performance of common stock recommendations made by prominent money managers at barron s annual roundtable from 1968 to 1991 to avoid survivorship bias they examine the performance of recommendations by all the participants the buy recommendations earn significant abnormal returns of 1 91 percent from the recommendation day to the publication day a period of about fourteen days however the abnormal returns are essentially zero for one to three year postpublication day holding periods thus an individual investing according to the roundtable recommendations published in in barron s would not benefit from the advice copyright 1995 by american finance association

discrete expectational data and portfolio performance in this article we examine the information content in analysts recommendations which are made on a five point buy hold or sell scale our data set includes data on 10 000 forecasts per month unlike most prior studies our data set does not suffer from selection or survivorship bias we find information in analysts changes in recommendations approximately 4 5 extra return can be earned by purchasing new buys rather than new sells

testing an aggressive investment strategy using value line ranks a comment in the june 1981 journal of finance clark holloway reviews returns on a value line investments service vl market portfolio over the past fourteen years although he concludes vl does indeed have the ability to choose good stocks he is careful not to present that conclusion explicitly as an indictment of the efficient markets hypothesis holloway s hesitation is appropriate since the results of this and similar articles about value line are not inconsistent with efficient markets in the article holloway observes that the probability of value line s success by mere chance is only 0286 that observation is a misuse of statistics value line is only one of a number of investment advisory services it was not selected ex ante for this experiment it was selected precisely because it has been successful that value line has put together a string of market successes from 1965 to 1978 is no more significant than the fact that there are always a few gamblers ahead of the house in las vegas if in efficient markets chances of success are about one in two the probability of a randomly selected investment advisory service suffering only three bad years out of 14 is indeed 0286 but out of a population of say 20 investment advisory services the probability of finding at least one with three or less bad years out of 14 is 44 in fact it would only take 24 investment services to give you a betterthan even chance of finding at least one as good as value line that the firm would want to advertise that success is certainly no surprise nor is it surprising that a number of businessmen and academics would notice how well value line has performed against the average but holloway and others have only focused on a firm in the tail of a standard binomial distribution and that doesn t contradict the existence of the distribution itself over 14 years an advisory service in the other tail 3 out of 14 losers will probably have gone out of business whatever clark holloway s intention his results are likely to be misunderstood this is not evidence of a capability systematically to beat the market the statistical experiment is wrongly conceived but if value line performs equally well in the future i promise to discard my faith in efficient markets

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

alternative hypotheses and the volume of trade the gravity equation and the extent of specialization we examine why the gravity equation works and the implications for its use first we demonstrate that the gravity equation as a statistical relationship can be generated from a model with incomplete specialization and trade costs second we analyse the predominance of zero bilateral trade values as a puzzle broadly inconsistent with the complete specialization models typically used to derive the gravity equation but consistent with the alternative hypothesis of incomplete specialization third we demonstrate that the explanation for why the gravity equation works has considerable relevance for how the gravity equation is interpreted and used and how we view bilateral trade diverses hypotheses et le volume du commerce l equation de gravite et le degre de specialisation les auteurs examinent comment fonctionne l equation de gravite et les implications de son usage on propose trois contributions d abord on montre que l equation de gravite en tant que relation statistique et non pas en tant que prediction specifique de commerce bilateral peut etre produite a partir d un modele avec specialisation incomplete et couts de transaction ensuite on analyse la predominance de valeurs zero dans les commerces bilateraux en tant qu enigme generalement incompatible avec les modeles de specialisation complete utilises habituellement pour deriver l equation de gravite mais compatible avec l hypothese de rechange de specialisation incomplete enfin on montre que les raisons pour lesquelles l equation de gravite fonctionne ont un impact sur la facon de l interpreter et de l utiliser et sur notre facon de concevoir le commerce bilateral

information content of equity analyst reports abstract we catalog the complete contents of institutional investor all american analyst reports and examine the market reaction to their release including the justifications supporting an analyst s opinion reduces and in some models eliminates the significance of earnings forecasts and recommendation revisions analysts both provide new information and interpret previously released information the information in a report is most important for downgrades target prices and the analyst s justifications are the only significant elements for reiterations no correlation exists between valuation methodology and either analyst accuracy or the market s reaction to a report our adjusted r 2 s are much larger than those of studies using only summary measures

the use of accounting and security price measures of performance in managerial compensation contracts a discussion abstract it is commonly observed that the compensation paid to senior level executives depends on both accounting and security price measures of performance the articles by kim and suh bushman and indjejikian and sloan which i have been invited to discuss examine the issue of how much weight to place on these two measures in the contract the first two papers analyze the role that earnings can play in removing the noise in stock price in a rational expectations pricing model the sloan paper analytically and empirically examines the role that earnings can play in removing macroeconomic factors from stock price

