stock price reactions as surrogates for the net cash flow effects of corporate policy decisions abstract this paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions the focus is on testing cross sectional associations between cash flow effects and the underlying characteristics of affected firms we find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process

evidence on the choice of inventory accounting methods lifo versus fifo in this paper we describe various systematic properties of lifo and fifo firms accounting numbers included are assessments of these properties for firms reported annual numbers and for their as if counterparts obtained by estimating what lifo fifo firms would have reported had they used the fifo lifo inventory method instead our purpose in conducting these assessments is to provide additional evidence on tax and nontax explanations of firms choices of inventory accounting methods in the next subsection we elaborate on these two classes and suggest that the nontax explanations may have attracted adherents partly because existing empirical evidence is not entirely consistent with the tax explanation of lifo fifo choices of inventory accounting methods although data limitations prevent us from performing direct tests of these alternative explanations our empirical results

structural changes in the uk energy market abstract energy use in the uk has undergone substantial structural changes since the rapid rise in the price of oil in 1979 this paper traces the effect of the second round of oil price increases on the adoption of effective energy saving methods in industry and in private households in the uk the analysis shows the largest decrease of energy consumption occurred in industry which is both the most energy intensive as well as the most sensitive to energy prices

capital stock rotation conservation and fuel substitution in the uk industrial steam raising market abstract this paper summarizes recent research on economic and technological change in the uk steam boiler stock in the industrial and commercial sectors whilst some recent econometric analyses have drawn upon capital stock theory many hypotheses remain untested against empirical data the paper draws upon insurance company records to examine the key technical characteristics of the boiler stock in analysing current and prospective boiler fuel requirements emphasis is placed on the scope for interfuel substitution especially towards coal in this major market over the period to 2000

after the paris agreement measuring the global decarbonization wedges from national energy scenarios the new bottom up approach of the paris agreement calls for a better understanding of the domestic dimension of development pathways and of the implications for global emissions trajectory to this end it is of strategic importance to provide a common framework that makes it possible to identify the key decarbonization wedges at the national level and to highlight the potential benefits of international cooperation the article proposes an advanced index decomposition analysis methodology based on sectoral energy service indicators and on a specific decomposition in the power sector for quantifying the contribution of different mitigation strategies it is applied to national deep decarbonization pathways elaborated in the deep decarbonization pathway project ddpp by the sixteen largest ghg emitting countries in a global perspective the results reveal the key role of energy efficiency and decarbonization of energy carriers in the industry sector deployment of renewables in the power sector and to a lesser extent coal gas substitution and efficiency and energy decarbonization in the transport sector the analysis also calls for a deeper understanding of the role a reduction in energy service demand can play in mitigation scenarios and of the respective contribution for industry of energy efficiency and structural change

information in prices about future earnings abstract stock return over a period reflects the market s revision in expectation of future earnings accounting earnings over the same period however have limited ability to reflect such revised expectations therefore returns anticipate earnings changes and the earnings response coefficient from a regression of returns on contemporaneous earnings changes is biased toward zero we reduce this bias by including leading period returns in price earnings regressions the resulting estimated earnings response coefficient magnitudes suggest that the capital market on average views earnings changes to be largely permanent this is consistent with the random walk time series property of annual earnings

stock price reactions to lifo adoptions the association between excess returns and lifo tax savings although long a topic of accounting research little is known about the motives for or effects of voluntary changes in accounting techniques among the motives which have been suggested are attempts by managers to smooth reported earnings gordon 1964 copeland 1968 cushing 1969 white 1972 and ronen and sadan 1981 to influence man agement compensation to reduce regulatory or political costs watts and zimmerman 1978 and to avoid bond covenant restrictions holthausen 1981 while some of these motives may be consistent with a market value rule they often fail to provide unambiguous accounting change predictions e g which accounting changes result in lower regulatory costs moreover empirical verification has been constrained by the unobservability of the variables to which the managers allegedly respond the stock price reaction which should be expected for a given account ing change depends not only on its implications for the valuation of securities but also on the extent to which the implications are already known or anticipated by investors 3 ultimately our ability to detect these stock price effects if any depends on the power of our tests previous studies of the effects of accounting changes have generally not found significant stock price reactions archibald 1972 ball 1972 kaplan and roll 1972 harrison 1977 and holthausen 1981 4 for the most part these studies dealt with accounting changes which had no direct cash flow effects in contrast changes in inventory costing methods especially those involving the last in first out lifo cost flow assumption can generate potentially large changes in a firm s cash flows due to their impact on taxable earnings these cash flow effects provide not only a motive for lifo changes5 which is consistent with the market value rule but also implications for associated stock price effects if investors react to lifo s cash flow implications rather than to its effects on reported earnings then positive stock price adjustments should be associated with lifo adjustments however the evidence from previous studies of stock price reactions to lifo adoptions is inconclusive ball 1972 sunder 1973 1975 abdel khalik and mckeown 1978 brown 1980 and ricks 1982 while several factors may account for these results see section 2 it can be noted that the previous studies have considered only a dichotomous variable whether or not a firm has adopted lifo yet because the cash flow consequences of a lifo adoption decision depend on a number of firm specific factors this approach ignores potentially large differences among firms in the economic consequences of lifo adoptions most firms switching to lifo now reveal in their financial statement disclosures the tax savings which have been realized this study uses these disclosures to examine the association between unsystematic re turns and the magnitudes of first year lifo tax savings for all nyse firms which adopted or extended their use of lifo during the period 1972 80 subject to data availability 6 the research design employs within group comparisons based on cumulative monthly unsystematic excess returns with appropriate controls for unexpected earnings per formance 7 this design avoids several methodological weaknesses inherent in the previous studies and allows more definitive tests of hypotheses relating investor reactions to the income and cash flow effects of lifo adoptions as reported more fully below results based on lifo adoptions made in 1974 are consistent with a positive association between cumulative excess stock returns and the magnitudes of lifo tax savings 8 the results also provide evidence that changes in systematic risk may accompany lifo adoptions however contrary to previous studies most of the sample firms exhibit downward rather than upward changes in systematic risk section 2 reviews the previous studies of stock price reactions to lifo adoptions and suggests explanations for their results section 3 discusses the alternative approach employed in this study while section 4 describes the test methodologies employed the data and data selection procedures are described in section 5 the results and a discussion are presented in section 6 section 7 offers some conclusions