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

an empirical investigation of the relative performance evaluation hypothesis the principal agent framework has become a widely used paradigm in accounting and economics for analyzing issues in performance evaluation management control and the design of incentive systems while recent work in experimental economics has begun to examine empirically some of the underlying assumptions and implications of agency theory see baiman and lewis 1989 and kirby forthcoming few precise hypotheses have been tested using real world or naturally occurring data one exception has been the empirical investigation of the relative performance evaluation rpe hypothesis agency theory suggests that there are benefits associated with evaluating agents on the basis of their relative performances when the agents performances are affected by a common shock term e g see diamond and verrecchia 1982 and holmstrom 1979 1982 specifically a relative performance based contract can remove the common shock term from an agent s performance which enables a better evaluation of the agent s actions

accounting income stock price and managerial compensation abstract this paper employs an agency model where a manager has a two dimensional action choice to study how the information content of earnings affects the design of compensation contracts based on earnings and price price is modeled as an endogenous variable that reflects all available information including earnings two settings are contrasted in the first earnings and price reflect the same underlying information about firm value while in the second earnings reflect a subset of the information reflected in price it is shown that differences in information content substantially alter the characteristics of compensation contracts based on earnings and price

do analysts generate trade for their firms evidence from the toronto stock exchange abstract it has generally been assumed that the potential commission revenue is an important determinant of a sell side analyst s decision of what firms to cover and what information to publicly release however because stock volume has not been disaggregated on a brokerage firm level uncertainty remains regarding the economic importance of the relation between analyst coverage and brokerage firm volume using a unique data set that identifies the broker s involved in each trade i find that brokerage volume is significantly higher in covered stocks than in uncovered stocks on average brokers increase their market share in covered stocks by 3 8 relative to uncovered stocks

the informative role of the value line investment survey evidence from stock highlights i examine abnormal stock returns associated with stock highlights published by the value line investment survey at the time of their publication stock highlights elicit strong positive abnormal returns they also have positive abnormal returns at the time of the earnings announcement preceding stock highlight publications post earnings announcement drift is present but is much too small to explain abnormal returns at the time of the publication of stock highlights thus value line stock highlights provide useful information to investors this information is rapidly reflected in stock prices consistent with market efficiency

earnings surprise research synthesis and perspectives an investigation of the relation between earnings surprise and three empirical anomalies the p e effect the size effect and the value line enigma indicates that the standardized unexpected earnings sue effect appears to be separate and distinct from each of the three the relations between the sue phenomenon and firm risk the appropriateness of the earnings expectations model and the role of transaction costs are also investigated the sue phenomenon is not attributable to inappropriate risk adjustment use of the wrong earnings expectations model or ignoring transaction costs the sue effect may be partly explained by analysts behavior and is both predictable and profitable the sue effect has also been observed in japan

how much intraregional exchange rate variability could a currency union remove the case of asean 3 abstract a multilateral currency union removes intraregional exchange rates but not the union rate the pre union intraregional exchange rate variability is thus latent a two step procedure is developed to measure this the measured variables are used to model inflation and intraregional trade growth of individual union members counterfactual simulations of the union impact are carried out using the resulting models application to asean 3 shows that the intraregional variability mainly consists of short run exchange rate shocks that the variability significantly affects inflation and intraregional trade of major asean 3 members and that a union would reduce inflation and promote trade regionwide