innovation and inequality in a small world we present a multicountry theory of economic growth and r d driven technological progress in which countries are connected by a network of knowledge exchange technological progress in any country depends on the state of technology in the countries it exchanges knowledge with the diffusion of knowledge throughout the world explains a period of increasing world inequality followed by decreasing relative inequality knowledge diffusion through a small world network produces an extraordinary diversity of country growth performances including the overtaking of individual countries and the replacement of the technologically leading country in the course of world development

market based empirical research in accounting a review interpretation and extension a decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here it is the search into the relationship between publicly disclosed accounting information and the consequences of the use of this information by the major group of usersequity investors as such consequences are reflected in characteristics of common stocks traded in major exchanges this research effort known as market based accounting research mbar obtained its impetus from major developments in finance theory during the late 1950s and early 1960s these were the portfolio selection theory and its offspring the capital asset pricing model capm and the concept of informationally efficient capital markets ecm subsequent developments in information economics agency theory and optimal incentive signaling models were quickly incorporated into mbar while the impetus to this line of research came from other disciplines accounting was not only a beneficiary but also to a modest extent a benefactor mbar is relevant to the study of capital market efficiency the capm information economics and regulation this contribution distinguishes mbar from most accounting areas whose contributions to other disciplines are negligible in

market valuation and deregulation of electric utilities abstract this study examines the effect of ongoing deregulation in the electric utility industry on the relation between market value book value and earnings we predict that deregulation decreases increases the relative importance of book value earnings in explaining price we test this prediction by examining changes in the value relevance of book value and earnings during the 1988 1996 time period for a sample of large investor owned electric utilities we find that the regression coefficients and incremental explanatory power related to book value earnings have decreased increased over this time period these results are generally robust in sensitivity analysis

failure of stock prices to discipline managers in a rational expectations economy in this paper we show that even a strongly efficient stock market is by itself insufficient to discipline managers who may hold incorrect beliefs about investors behavior and their decision rules instead of disciplining the managers the stock market may generate prices that reinforce these incorrect beliefs when this happens the disciplining of managers must be accomplished through other mechanisms such as through markets for managerial labor mergers and takeovers the financial press and education these alternative mechanisms may produce slower disciplinary reactions than the stock market several important classes of accounting phenomena seem consistent with a failure of the stock market to discipline managers promptly we present in detail how the apparent failure of managers to make cashflow maximizing lifo fifo choices in a timely fashion is consistent with this theory our approach is also applicable to other financial reporting conundrums in which adverse managerial and stock market reactions were predicted in response to financial accounting standard no 2 accounting for research and development outlays standard no

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

global inequality of opportunity how much of our income is determined by where we live suppose that all people in the world are allocated only two characteristics over which they have almost no control country of residence and income distribution within that country assume further that there is no migration the authors show that more than one half of variability in income of world population classified according to their household per capita in one percent income groups by country is accounted for by these two characteristics the role of effort or luck cannot play a large role in explaining global distribution of income

the economic consequences of accounting choice implications of costly contracting and monitoring abstract in this paper we review research into the economic consequences of voluntary and mandatory choices of accounting techniques and standards we discuss how the predictions of extant economic consequence theories are driven by contracting and monitoring costs associated with management compensation contracts bond covenants regulation and or political visibility we review empirical tests of economic consequence theories categorize those tests and discuss their strengths and weaknesses the empirical tests reveal two systematic associations with accounting choice size a proxy for political visibility and leverage a proxy for contracting and monitoring costs of lending agreements interpretation of the results is difficult due to general limitations of the tests we conclude by suggesting some directions for future research based on our analysis of the potential payoffs associated with different types of empirical tests

globalization and its challenges rudi was born and grew up in krefeld germany he was an undergraduate at the university of geneva and completed his ph d at the university of chicago in 1971 which is where we met he was a student of robert mundell and both the subject matter the development of the mundell fleming model and the elegance and insights of his early work reflected mundell s influence he taught at the university of rochester and at the university of chicago before accepting an offer from mit in 1975