analysts and anomalies abstract analysts price targets and recommendations contradict stock return anomaly variables using an index based on 125 anomalies we find that analysts annual stock return forecasts are 11 higher for anomaly shorts than for anomaly longs anomaly shorts return forecasts are excessively optimistic exceeding realized returns by 34 recommendations also tend to be more favorable for anomaly shorts although this result varies across anomaly types consistent with analysts slowly incorporating anomaly information anomalies forecast revisions in both price targets and recommendations our findings imply that investors who follow analysts actionable information contribute to mispricing

on the trade impact of nominal exchange rate volatility what is the effect of nominal exchange rate variability on trade i argue that the methods conventionally used to answer this perennial question are plagued by a variety of sources of systematic bias i propose a novel approach that simultaneously addresses all of these biases and present new estimates from a broad sample of countries from 1970 to 1997 the estimates indicate that nominal exchange rate variability has no significant impact on trade flows

the total cost of transactions on the nyse this paper develops a measure of execution costs market impact of transactions on the nyse the measure is the volume weighted average price over the trading day it yields results that are less biased than measures that use single prices such as closes the paper then applies this measure to a data set containing more than 14 000 actual trades we show that total transaction costs commission plus market impact costs average twenty three basis points of principal value for our sample commission costs averaging eighteen basis points are considerably higher than execution costs which average five basis points they vary slightly across brokers and significantly across money managers though brokers do not incur consistently high or low transaction costs money managers experience persistently high or lost costs finally the paper explores the possible tradeoff between commission expenditures and market impact costs paying higher commissions does not yield commensurately lower execution costs even after adjusting for trade difficulty we cannot determine whether other valuable brokerage services are being purchased with higher commission payments or whether some money managers really are inefficient consumers of brokerage trading services recent years have witnessed an explosion of institutional trading on the nation s stock exchanges in 1970 only 17 000 trades of blocks of 10 000 or more shares were done on the new york stock exchange these accounted for merely fifteen percent of total volume in 1984 there were 433 000 such block trades accounting for fifty percent of volume these trades are costly and in an informationally efficient stock market cannot help but have a deleterious effect on the investment performance of institutional investors

a practitioners guide to gravity models of international migration the use of bilateral data for the analysis of international migration is at the same time a blessing and a curse it is a blessing because the dyadic dimension of the data allows researchers to address a number of previously unanswered questions but it is also a curse for the various analytical challenges it gives rise to this paper presents the theoretical foundations of the estimation of gravity models of international migration and the main difficulties that have to be tackled in the econometric analysis such as the nature of migration data how to account for multilateral resistance to migration or endogeneity we also review some empirical evidence that has considered these issues

the effects of exchange rate volatility on agricultural trade i extend cho sheldon and mccorriston s 2002 analysis of the effect of exchange rate volatility on agricultural trade among the g 10 countries to a broad sample of developed and developing nations i replicate their original finding that exchange rate volatility has a large negative impact on agricultural trade between g 10 members after controlling for agricultural export subsidies which are correlated with exchange rate volatility i show that the original impact declines by half using the extended sample i find that the effect of exchange rate volatility is much larger for developing country exporters than for developed exporters copyright 2008 oxford university press

stock price reaction and value relevance of recognition versus disclosure the case of stock based compensation this study examines the equity price reaction to the pronouncements related to accounting for stock based compensation and assesses the value relevance of recognition versus disclosure in financial reporting we document that firms exhibit significant abnormal returns around the issuance of the exposure drafts proposing to require recognition of stock based compensation costs and also around the event reversing that decision to require disclosure only while encouraging recognition we also document that the abnormal returns are most pronounced for high tech high growth and start up firms our results are consistent with the contracting theory and show that disclosure is not a substitute for recognition r 2002 elsevier science b v all rights reserved

endogeneity in count data models an application to demand for health care the generalized method of moments gmm estimation technique is discussed for count data models with endogenous regressors count data models can be specified with additive or multiplicative errors and it is shown that in general a set of instruments is not orthogonal to both error types simultaneous equations with a dependent count variable often do not have a reduced form which is a simple function of the instruments however a simultaneous model with a count and a binary variable can only be logically consistent when the system is triangular utilizing data from the british health and lifestyle survey 1991 1992 the gmm estimator is used in the estimation of a model explaining the number of visits to doctors with a self reported binary health index as a possible endogenous regressor if this regressor is truly endogenous one expects the pseudo likelihood estimate of its coefficient to be biased upwards indeed for the additive model the estimated coefficient of the binary health index decreases in value when the possible endogeneity of this regressor is taken into account further indication of endogeneity is given by the fact that the overidentifying restrictions are rejected in the multiplicative model but not in the additive model finally a model that includes predicted latent health instead of the binary health index is estimated in stages