dynamic analysis of inventory accounting choice this study presents a dynamic model of inventory accounting choice and thereby permits a systematic consideration of that choice over time i also restrict the dynamic model sufficiently to generate a static crosssectional model similar to those used in previous studies e g lee and hsieh 1985 and caster and simon 1986 estimation of the dynamic model identifies correlates of the change in inventory methods empirical estimates of the cross sectional model extend previous research on firm characteristics related to the use of different inventory accounting methods consistent with theories of optimal inventory accounting choice i find that factor prices play an important role in the accounting choice size change in gross national product and to a small extent industry membership also play a role in the transition assuming that managers act to maximize firm values i develop an econometric threshold model in which a dichotomous inventory method choice is determined by an underlying continuous variable a change occurs when the continuous variable crosses a threshold the model is simplified by assuming that changes of accounting state follow a first

the magnitudes of financial statement effects and accounting choice the case of the adoption of sfas 87 abstract we examine the accounting choice decision in the context of the timing of adoption of sfas 87 unlike most prior studies we consider interactions between firm characteristics and the magnitudes of the financial statement effects of an accounting decision we expect that including interactions will both enhance the ability to explain accounting choice and facilitate distinction between omitted variables ball and foster 1982 and hypothesized relations results are consistent with these expectations

green and brown globalization and the environment globalization viewed as a process of economic integration that embraces governance as well as markets could lead to worldwide convergence toward higher or lower environmental quality or to environmental polarization in which the greening of the global north is accompanied by the browning of the global south the outcome will not be dictated by an inexorable logic rather it will depend on how the opportunities created by globalization alter balances of power within countries and among them copyright 2004 oxford university press

the use of mathematical models in financial accounting well over a year ago it was proposed that i write a survey paper for this conference which discussed the role of mathematical models in financial accounting the difficulty with this assignment is that mathematical models have been used to address a wide variety of issues in financial accounting and a paper which touched on all of them would probably be unable to examine any single one in depth therefore i have chosen in financial accounting three popular mathematical modeling themes and have interpreted these themes in the context of a competitive equilibrium market model to lend greater cohesiveness to the discussion i refer to the three topics chosen as 1 assessing the consequences of public disclosure 2 formalizing the notion that markets are efficient with respect to information and 3 understanding the effect of increased public disclosure on private incentives to acquire information other areas in financial accounting which use mathematical models but are not discussed here include income measurement valuation models i e models which map accounting variables or other information into equi

analyst forecast errors and stock price behavior near the earnings announcement dates of lifo adopters between june 1974 and may 1975 over 400 firms on the new york and american stock exchanges adopted the last in first out lifo inventory costing method responding to the first round of double digit inflation since wwii these firms were able to assign their newer and thus higher inventory costs to units sold thereby realizing substantial tax savings 1 however ricks 1982 found that stock returns near the earnings disclosure dates of 1974 lifo adopters were negative and significantly lower than returns near the earnings disclosure dates of firms not using lifo given that firms adopting lifo in 1974 were voluntarily switching to an accounting method providing often significant tax savings it is not obvious why investors would have reacted negatively nor is it likely that investors were unaware of many of the firms lifo adoption decisions stevenson 1987 found that at least two thirds of the firms in ricks sample had disclosed their lifo adoptions prior to their earnings disclo sure dates if investors were reacting to the effects of the lifo adoptions why did they react negatively given the increased cash flows and prior disclosures if investors were not reacting to the effects of the lifo adoptions what caused the significant negative excess returns near the earnings disclosure dates of firms adopting lifo in 1974 this study presents evidence suggesting that the negative excess re turns observed by ricks 1982 were associated with and possibly due to analysts systematic overestimates of earnings of firms adopting lifo in 1974 we are aware of no previous study documenting systematic errors in analysts earnings forecasts conditional on a voluntary account ing method change as a first step we assess the generality of ricks finding by examining excess returns near the preliminary earnings disclosure dates hereafter prelim dates of all new york nyse and american stock exchange amex firms adopting lifo between 1973 and 1980 the results confirm negative excess returns around the prelim dates of firms adopt ing lifo in 1974 there is little evidence of significant excess returns negative or positive near the prelim dates of firms adopting lifo in other years to explain the negative returns of the 1974 adopters we examine the association between excess returns and earnings forecast errors we find that standard poor s analysts systematically overestimated the earn ings of these firms analyst forecast errors are found to be significantly correlated with both the excess returns around the prelim dates and the earnings reductions due to the lifo adoptions finally we offer two possible explanations for the negative excess returns and the positive correlations between excess returns analyst earnings forecast errors and earnings effects of the 1974 lifo adoptions first the limited availability of information regarding the likely earnings effects of the 1974 lifo adoptions combined with the relative novelty of this accounting change may have led analysts and investors to underestimate the lifo earnings effects and may have made it difficult for the market to discern immediately the cause of the resulting negative forecast errors evidence consistent with this limited information hypothesis is found in the predictions of value line analysts of lifo earnings effects the actual mean earnings per share effect of the lifo adoptions 947 was 62 higher than the average value line estimate 584 however tests for the stock price reversals which would be implied by the limited information explanation are inconclusive a second possible explanation is that the magnitudes of lifo earnings effects were caused by and or provided implications regarding another factor which was important in valuing the firms yet difficult for analysts and investors to predict inflation is suggested as the likely candidate since lifo tax savings are a function of the rate at which inventory costs are increasing firms experiencing higher rates of inflation would have greater incentives to adopt lifo 4 thus the self selected sample of firms which adopted lifo in 1974 may include firms most affected by that year s surge of inflation since the extent to which inventory costs have increased is reflected in the magnitudes of the earnings effects of lifo adoptions the negative analyst forecast errors and the positive correlation between these forecast errors and the earnings effects of lifo adoptions could be explained by analyst underestimates of the rates of inflation experienced by these firms evidence consistent with this inflation hypothesis is found in the fact that managers of firms adopting lifo underestimated the impact of inflation on their own firms in addition negative excess returns and earnings overestimates are observed for a sample of established lifo users consistent with analysts and investors being surprised by the impact of inflation on these firms as well however aggregate tests based on cross industry correlations between changes in wholesale prices and lifo related variables are generally inconclusive

pattern of uk fuel use abstract this paper provides an analysis of the historical development of the uk primary energy market more specifically of coal gas and heavy fuel oil the period considered for this investigation is 1960 83 a theoretical framework is set up and the significant shifts in the market are traced accordingly as it turns out the shifts in the energy market of the uk have been similar to those in other european countries despite indigenous oil and gas resources

evidence on the effect of bond covenants and management compensation contracts on the choice of accounting techniques the case of the depreciation switch back abstract provisions of bond indenture agreements and management compensation contracts are examined to derive testable implications concerning management s incentives to choose among alternative accounting techniques the hypotheses are subjected to empirical examination by investigating the voluntary change from accelerated to straight line depreciation for financial reporting purposes only the methodology utilized incorporates an expectations model of accounting earnings in an attempt to separate out of the effects of earnings announcements from accounting change announcements which are often concurrent the evidence from both price and non price data is not consistent with the general hypothesis that bond covenants and management compensation contracts are important determinants of the decision to change depreciation techniques five potential explanations for the results are offered

the market s response to the 1974 lifo adoptions in this paper i report the results of a study of stock price reactions to lifo adoptions in 1974 and 1975 these two years were characterized by high levels of inflation and wide swings in stock prices and more than 400 firms on the new york and american stock exchanges switched to lifo previous studies see below provide conflicting results of the market s reaction to lifo adoptions these studies exhibit certain research design and small sample limitations which prevent one from resolving the issue of how the market reacts to lifo switches using a better matched pair design and a larger sample i conclude that lifo adopters suffered negative abnormal return performance during the period surrounding their annual earnings announcements while several possible explanations for this result are discussed additional research is needed to provide further insight into the nature of the market reaction to lifo adoption

the asymmetric relationship between executive earnings management and compensation a panel threshold regression approach abstractprior research shows that chief executive officers ceos are rewarded for their earnings management we re examine this issue using a panel threshold regression approach which allows the effect of earnings management on the ceo compensation to change across the level of earnings management and ceo compensation our results show that the effect of ceos discretionary accounting choices on their compensation is not homogeneous across various degrees of earnings management and compensation in particular for firms with moderate inordinate levels of earnings management and ceo compensation earnings management is rewarded penalized

environmental policies market responses and incentives abstract environmental degradation cannot be cured by relying solely on the public sector debating and introducing policies and control to prompt the market to develop the technology for reducing emission there has to be a more tangible evidence of an economic gain and a much higher return than currently prevails for new investment there is a tendency within industry to favour revenue generation projects against those for cost reduction by requiring shorter gestation and payback periods for the latter even though the former is the dual of the latter thus energy efficiency projects tend to receive low priorities by industry by requiring much higher return and faster payback periods for them sometimes as low as three months it is possible that a supply shock may need to occur to induce the market to invest and develop the required technology in order to redress some of the current environmental imbalance

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

performance fee contract change and mutual fund risk abstract we examine the effect that an exogenously specifically governmentally required change in compensation contract had on a managerial decision we find that a group of mutual funds changed their portfolio risk levels after they were forced to change their performance fee schedules their portfolio risk choices differed predictably from a randomly selected group of nonperformance fee funds and a group of performance fee funds that were not required to change their compensation contracts in addition the affected mutual funds lost both shareholders and assets around the time of the imposition of the restriction while the other funds exhibited little change or gained assets and shareholders

firm size effects and the association between excess returns and lifo tax savings biddle and lindahl 1982 henceforth b l used cross sectional regressions to analyze the market reaction for 311 nyse firms that adopted lifo in the period 1973 80 fifteen month excess returns were regressed on an unexpected earnings variable and a measure of the tax savings from lifo adoption the coefficient on the tax savings variable was positive and highly significant leading to the conclusion that the market reacted positively to the cash flow implications of lifo adoption this paper reexamines the b l analysis by enlarging the sample and addressing several methodological concerns the results which suggest b l s findings are attributable to the confounding effects of firm size are consistent with any of three views 1 the lack of a positive market reaction to lifo adoption 2 the inadequacy of adoption year tax savings as a proxy for the net benefit of lifo adoption or 3 the confounding of the market reaction to lifo adoption with the reaction to other events because returns are cumulated over such a long time period section 2 describes the data collection procedures section 3 presents the results and section 4 offers some conclusions

a conceptual framework for the stock price effects of lifo tax benefits this paper presents a conceptual evaluation of the stock price effects of lifo tax savings in periods of inflation adopting lifo can create cash flow benefits by deferring tax payments whether lifo tax savings are valued by investors has been extensively investigated through examinations of the stock price reaction to initial announcements of lifo adoptions 1 while evidence of positive abnormal returns at announcements of lifo adoptions proportional to the projected nominal lifo tax savings would be viewed as consistent with investors recognizing the expected tax benefits of lifo overall empirical evidence available to date does not indicate that lifo adoption related abnormal returns are positively associated with the size of potential nominal lifo tax savings 2

inventories and the structure of macro models the message of this paper can be summed up in two words inventories matter they matter empirically in the sense that inventory developments are of major importance in the propagation of business cycles and they matter theoretically in the sense that recognition of their existence changes the structure of a variety of theoretical macromodels in some fairly important ways this paper is mainly about the implications of inventories for the structure of theoretical macro models but i begin by demonstrating the empirical importance of inventories in business fluctuations this abstract was borrowed from another version of this item

a new data set measuring income inequality this article presents a new data set on inequality in the distribution of income the authors explain the criteria they applied in selecting data on gini coefficients and on individual quintile groups income shares comparison of the new data set with existing compilations reveals that the data assembled here represent an improvement in quality and a significant expansion in coverage although differences in the definition of the underlying data might still affect inter temporal and international comparability based on this new data set the authors do not find a systematic link between growth and changes in aggregate inequality they do find a strong positive relationship between growth and reduction of poverty

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

the price elasticity of electricity demand in south africa this paper examines the effects of price on the demand for electricity in south africa over the period 1950 83 emphasis is placed on the estimation of the long run own price elasticity of electricity demand an unconstrained distributed lag model is used and the 12 years elasticity is estimated to be 0 90 the policy implications of this finding are discussed

are economic liberalization and equality compatible evidence from south asia summary global studies of liberalization and inequality have produced divergent findings arguably because of highly heterogeneous contexts across countries and regions this paper focusing on the south asian experience with more homogeneous contexts finds that liberalization efforts and inequality grew in the region during 1980 03 data support a mutually reinforcing positive relationship in the region suggesting that liberalization helps increase inequality which in turn serves as a precondition to liberalize because economically unequal countries tend to liberalize more intensely possibly hurting the poor a lesson for concerned policymakers is to introduce policies to incrementally advance economic openness

firm size and the information content of prices with respect to earnings abstract beaver lambert and morse 1980 suggest that prices may be useful in forecasting future earnings we explore the information content of prices with respect to earnings by focusing on firm size and its relation to the predictive accuracy of price based earnings forecasts firm size proxies for the amount of information and for the number of traders and professional analysts processing the available information about an enterprise our empirical results are consistent with the hypothesis that price based earnings will outperform univariate time series forecasts by a greater margin for larger firms than for smaller firms

rational expectations and the smoothing properties of inventories of finished goods abstract this paper formulates and estimates a dynamic rational expectations equilibrium model of inventories of finished goods and employment of labor the view that the primary role of inventories of finished goods is to act as a buffer stock in the face of fluctuating demand is examined both the model and estimation results indicate that this is the case because of differences in the costs involved for firms in changing their inventory stocks and labor force in addition to providing some new evidence on the behavior of inventories of finished goods and employment the paper illustrates a technology for maximum likelihood estimation of structural parameters under the hypothesis of rational expectations

the scope for fuel substitution in manufacturing industries a case study of chile and colombia this article analyzes plant level data from chile and colombia to assess how manufactures might respond to carbon taxes and other policies that induces substitution between clean and dirty fuels is producer flexibility linked with sector of activity capital vintage or rates of new capital formation when adjustments in energy use occur are they accomplished through changes in factor proportions for individual producers changes in the output shares of producers within an industry or changes in the relative production levels of different manufacturing industries patterns of energy use within and between industries show that fiscal polices can significantly influence the level and mixture of energy use among manufacturers

earnings and price based compensation contracts in the presence of discretionary trading and incomplete contracting abstract the paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information and share price is set rationally based on privately held information publicly available and contractible information and publicly available but noncontractible information in addition we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy

promise and pitfalls in the use of secondary data sets income inequality in oecd countries as a case study this paper examines the role of secondary data sets in empirical economic research taking the field of income distribution as a case study we illustrate problems faced by users of secondary statistics showing how both cross country comparisons and time series analysis can depend sensitively on the choice of data after describing the genealogy of secondary data sets on income inequality we consider the main methodological issues and discuss their implications for comparisons of income inequality across oecd countries and over time the lessons to be drawn for the construction and use of secondary data sets are summarized at the end of the paper

true world income distribution 1988 and 1993 first calculation based on household surveys alone the paper derives world income or expenditure distribution of individuals for two years 1988 and 1993 it is the first paper to calculate world distribution for individuals based entirely on household survey data from 91 countries and adjusted for differences in purchasing power parity between the countries measured by the gini index inequality increased from an already very high 63 in 1988 to 66 in 1993 the increase was driven more by rising differences in mean incomes between the countries than by rising inequalities within countries the most important contributors were rising urban rural differences in china and slow growth of rural incomes in south asia compared to several large developed market economies

asymmetric treatment of reported pension expense and income amounts in ceo cash compensation calculations abstract we provide evidence that ceo cash compensation is relatively less sensitive to pension expense than pension income suggesting that compensation committees shield ceo cash compensation from pension expense amounts we also provide evidence that managers use relatively higher expected rate of return estimates when reporting pension income suggesting that managers select income increasing accounting estimates in response to compensation committees greater emphasis on pension income in ceo cash compensation determinations pension cost amounts represent a unique setting to examine such behavior as their effect on ceo cash compensation can be detrimental or beneficial but arise from the same underlying economic activity

a delayed revolution environment and agrarian change in india slow growth of agricultural income has contributed to poor economic growth and poverty in india in modern times the condition was weakened by green revolutions in the last third of the twentieth century conventional accounts attribute the stagnation to institutions created during colonial rule in india this article suggests instead that it derived from an environmental constraint the green revolutions succeeded partly because state aid enabled peasants to overcome the constraint in some regions

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

resolving lifo uncertainty a theoretical and empirical reexamination of 1974 75 lifo adoptions and nonadoptions this study reexamines the lifo adoption decision by focusing on what can be inferred about the sophistication of managers and investors decision making through analyzing the effect on stock prices of the resolution of publicly disclosed uncertainty about the lifo adoption nonadoption decision i establish and test implications of three models of the lifo adoption nonadoption decision the traditional tax benefit model an extension of kang s 1988 real value model and a functional fixation model each model yields distinct predictions about the mean excess stock return when uncertainty about the lifo adoption nonadoption decision is resolved and about the cross sectional relations between individual excess stock returns and several explanatory

review on integrated strategies for energy policy planning and evaluation of ghg mitigation alternatives abstract this review paper is devoted to elaborating the status of different energy policy planning studies and the evaluation of various ghg mitigation studies it includes some of the major developments in global energy scenario status of green house gas ghg emissions issues in the implementation of kyoto protocol and ghg mitigation clean development mechanism cdm and energy scenario especially pertaining to the residential industrial and commercial energy sector in the initial sections the later part of this paper highlights the salient contributions in various literatures pertaining to energy demand forecasting in residential commercial and industrial sector ghg estimation methodologies and ghg mitigation studies in various sectors the success and difficulties in implementing various policy planning practices were also discussed in the paper most of the prominent literature in the area of energy demand and consumption analysis towards effective implementation of ghg mitigation is described in the end a comprehensive comments and recommendations based on the study were furnished

empirical tax research in accounting this paper traces the development of archival microeconomic based empirical income tax research in accounting over the last 15 years the paper details three major areas of research i the coordination of tax and non tax factors ii the effects of taxes on asset prices and iii the taxation of multijurisdictional international and interstate commerce methodological concerns of particular interest to this field also are discussed the paper concludes with a discussion of possible directions for future research r 2001 elsevier science b v all rights reserved jel classification m41 h25 k34 g32 f23

earnings management through transaction structuring contingent convertible debt and diluted earnings per share in this article we examine whether firms structure their convertible bond transactions to manage diluted earnings per share eps we find that the likelihood of firms issuing contingent convertible bonds cocos which are often excluded from diluted eps calculations under statement of financial accounting standard sfas 128 is significantly associated with the reduction that would occur in diluted eps if the bonds were traditionally structured we also document that firms use of eps based compensation contracts significantly affects the likelihood of coco issuance and find weak evidence that reputation costs measured using earnings restatement data play a role in the structuring decision these results are robust to controlling for alternative motivations for issuing cocos including tax and dilution arguments in addition an examination of announcement returns reveals that investors view the net benefits and costs of cocos as offsetting one another our results contribute to the literature on earnings management diluted eps financial reporting costs and financial innovation

rationality of self and others in an economic system in this paper i want to disentangle some of the senses in which the hypothesis of rationality is used in economic theory in particular i want to stress that rationality is not a property of the individual alone although it is usually presented that way rather it gathers not only its force but also its very meaning from the social context in which it is embedded it is most plausible under very ideal conditions when these conditions cease to hold the rationality assumptions become strained and possibly even self contradictory they certainly imply an ability at information processing and calculation that is far beyond the feasible and that cannot well be justified as the result of learning and adaptation let me dismiss a point of view that is perhaps not always articulated but seems implicit in many writings it seems to be asserted that a theory of the economy must be based on rationality as a matter of principle otherwise there can be no theory this position has even been maintained by some who accept that economic behavior is not completely rational john stuart mill 1909 bk 2 ch 4 argued that custom not competition governs much of the economic world but he adds that the only possible theory is that standard economic doctrine makes assumptions of rationality that have very strong implications for the complexity of individuals decision processes the most complete assumptions of competitive general equilibrium theory require that all future and contingent prices exist and be known in fact of course not all these markets exist the incompleteness of markets has several side consequences for rationality for one thing each decision maker has to have a model that predicts the future spot prices this is an informational burden of an entirely different magnitude than simply optimizing at known prices it involves all the complexity of rational analysis of data and contradicts the much praised informational economy of the price system it is also the case that equilibria become much less well defined similar problems occur with imperfect competition this research was supported by the office of naval research grant onr n00014 79 c 0685 at the center for research in organizational efficiency institute for mathematical studies in the social sciences stanford university stanford california

world inequality and globalization the article assesses recent attempts to measure the level and changes in world inequality it compares results based on country averages population weighted inter country gini coefficients and combinations of inter country and intra country distribution figures most measures agree that inequality grew up to 1980 some suggest that it stabilized or declined slightly after that date but that conclusion is not definitive the article argues against reliance on single indicators to measure world inequality as opposed to looking at various measures including inequality between regions and the ratios of incomes of the poor and the rich according to several of these measures inequality has continued to grow the addition of variables other than income life expectancy and education appear to reduce inequality but this is largely an illusion copyright 2004 oxford university press

cross sectional dependence and problems in inference in market based accounting research this paper provides a framework and some empirical evidence to evaluate the seriousness of problems in inference that arise in stockreturn based studies when the data are cross sectionally dependent the study is motivated on the grounds that statistical procedures designed to address such problems are often infeasible and even when they can be implemented they sometimes introduce other more serious difficulties thus researchers have frequently adopted an approach that ignores the cross sectional dependence e g ordinary least squares ols the objective of this paper is to help identify the contexts in which ignoring the dependence would lead to serious misstatement of significance levels cross sectional dependence in stock returns data is likely to exist when at least some of the returns are sampled from common time periods this would be the case in all studies of the reaction of stock prices to a

ceo compensation after deregulation the case of electric utilities the 1992 national energy policy act nepa intensified competition in the electric utility industry by allowing nonutility generators to produce and sell power in wholesale energy markets congress expected nepa to lead to improved operating efficiencies by substituting market forces for regulation a data set that is unique to the utility industry allows us to test how and whether utility firms reallocated resources to improve efficiencies and more important for this study whether ceo compensation changed in accordance with agency theory predictions that ceo compensation would become more incentive based and more equity based in the competitive operating environment

new evidence on lifo adoptions the effects of more precise event dates results of recent research support conclusions of an increase a decrease or no change in share values for firms switching to lifo biddle and lindahl 1982 ricks 1982 and brown 1980 this study supports the view that on average firms which adopt lifo experience an increase in share values tests are based on more nearly accurate dates when the change to lifo was announced the results suggest that a search for voluntary accounting change disclosure dates can be productive if some previously unexploited sources are examined a cross sectional regression similar to the approach taken by for example biddle and lindahl 1982 is used to explain cumulative residual stock returns at announcements of the change in accounting method variables representing quarterly unexpected earnings annual unexpected earnings systematic risk and firm size are used to control for extraneous effects the independent variable of interest is tax savings

1974 lifo excess stock return and analyst forecast error anomalies revisited in this paper i reexamine three lifo anomalies reported by ricks 1982 and biddle and ricks 1988 with the aim of investigating the degree of analyst and investor sophistication in responding to fiscal 1974 lifo adoptions biddle and ricks henceforth br s first anomaly is that their sample of 1974 lifo adopters realized a reliably negative mean excess stock return at their annual earnings announcement br view this as anomalous because 1974 lifo adopters switched voluntarily and almost always obtained substantial tax savings second br find even firms who publicly disclosed lifo adoptions in advance of their annual earnings announcements earned negative returns at the annual earnings announcement date taken at face value this result implies an opportunity

corporate performance and managerial remuneration an empirical analysis abstract economic theories of efficient compensation predict a positive relationship between executive pay and corporate performance and yet efforts to document this relationship have been largely unsuccessful in this paper we argue that previous cross sectional studies have omitted important variables which seriously bias their results using data that focus on individual executives over time we find that executive compensation is strongly positively related to corporate performance as measured by shareholder return and growth in firm sales the results are robust to the stock market performance measure utilized

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

the ex ante information content of accounting information systems this study examines the effect of the particular set of accounting methods used by a firm its information system on the ex ante information content of its earnings announcements the results suggest that reported income figures produced from a system consisting of inventory depreciation and tax credit accounting methods which are consistent in their effects on net income are more informative than when those effects are inconsistent informativeness of an earnings announcement is estimated by the expected increased variability in share prices at the earnings announcement date using the option pricing methodology introduced by patell and wolfson 1979 1981 an accounting information system can be defined by the product of managers choices with respect to alternative methods of accounting for various items demski 1972 for example managements can choose between last in first out lifo and first in first out fifo for determining the cost of inventory between straight line sl and accelerated acc to account for depreciation and between deferral def and flowthrough ft to account for the investment tax credit the collective choice from alternative methods constitutes a firm s accounting information system e g lifo acc ft prior research has indicated that annual and interim accounting reports are informative there have also been attempts to assess the oklahoma state university i wish to acknowledge the support of professors t williams w frank r d nair j hickman and w taylor in the completion of the dissertation on which this article is based the comments of j boatsman n dopuch k schipper r leftwich the participants of the accounting workshop at oklahoma state university and anonymous referees are appreciated 1 beaver 1968 may 1971 and gonedes 1974 for example

the effect of accounting procedure changes on ceos cash salary and bonus compensation abstract this paper examines the effect of accounting procedure changes on cash salary and bonus compensation to ceos we estimate whether there is an adjustment to the statistical relation between compensation and corporate earnings following changes that lower earnings fifo to lifo inventory valuation and that raise earnings accelerated to straight line depreciation the results indicate that 1 subsequent to these changes salary and bonus payments are based on reported earnings rather than earnings under the original accounting method and 2 the potential compensation effect of the changes is small compared to the effect of economy or industry wide changes in compensation

bond rating agencies and stock analysts who knows what when both bond rating agencies and stock analysts evaluate publicly traded companies and com municate their opinions to investors comparing the timeliness of each we find that granger causality flows both ways while most bond downgrades are preceded by declines in actual and forecast earnings both actual earnings and forecasts of future earnings tend to fall following downgrades although part of this post downgrade forecast revision can be attributed to negative news regarding actual earnings most appears to be reaction to the downgrade itself we find little change in actual earnings following upgrades analysts however tend to increase their forecasts of future earnings

an empirical analysis of the economic implications of fair value accounting for investment securities abstract this paper analyzes security returns of bank holding companies and insurance companies during periods surrounding the adoption of sfas 115 we find bank share prices were negatively affected by the examined events but find little share price reaction for insurance companies our evidence suggests banks were adversely affected by the standard because of problems with the standard s market value accounting approach cross sectional analysis of event period returns shows that banks that more frequently traded their investments with longer maturing investments and that are more fully hedged against interest rate changes were the most negatively impacted by the standard

electricity consumption electricity intensity and industrial structure abstract this paper describes an analysis of recent trends in industrial output and electricity consumption carried out at the electricity council the analysis examines the significance of changes in industrial structure and in the intensity of electricity use within major industries using a simple arithmetical procedure the conclusion reached is that such factors have in recent years had a major influence on trends in industrial electricity consumption the importance of these factors explains why simple econometric models which describe industrial electricity sales as a function of total industrial output have proved unsatisfactory for forecasting purposes this conclusion underlines the need to use a disaggregated approach to electricity forecasting an approach which the electricity industry has used increasingly

an analysis of value destruction in at t s acquisition of ncr abstract at t s 7 5 billion acquisition of ncr decreased the wealth of at t shareholders by between 3 9 billion and 6 5 billion and resulted in negative synergies of 1 3 to 3 0 billion we find that at t paid a documented 50 million and possibly as much as 500 million to satisfy pooling accounting thus boosting eps by roughly 17 but leaving cash flows unchanged we conclude that at t s decision to acquire ncr in what the market perceived as a value destroying transaction was related at least in part to the 1984 consent decree with the department of justice that led to the break up of at t

stock price effects of the allowance of lifo for tax purposes abstract i investigate stock price behavior associated with the allowance of lifo for tax purposes the analysis is structured as an event study of the revenue acts of 1938 and 1939 the results indicate a positive net market reaction to legislative events leading to lifo s incorporation into the us tax code for the sample firms having the largest estimated lifo tax benefits i conclude the market revised its probabilities that firms most likely to benefit would avail themselves of the opportunity to use lifo and defer taxes on inventory profits

industrial electricity consumption in the uk past determinants and future prospects the determinants of industrial electricity demand are examined and it is found that more than 40 of demand growth in the period 1959 1980 was caused by factors either unrelated or only indirectly related to growth in industrial output factors such as adjustments in industrial structure technical change and the decline in self generation of electricity were all important contributors to demand growth together with the methodological problems of using price as an explanatory variable this suggests that those econometric approaches to demand forecasting for industrial electricity which rely solely on projections of industrial output and price are seriously defective output level and price are important in future demand but current methods are not appropriate to capture their effect and more detailed sectoral work is required which should take into account structural and technical change and developments in self generation

inequality among world citizens 1820 1992 this paper investigates the distribution of well being among world citizens during the last two centuries the estimates show that inequality of world distribution of income worsened from the beginning of the 19th century to world war ii and after that seems to have stabilized or to have grown more slowly in the early 19th century most inequality was due to differences within countries later it was due to differences between countries inequality in longevity also increased during the 19th century but then was reversed in the second half of the 20th century perhaps mitigating the failure of income inequality to improve in the last decades jel d31 f0 n0 o0

explicit and implicit tax effects of the r d tax credit this paper investigates the effects of the 1981 research and development r d tax credit first by examining the impact of the credit on the level of r d investment and second by estimating the magnitude of the implicit tax created by the credit the two effects are interrelated because an increase in the level of r d investment will increase the demand for r d inputs thus reducing the pretax rate of return from r d activity 1 i test the credit s investment effect using a time series r d spending model that includes both factors from the industrial organization literature to control for nontax effects and an r d credit usability variable to capture the incentive created by the credit previous research has produced mixed evidence on whether the credit had any positive