mutual fund trades and the value of contradictory private information abstract we investigate the performance of mutual funds that trade using private information these funds are uniquely identified from a set of 2730 funds with 44 315 fund periods between 1994 and 2005 we compare the alignment of fund trades with brokers recommendations which we regard as public information in the universe of informed and uninformed mutual funds funds that systematically trade counter to the public information form a homogenous subset of the privately informed funds by using private information that contradicts the public information these funds exhibit a superior average performance after we control for serial correlation in fund returns we assess this advantage as being an economically significant 1 7 per annum we also show empirically that smaller funds are better able to capture the benefit of private information

economic effects of currency unions we develop a new instrumental variable iv approach to estimate the effects of different exchange rate regimes on bilateral outcomes the basic idea is that the characteristics of the exchange rate between two countries are partially related to the independent decisions of these countries to peg explicitly or de facto to a third currency notably that of a main anchor this component of the exchange rate regime can be used as an iv in regressions of bilateral outcomes we apply the methodology to study the economic effects of currency unions the likelihood that two countries independently adopt the currency of the same anchor country is used as an instrument for whether they share a common currency we find that sharing a common currency enhances trade increases price comovements and decreases the comovement of real gross domestic product shocks

bilateral trade flows the linder hypothesis and exchange risk bilateral trade flows are used to examine the linder hypothesis and the effect of exchange rate variability in a gra vity type trade model derived from an underlying demand and supply mo del a behavioral model is used to justify examining these issues joi ntly the model performs well empirically using a sample of seventeen countries for the period 1974 82 the authors find overwhelming supp ort for the linder hypothesis and this version of the gravity model moreover they find strong support for the hypothesis that increased exchange rate variability affects bilateral trade flows copyright 1987 by mit press

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

conflict of interest and the credibility of underwriter analyst recommendations brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public we show that stocks that underwriter analysts recommend perform more poorly than buy recommendations by unaffiliated brokers prior to at the time of and subsequent to the recommendation date we conclude that the recommendations by underwriter analysts show significant evidence of bias we show also that the market does not recognize the full extent of this bias the results suggest a potential conflict of interest inherent in the different functions that investment bankers perform

incentive contracting and value relevance of earnings and cash flows accounting performance measures such as earnings and cash flows are useful for both valuation and performance evaluation purposes however little evidence exists on whether there is any association between these two roles in this study we provide large sample empirical evidence that the value relevance of earnings explains a significant amount of the cross sectional variation in the pay sensitivity of earnings and the incremental value relevance of cash flows explains variation in the marginal pay sensitivity of cash flows we document that while both value relevance and compensation weight on earnings decline from the subperiod of 1993 to 1997 to the subperiod of 1998 to 2003 both value relevance and compensation weight on cash flows increase from the earlier subperiod to the later subperiod overall our results provide additional evidence that value relevance of a performance measure plays a significant role in its use for performance evaluation

incentive efficiency of compensation based on accounting and market performance abstract this paper analyzes how earnings and price are used in executive compensation contracts risk averse shareholders collectively design a contract and individually trade in the stock market in the optimal linear contract the use of earnings and price depends critically on incentive efficiency i e how precisely the measures convey the true outcome the relative weight of price to earnings exaggerates the true relative importance of price because price impounds traders overall information while its informational value lies in the incremental information it provides the use of price allows shareholders to share trading risks with managers

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

currency unions and international integration this paper characterizes the integration patterns of international currency unions such as the cfa franc zone we empirically explore different features of currency unions and compare them to countries with sovereign monies by examining the criteria for mundellos concept of an optimum currency area we find that members of currency unions are more integrated than countries with their own currencies for instance we find that currency union members have more trade and less volatile real exchange rates than countries with their own monies business cycles are more highly synchronized across currency union countries than across countries with sovereign monies

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed