corporate philanthropy ownership type and financial transparency drawing on stakeholder theory and the concept of enlightened self interest we argue that firms that actively engage in corporate philanthropic giving also tend to demonstrate greater concern for investors interests by providing more transparent financial information and avoiding corporate misconduct moreover the relationships between corporate giving financial information transparency and corporate misconduct vary significantly according to the firm s ownership type which affects the fundamental motivations for corporate philanthropy in a sample of chinese publicly listed firms from the 2003 2009 period we find a positive relationship between corporate giving and financial transparency and note that the relationship is stronger for non state owned enterprises non soes we also find a significantly negative association between corporate giving and corporate misconduct for non soes but not for soes taken together these findings suggest that responsibility to both stakeholders and shareholders is a vital part of building trust and reputations in china s non soe sector

markets for pollution control when firms are noncompliant the problem of noncompliance and enforcement in transferable discharge permit tdp markets has not received much attention this paper examines the consequences of noncompliance for a tdp market given fairly general assumptions about the characteristics of the enforcement policy in place the analysis reveals that when firms are noncompliant tdp markets retain their efficiency property only under some fairly stringent conditions the effect of noncompliance on the equilibrium permit price raises some important questions about the ability of a tdp market to achieve and remain in equilibrium when firms are noncompliant

s p 500 cash stock price volatilities s p 500 stock return volatilities are compared to the volatilities of a matched set of stocks after controlling for cross sectional differences in firm attributes known to affect volatility no significant difference in volatility is observed between 1975 and 1983before the start of trade in index futures and index options since then s p 500 stocks have been relatively more volatile the difference is statistically but not economically significant the relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns other factors besides the start of derivative trade could be responsible for the small increase in volatility stock price volatility has received much attention in the popular press over the last few years especially since the october 19 1987 stock market crash the rise in volatility has alarmed investors regulators and the public in general some suggest that the start of trade in stock index futures and index options increased speculative activity that in turn destabilized cash markets causing higher volatility large trading activity in the derivative contracts makes the suggestion plausible volume in index futures and index options increased dramatically since their introductions in 1982 and 1983 by 1987 the average daily dollar volume in the s p 500 futures contracts alone exceeded the dollar volume of cash s p 500 trade by a factor of about two while the dollar value of the daily net change in total open interest is about 8 of s p 500 stock dollar volume speculative trade in futures and options frequently is accused of destabilizing underlying cash markets the charge has been made for more than a century in the agricultural precious metal and currency markets recent evidence by french and roll 1986 showing stock variance to be strongly related to trading session hours heightens these concerns unfortunately theoretical analyses of whether speculative trade destabilizes cash markets lead to conflicting conclusions depending on what assumptions are made 1 school of business administration university of southern california and office of economic analysis u s securities and exchange commission i wish to thank mary denny mcsweeny and steve hornstein for their valuable research assistance and the referee and editor for their many suggestions and insights the opinions expressed in this paper do not necessarily reflect those of the u s securities and exchange commission or those of the author s colleagues on its staff an increase in well informed speculative trade has two opposite effects on measured volatility it decreases volatility due to order flow imbalances caused by uninformed traders because informed traders provide liquidity in such events and it increases volatility due to new fundamental information since the information which is assumed to be generated at discrete time intervals is impounded into

procedural unfair wage differentials and their effects on unethical behavior in this paper we investigate how payment procedures that are deemed unfair can spur unethical behavior towards innocent coworkers in a real effort experiment in our discrimination treatment a highly unfair payment procedure with wage differentials half the workforce is randomly selected and paid by relative performance whereas the remaining receives no payment a joy of destruction game measures unethical behavior subsequently non earners in discrimination destroy significantly more than in the non discriminatory control treatments in discrimination unethical behavior is generally high for all non earners independent of individual inequality aversion and relative performance beliefs in the control treatments inequality aversion is the main driver of destructive behavior

watchdogs of the invisible hand ngo monitoring and industry equilibrium globalization has been accompanied by rising pressure from advocacy non governmental organizations ngos on multinational firms to act in socially responsible manner we analyze how ngo pressure interacts with industry structure using a simple model of ngo firm interaction embedded in an industry environment with endogenous markups and entry we explain three key empirical patterns in developing country industries under activist pressure the degree of exit under more intense activist pressure the differential response of industries to ngo activism and the general rise of ngo activism following globalization

losses from effluent taxes and quotas under uncertainty recent theoretical papers by adar and griffin j environ econ manag 3 178 188 1976 fishelson j environ econ manag 3 189 197 1976 and weitzman rev econ studies41 477 491 1974 show that different expected social losses arise from using effluent taxes and quotas as alternative control instruments when marginal control costs are uncertain key assumptions in these analyses are linear marginal cost and benefit functions and an additive error for the marginal cost function to reflect uncertainty in this paper empirically derived nonlinear functions and more realistic multiplicative error terms are used to estimate expected control and damage costs and to identify empirically the mix of control instruments that minimizes expected losses

lender penalty for environmental damage and the equilibrium cost of capital in a model of the lending relationship incorporating both adverse selection and moral hazard we show that increasing the liability of lenders for environmental damage done by their borrowers has a qualitatively ambiguous impact upon interest rates this calls into question the assertion of financial community representatives that such reform will necessarily driveup interest rates and have adverse macroeconomic consequences if it is this fear which is preventing reform then that reluctance may in the case of many classes of pollutant be misplaced the implications of such reform for credit rationing are also explored

buy lie or die an investigation of chinese st firms voluntary interim audit motive and auditor independence in the chinese stock market special treatment st firms are the firms listed as facing imminent danger of delisting unless they return to profitability after reporting two consecutive annual losses some st firms voluntarily pay substantial fees to their external auditors to conduct interim audits which are not required by regulations in this study we investigate and find that st firms that pay for voluntary interim audits report greater discretionary accrued earnings higher non operating earnings and higher returns on assets in ensuing annual reports as a result these firms are more likely to return to profitability and reduce their delisting risk our results which contribute to the current debate on auditor independence appear to be consistent with the possibility that st firms buy external auditors cooperation to manipulate earnings when faced with the threat of delisting

the impact of wind power generation on the electricity price in germany abstract this paper investigates the relationship between intermittent wind power generation and electricity price behaviour in germany using a garch model i evaluate the effect of wind electricity generation on the level and the volatility of the electricity price in an integrated approach the results show that variable wind power reduces the price level but increases its volatility this paper s results also indicate that regulatory change has stabilised the wholesale price the electricity price volatility has decreased in germany after a modification of the marketing mechanism of renewable electricity this gives confidence that further adjustments to regulation and policy may foster a better integration of renewables into the power system

the effect of taxes on labor supply in the underground economy this paper uses micro data from a randomized survey carried out in the metropolitan area of quebec city canada to analyze the decision to evade taxes and work in the underground economy the results indicate that taxes distort labor market activities away from the regular sector to the underground sector but the distortion is small for the average worker the distortion is large however for particular groups of the population such as welfare claimants copyright 1994 by american economic association

an equilibrium model of incentive contracts in the presence of information manipulation abstract this paper develops an agency model in which stock based compensation is a double edged sword inducing managers to exert productive effort but also to divert valuable firm resources to misrepresent performance we examine how the potential for manipulation affects the equilibrium level of pay for performance sensitivity and derive several new cross sectional implications that are consistent with recent empirical studies in addition we analyze the impact of recent regulatory changes contained in the sarbanes oxley act of 2002 and show how policies intended to increase firm value by reducing misrepresentation can actually reduce firm value or increase the upward bias in manipulated disclosures

on optimal audit mechanisms for environmental taxes abstract we consider the auditing problem of an environmental enforcement agency with fixed audit resources how to decide which firms to audit after having observed the firms taxable emissions reports the goal of the agency is to implement the socially efficient emissions level the audit mechanism is the agency s sole choice variable while other variables such as the tax rate on emissions and the fine for non compliance are determined by other governmental actors the fines and budget of the agency are constrained in such a way that the common random audit mechanism fails to implement socially efficient emissions assuming perfect information among the firms we derive an optimal audit mechanism capable of implementing the socially efficient emissions level the optimal audit mechanism creates a contest exploiting the strategic interdependencies between the firms where the probability of winning not being audited for each firm depends on costly efforts their taxable emissions reports

profits from violating controls on the use of a polluting input profits from violating the quota charge and permit market systems are compared the results indicate that for a given permit price the violation profits of the charge and permit market systems are the same and exceed the profits from violating a quota system if the optimal use of inputs in a compliant market is lower than the quota it is also shown that under a permit market system the occurrence of violation decreases the equilibrium price of permits this implies that the profits from violating a permit market are lower than violation profits of a charge system

the shadow economy in transition countries friend or foe a policy perspective abstract by treating the shadow economy as a distinct entity rather than just a symptom of policy failures we are able to examine its short term and dynamic consequences for development first we construct measures of the size of the shadow economy in 25 transition countries for 1990 97 we find hysterisis suggesting that once established the shadow economy is hard to remove a dollar decline rise in official gdp is attenuated by a shadow expansion contraction of 31 25 cents we then examine whether the shadow economy prevents merely slows down or actually promotes economic growth and competitiveness and through what mechanisms we also consider implications for policymaking

ethical differentiation and market behavior an experimental approach abstract does ethical differentiation of products affect market behavior we examined this issue in triopolistic experimental markets where producers set prices one producer s costs were higher than the others in two treatments the additional costs were attributed to compliance with ethical guidelines in the third no justification was provided many consumers reduced their experimental gains by purchasing the ethically differentiated products at higher prices individual differences were important business economics students paid smaller premia finally we speculate about the observed demand function for ethics and emphasize using experimental methodology to complement empirical studies in assessing markets for ethically differentiated products

remediation and self reporting in optimal law enforcement abstract many environmental laws encourage firms to self report their violations to government regulators rather than subject themselves to probabilistic enforcement this paper studies self reporting enforcement regimes when there are ex post benefits of remediation or clean up remediation benefits are shown to impart two advantages to the use of self reporting beyond those identified elsewhere firstly whereas non reporting firms only engage in costly clean up when they are caught by an enforcement authority self reporting firms always engage in efficient remediation secondly with self reporting the government can costlessly impose stiffer non reporter penalties that reduce the government enforcement effort required to achieve a given level of violation deterrence

measurement error and state dependent pollution control enforcement abstract a two group model of state dependent enforcement is applied to identical firms which minimize the expected present value of costs and fines measurement error affects the probabilities of transitions between groups and the receipt of fines it is shown that state dependent enforcement can reduce social cost below the level attainable with static enforcement and that differentiation in both monitoring probabilities and standards may be optimal however setting fines for both groups at the maximum is likely to be optimal comparisons between models and alternative model interpretations are offered

who lets ethics guide his economic decision making an empirical analysis of individual investments in ethical funds this paper shows that one out of eight investors chooses ethical funds and foregoes return for ethical principles however few screen completely human capital being female and empathetic professions all predict ethical decision making interestingly neither income nor wealth explains screening

price discovery and volatility spillovers in index futures markets some evidence from mexico abstract this paper investigates the hypotheses that the recently established mexican stock index futures market effectively serves the price discovery function and that the introduction of futures trading has provoked volatility in the underlying spot market we test both hypotheses simultaneously with daily data from mexico in the context of a modified egarch model that also incorporates possible cointegration between the futures and spot markets the evidence supports both hypotheses suggesting that the futures market in mexico is a useful price discovery vehicle although futures trading has also been a source of instability for the spot market several managerial implications are derived and discussed

the underground economy in the late 1990s evading taxes or evading competition summary this paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s i propose a novel explanation for this phenomenon the sharp increase in market competition worldwide which reduces prices and profits and drives firms into the shadow economy empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy the effect is strongest in low tax high corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure

chief executive officer equity incentives and accounting irregularities this study examines whether chief executive officer ceo equity based holdings and compensation provide incentives to manipulate accounting reports while several prior studies have examined this important question the empirical evidence is mixed and the existence of a link between ceo equity incentives and accounting irregularities remains an open question because inferences from prior studies may be confounded by assumptions inherent in research design choices we use propensity score matching and assess hidden omitted variable bias within a broader sample in contrast to most prior research we do not find evidence of a positive association between ceo equity incentives and accounting irregularities after matching ceos on the observable characteristics of their contracting environments instead we find some evidence that accounting irregularities occur less frequently at firms where ceos have relatively higher levels of equity incentives

on the determinants of corporate social responsibility international evidence on the financial industry this article sets out to undertake a thorough point by point examination of the theory postulated by campbell 2007 in which an attempt is made to specify the conditions under which corporations may or may not act in socially responsible ways in order to ensure the overall reliability of our study and to attempt to provide a new understanding of and greater insights into whether corporate social responsibility csr is affected by financial and institutional variables we empirically investigate a total of 520 financial firms in 34 countries between the years 2003 and 2005 our empirical findings are i firms with larger size are more csr minded and the financial performance and csr are not related ii firms would actually act in more socially responsible ways to enhance their competitive advantages when the market competitiveness is more intense iii financial firms in countries with stronger levels of legal enforcement tend to engage in more csr activities however interestingly and rather strikingly those firms in countries with stronger shareholder rights tend to engage in less csr activities and iv self regulation within the financial industry has a significantly positive effect on csr with firms being found to act in more socially responsible ways in those countries which have more cooperative employer employee relations higher quality management schools and a better macroeconomic environment

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

evolutionary competition in a mixed market with socially concerned firms abstract in this paper we study an oligopoly market where profit maximizing firms and socially concerned firms compete in quantities confronting remarks by milton friedman and gary becker we are using an evolutionary setting to investigate the endogenous choice of the proper objective of business firms and the influence of product differentiation on the long run survival of firms which pursue non profit motives we find that firms which consider a combination of profit and consumer welfare can indeed have larger market shares and profits than their profit maximizing rivals one insight is that it might pay off for shareholders to consider stakeholder welfare but that the level of social concern should not be too high based on a strategy s profitability we consider asynchronous evolutionary updating with firms selecting nash quantities or choosing best replies to the expected market quantity here we observe that the consumers willingness to pay a price premium for products is crucial for the long run survival of socially concerned firms depending on the degrees of product differentiation and social concern long run outcomes consist either of both types of firms or only one type of firm if the firms propensity to switch between a social or a profit maximizing strategy is sufficiently large steady states are unstable and even complicated dynamics can occur

competition or manipulation an empirical evidence of determinants of the earnings persistence of the u s banks we examine the impact of competition on bank earnings persistence by exploiting a natural experiment following interstate banking deregulation that increased bank competition we find that bank earnings adjustment speed increases after their states implement the deregulation this relationship is weakened however with the increase of bank s abilities to sustain earnings as reflected in size diversification managerial efficiency and safety we further find that the impact of compeititon on bank earnings adjustment speed is direct but not indirectly through the channel of earnings management

the economics of corporate social responsibility a firm level perspective survey this paper analyzes the economics of corporate social responsibility csr as a private response to market imperfections in order to satisfy social preferences depending on whether they affect regulation competition or contracts market imperfections driving csr decisions are classified in three categories public goods and bads and altruism imperfect competition and incomplete contracts we successively present these drivers of csr decisions and highlight the nature of incentives external or internal at work and the testable and tested hypotheses in the reviewed studies we finally review the link between csr and financial performance as well as between csr and social and environmental performance a twofold discrepancy appears in the literature opening future research paths a disconnection between our understanding of csr drivers and csr impacts and a knowledge gap between csr financial and social consequences the latter having received little attention

the role of accruals in asymmetrically timely gain and loss recognition we investigate the role of accrual accounting in the asymmetrically timely recognition incorporation in reported earnings of gains and losses timely recognition requires accruals when it precedes complete realization of the gains and losses in cash we show that nonlinear accruals models incorporating the asymmetry in gain and loss recognition timelier loss recognition or conditional conservatism offer a substantial specification improvement explaining substantially more variation in accruals than equivalent linear specifications conversely conventional linear accruals models by omitting the loss recognition asymmetry exhibit substantial attenuation bias and offer a comparatively poor specification of the accounting accrual process linear specifications also understate the ability of current earnings to predict future cash flows these findings have implications for our understanding of accrual accounting and conservatism as well as for researchers estimating discretionary accruals earnings management and earnings quality

the temporal price relationship between s p 500 futures and the s p 500 index this paper empirically examines the intraday price relationship between s p 500 futures and the s p 500 index using minute to minute data three stage least squares regression is used to estimate lead and lag relationships with estimates for expiration days of the s p 500 futures compared with estimates for days prior to expiration the results suggest that futures price movements consistently lead index movements by twenty to forty five minutes while movements in the index rarely affect futures beyond one minute

efficient environmental policy with imperfect compliance discussions of efficient environmental policytend to recommend taxes rather than quotas ongrounds of efficiency a uniform tax willequalize marginal abatement cost betweenpolluters when polluters actions are imperfectly observable the distinction betweentaxes and quotas becomes less clear taxes maybe evaded by underreporting of emissions whilequota violations will not always be discovered this paper explores the conditions under whichthe efficiency properties of taxes continue tohold even when evasion is possible and theextent to which the fine for quota violationsplays the same role as a tax on emissions withsimilar efficiency properties

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

guilty until proven innocent regulation with costly and limited enforcement abstract we consider optimal regulations for a polluting firm when regulators cannot observe emission control costs and can only observe emissions via costly monitoring fines or subsidies for enforcing compliance are also limited the optimal regulations resemble a deposit refund system the firm reports its emissions and pays an initial tax based on this report if the firm is monitored it receives a rebate when actual and reported emissions coincide the enforcement constraints and the firm s rights determine whether the incentives to reduce emissions are optimally provided by varying the rebate for compliance the monitoring probability or the initial tax

a further analysis of the lead lag relationship between the cash market and stock index futures market the intraday lead lag relation between returns of the major market cash index and returns of the major market index futures and s p 500 futures is investigated empirical results show strong evidence that the futures leads the cash index and weak evidence that the cash index leads the futures the asymmetric lead lag relation holds between the futures and all component stocks including those that trade in almost every five minute interval evidence indicates that when more stocks move together market wide information the futures leads the cash index to a greater degree this suggests that the futures market is the main source of market wide information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

does futures trading increase stock market volatility 1988 does futures trading increase stock market volatility financial analysts journal vol 44 no 1 pp 63 69

futures trading information and spot price volatility evidence for the ftse 100 stock index futures contract using garch abstract this paper examines the impact of trading in the ftse 100 stock index futures on the volatility of the underlying spot market to examine the relationship between information and volatility as subject neglected in previous studies the garch family of techniques is used the results suggest that futures trading has led to increased volatility but that the nature of volatility has not changed post futures the finding of price changes being integrated pre futures but being stationary post futures implies that the introduction of futures has improved the speed and quality of information flowing to the spot market

analyzing economic market interactions as conflicts new concepts to assess market based policy instruments complementing market based policy instruments with conflict analysis approaches provides a wider understanding of market situations and allows to identify minimal requirements regarding needs power and conflict dynamics if these are not met a market cannot be successfully introduced or a liberalization process implemented conflict analysis offers a language better suited to the concerns of people negatively affected by new markets applying this language helps to counterbalance the predominance of economic concepts this fosters mutual understanding and enhances the prospect for successful implementation of market based policies we illustrate the potential of conflict analysis with examples from water privatization and labeling

the economics of earnings manipulation and managerial compensation this article examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm when realized these earnings constitute hidden information that is privately observed by the manager who may expend resources to generate an inflated earnings report we characterize the optimal managerial compensation contract in this setting and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits and to report those profits honestly as a result some degree of earnings management must be tolerated as a necessary part of an efficient agreement

prisoner s dilemmas cooperative norms and codes of business ethics prisoner s dilemmas can lead rational people to interact in ways that lead to persistent inefficiencies these dilemmas create a problem for institutional designers to solve devise institutions that realign individual incentives to achieve collectively rational outcomes i will argue that we do not always want to eliminate misalignments between individual incentives and efficient outcomes sometimes we want to preserve prisoner s dilemmas even when we know that they systematically will lead to inefficiencies no doubt prisoner s dilemmas can create problems but they also create opportunities to practice the cooperative norms that make market institutions possible in the first place an ethical market culture i argue benefits from the presence of prisoner s dilemmas i first consider standard approaches for solving prisoner s dilemmas i then argue for the value of prisoner s dilemmas finally i show the significance of this argument for advocating codes of business ethics

an experimental analysis of the effectiveness of an environmental assurance bonding system on player behavior in a simulated firm it has long been recognized that the present command and control methods for pollution abatement are inefficient using market mechanisms for environmental management is a promising alternative to the direct regulatory approach market mechanisms are just beginning to appear in u s environmental policy for example tradable permit schemes are being developed and implemented for some air pollutants under the amended clean air act various other forms of taxes and tradable permits have been proposed however these systems do not address the large uncertainty inherent in most environmental problems one mechanism currently being studied to address uncertainty more effectively is a flexible environmental assurance bonding system designed to incorporate environmental criteria and uncertainty into market incentives this study uses an experimental approach employing an interactive computer game simulation model with human players to examine the effectiveness of the assurance bonding system under varying degrees of uncertainty an environmental cost efficiency index ecei or profit per unit waste is used to measure player performance preliminary results indicate that players are more successful under the assurance bonding system in terms of ecei than under the simulated current system

cheating to win dishonesty and the intensity of competition we argue that the intensity of competition within a group or organization can have an important influence on whether or not people cheat to make this point we first work through a simple model of strategic misreporting in the workplace for low and high levels of competition we show that in equilibrium few are predicted to misreport it is for medium levels of competition that misreporting is predicted to be highest we test this prediction experimentally and find good support for it this finding has implications for the design of incentive structures within groups and organizations

the economics of fraudulent accounting we argue that earnings management and fraudulent accounting have important economic consequences in a model where the costs of earnings management are endogenous we show that in equilibrium low productivity firms hire and invest too much in order to pool with high productivity firms this behavior distorts the allocation of economic resources in the economy we test the predictions of the model using firmlevel data we show that during periods of suspicious accounting firms hire and invest excessively while managers exercise options when the misreporting is detected firms shed labor and capital and productivity improves our firm level results hold both before and after the market crash of 2000 in the aggregate our model provides a novel explanation for periods of jobless and investment less growth

enforcement costs and regulatory reform the agency and firm response influenced by models of optimal law enforcement several authors have recently revised the work on efficient levels of regulatory control to accommodate the realities of underenforcement and imperfect compliance however most of these efforts have centered on either the enforcement agency or the firm and have largely ignored the decentralized nature of the enforcement process this paper extends these results by modelling both the firm and the local agency and by incorporating detection uncertainty and concealment activity each model is then evaluated with respect to the alternative regulatory regimes of direct controls and emission taxes

corruption and market competition evidence from post communist countries summary this paper empirically examines whether market competition is associated with greater bribe payments we use firm level data from the business environment and enterprise performance surveys since market competition could be endogenous and some firms report zero bribes we employ a tobit estimation methodology instrumenting for market competition we find that greater market competition increases the amount of bribes paid results are robust across several measures of market competition however market competition is less strongly associated with bribes in the presence of other obstacles of doing business that could also lead to more bribes

self reporting of pollution and the firm s behavior under imperfectly enforceable regulations abstract motivated by the nature of u s laws a model is developed for a firm that maximizes expected profit and faces imperfectly enforceable pollution standards with imperfectly enforceable reporting requirements some previous models of imperfectly enforceable standards and taxes are special cases of this general mode when the fine for violating the pollution standard is linear in excess pollution the form will equate the marginal cost of control to the marginal fine rate and thus actual pollution will be insensitive to enforcement parameters related to under reporting the more complex comparative statics that exist when the fine is non linear are analyzed and comparisons with other models are made

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

futures trading and volatility in the gnma market futures markets for agricultural commodities have existed for well over 100 years recently there has been a major expansion of futures trading into nontraditional areas particularly interest bearing securities and foreign currenciesthe so called financial futures the introduction of exchange traded futures contracts for treasury bills gnma pass through certificates and other securities has created new hedging arbitrage and speculative opportunities for the investors issuers and dealers who are active in the cash markets for these securities futures trading has also opened these markets to participation by new classes of traders particularly private and smaller institutional investors through the process of arbitrage a financial futures market will be closely linked to the cash market for the underlying securities an important concern of the regulatory authorities is what effect opening a futures market is likely to have on an existing cash market the purpose of this paper is to analyze the impact of futures trading in government national mortgage association gnma passthrough certificates on price volatility in the cash market for these securities there are several major ways in which opening futures trading can increase efficiency and smooth price variations in a cash market most importantly futures provide a mechanism for those who buy and sell the actual security or commodity to hedge themselves against unfavorable price changes through the futures market risk can be spread across a large number of investors and transferred away from those hedging spot positions to professional speculators who are more willing and able to bear it this risk transfer may substantially improve the functioning of the spot market because it reduces the need to incorporate risk premia in cash market transactions to compensate for the risk of price fluctuations second futures market may increase the informational efficiency of a cash market since futures prices are determined in a unified highly visible market by traders who specialize in gathering and evaluating information the futures market is expected to be an efficient market in the sense that prices will reflect the best estimate of true future values given the information currently available if anything an informationally efficient futures market should lead to more efficient pricing in the cash market the importance of both of these effects will depend upon the structure of the existing cash market the more developed and integrated is the cash market the

impacts of derivative markets on spot market volatility and their persistence in this article we investigate the impacts of futures and options markets on the volatility of the underlying market unlike earlier studies the focus is on their persistence over time tests on the hang seng index yield several interesting results that often contrast with previous findings empirical results suggest that the quality of new information generated by derivative trading determines the impacts on the spot market volatility the futures market provides new material information reducing spot market volatility the options market on the other hand generates noisy information and distorts price which is followed by an increase in volatility and a decrease in its sensitivity to price change while the impact of futures persists that of options mostly disappears as the market matures our conjecture is that the futures market is mainly driven by informed experienced participants while the options market attracts new inexperienced investors

inattentive consumers and product quality this paper studies a model in which some consumers shop on the basis of price alone without attention to potential differences in product quality a firm may offer a low quality product to exploit these inattentive consumers in the unique symmetric equilibrium of the model firms choose prices with mixed strategies similarly to varian 1980 in which some consumers purchase from a random seller without attention to market prices in our model though firms also choose quality stochastically and there is both price and quality dispersion two stylized policy interventions are considered competition policy which acts to increase the number of sellers and market transparency reforms which act to increase the fraction of attentive consumers with fewer inattentive consumers firms are less likely to cheat i e cut quality which therefore improves welfare but profit and consumer surplus can either increase or decrease when there is a large number of sellers approximately half the sellers cheat regardless of the fraction of inattentive consumers and introducing more sellers boosts consumers surplus and reduces profit while the impact on welfare is ambiguous

the impact of stock index futures trading on daily returns seasonality a multicountry study in this article we investigate the impact of the introduction of stock index futures trading on the daily returns seasonality of the underlying index for seven national markets it has been previously argued that the introduction of futures trading should lead to reduced seasonality of mean returns and generally our results support this conclusion the impact of index futures introduction on return autocorrelations and volatility is also tested and the evidence presented suggests that futures trading has no impact on the former although a change in the seasonal for the latter was detected

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

what does ceos pay for performance reveal about shareholders attitude toward earnings overstatements if overstatements were a symptom of the agency conflict pay for performance sensitivities should have increased in response to the additional penalties for misreporting imposed by sox our finding of their decrease is inconsistent with the view that overstatements were an unintended consequence of incentive pay prior to 2002 to corroborate our interpretation we show that i ceo pay for performance sensitivities are higher among firms whose shareholders stand to benefit from overstatements ii this cross sectional relationship weakens significantly after sox and iii the within firm decrease in pay for performance sensitivity is most pronounced among firms with high pre sox shareholder benefits from overstatements

are they efficient in the middle using propensity score estimation for modeling middlemen in indian corporate corruption corrupt regulatory environment encourages firms to deploy middlemen for speedy and assured acquisition of different services from regulatory agencies using a world bank dataset of 2210 indian manufacturing firms this article examines how firms with middlemen deal with corrupt governmental agencies for its operational efficiency our results demonstrate that deployment of middlemen by the firms is often accompanied by a substantial increase in operational delay relatively trigger more consumption of senior management s time on regulatory disentanglement enhance the likelihood tendency to pay bribe and likely to face more court cases as a means of restitution of legal rights as firm specific attributes may contaminate our preliminary results we utilized the propensity score framework to examine relationships among variables of interests our study contributes to the inconspicuous part of the corruption literature by attempting to present a comprehensive but indirect assessment of the functions of middlemen that predominantly remained unattended except some scattered descriptive case based anecdotal presentations

market risk and the concept of fundamental volatility measuring volatility across asset and derivative markets and testing for the impact of derivatives markets on financial markets this paper proposes an unobserved fundamental component of volatility as a measure of risk this concept of fundamental volatility may be more meaningful than the usual measures of volatility for market regulators fundamental volatility can be obtained using a stochastic volatility model which allows us to filter out the signal in the volatility information we decompose four ftse100 stock index related volatilities into transitory noise and unobserved fundamental volatility our analysis is applied to the question as to whether derivative markets destabilise asset markets we find that introducing european options reduces fundamental volatility while transitory noise in the underlying and futures markets does not show significant changes we conclude that for the ftse100 index introducing a new options market has stabilised both the underlying market and existing derivative markets

truth or consequences enforcing pollution standards with self reporting abstract evidence suggests that a surprisingly large fraction of firms comply with pollution emission standards even though expected penalties for noncompliance are low we offer an explanation of this puzzle by extending the standard model of enforcement to include a self reporting requirement and enforcement power these extensions are enough to challenge the conventional result that higher fines lead to higher compliance rates we find that under plausible conditions higher compliance rates are achieved with lower fines for noncompliance and the cost of enforcing a given level of aggregate pollution is minimized by setting the fine for noncompliance equal to zero

does competition destroy ethical behavior explanations of unethical behavior often neglect the role of competition as opposed to greed in assuring its spread using the examples of child labor corruption excessive executive pay corporate earnings manipulation and commercial activities by universities this paper clarifies the role of competition in promoting censured conduct when unethical behavior cuts costs competition drives down prices and entrepreneurs incomes and thereby reduces their willingness to pay for ethical conduct nonetheless i suggest that competition might be good for ethical behavior in the long run because it promotes growth and raises incomes higher incomes raise the willingness to pay for ethical behavior but may also change what people believe to be ethical for the better this abstract was borrowed from another version of this item

an anatomy of cartel contracts we study cartel contracts using data on 18 contract clauses of 109 legal finnish manufacturing cartels one third of the clauses relate to raising profits the others deal with instability through incentive compatibility cartel organization or external threats cartels use three main approaches to raise profits price market allocation and specialization these appear to be substitutes choosing one has implications on how cartels deal with instability simplifying we find that large cartels agree on prices cartels in homogenous goods industries allocate markets and small cartels avoid competition through specialization

earnings management the shapes of the frequency distributions of earnings metrics are not evidence ipso facto we provide evidence that the shapes particularly around zero of the frequency distributions of earnings metrics examined in the extant earnings management literature are affected by 1 deflation using for example price or market capitalization 2 sample selection criteria that lead to differential inclusion exclusion of observations to the left of zero versus observations to the right of zero implicit in studies focusing on firms followed by i b e s and explicit in studies partitioning on a variable differing between loss observations and profit observations 3 differences between the characteristics of observations to the left of zero and observations to the right of zero such as market pricing and analyst optimism pessimism or 4 a combination of these factors since the shapes of the frequency distributions of earnings metrics at zero are likely due to one of the above effects we conclude that the shapes cannot be used as ipso facto evidence of earnings management

competition under industry stock driven prevailing market price environmental consequences and the effect of uncertainty abstract we address competition between several firms that cause pollution when producing fully substitutable products these firms comprise the industry and each individual firm charges for its products the market price determined by the difference between cumulative market supply and demand i e by the industry s stock we find that although the greater the number of firms competing for the same primary market the lower the market price and the higher the industry inventory surplus the reduction in price at market equilibrium is insufficient to stimulate greater aggregate sales that is greater competition does not necessarily induce higher industry output and pollution furthermore we show that commitment production pollution strategies compared to contingent strategies do not necessarily result in lower pollution especially when the number of competing firms is not high market uncertainty is low and proportional pollution taxation is high

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

futures markets cognitive ability and mispricing in experimental asset markets we study the effect of a futures market in which contracts maturing in the last period of the life of the asset can be traded our experiment has two treatments one in which a spot market operates on its own and a second treatment in which a spot and a futures market are active simultaneously futures markets lower spot prices but increase price volatility the futures markets themselves exhibit considerable overpricing individuals with higher cognitive reflection test crt scores achieve greater earnings and tend to sell in the overpriced futures market while traders with lower crt scores make purchases in the futures market greater average crt score among a group of traders is associated with better price discovery when no futures market is present but there is no such relationship in the presence of a futures market modified measures of crt which take into account different types of incorrect responses are introduced

introducing convexity into optimal compensation contracts abstract we study when it is appropriate to add a convex component such as stock options to an optimal managerial compensation contract we show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion in addition we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price the opposite effect results when increases in skewness leave the mean stock price unchanged

enforcing transferable permit systems in the presence of market power we derive an enforcement strategy for a transferable permit system in the presence of market power that achieves complete compliance in a cost effective manner we show that the presence of a firm with market influence makes designing an enforcement strategy more difficult than enforcing a perfectly competitive system we also re consider hahn s 1984 suggestion that a firm with market influence should be allocated permits so that it chooses to not participate in the permit market when enforcement and its costs are taken into account hahn s suggestion does not hold except in a very special case the presence of market power will limit the extent to which transferable emissions permit systems can fulfill their theoretical promises hahn 1984 was the first to show that permit trading in the presence of market power cannot be expected to result in a distribution of emissions that minimizes aggregate abatement costs furthermore the distribution of emissions will never be completely independent of the initial allocation of permits modeling a transferable permit system in which one firm has market power while the rest are perfect competitors a dominant firm competitive fringe model hahn demonstrated that aggregate abatement costs are minimized only when the dominant firm is allocated exactly the number of permits it will choose to hold in equilibrium simply aggregate abatement costs are minimized only when a firm that can manipulate the permit price does not because it chooses to not trade permits like most of the theoretical literature on transferable permit systems hahn ignored the fact that compliance in a permit system must be enforced recognizing this important omission van egteren and weber 1996 extended hahn s work to

overstatement and rational market expectation abstract when an agent overstates his her true performance a rational market can still correctly guess the true performance this paper shows however that such rational market expectation and a profit maximizing principal can exacerbate the lack of productive effort by the agent

environmental enforcement when inspectability is endogenous a model with overshooting properties if a firm can influence its monitorability vis a vis an environmental regulator it is shown that increasing the thoroughness of inspections induces the firm to substitute towards more transparent technologies whilst increasing their frequency may cause substitution the other way perversely when the effect of such substitution is taken into account an increase in the frequency of inspections or equally the stringency of penalties may worsen the firm s environmental performance the agency should favour more thorough inspections than existing theory suggests particularly in sectors where the scope for such substitution is great moreover when monitorability adjusts only sluggishly to policy shocks because it is an embodied characteristic of capital for example the environmental impacts of increased frequency and increased thoroughness well over and under shoot their respective long run impacts in assessing regulatory reform therefore it is important to leave sufficient time for the class of adjustments identified to occur the possibility of overshooting can be used as an alternative to existing regulatory capture theories to explain why the efficacy of some classes of regulatory reform may fade through time

relationship of profitability of world s top companies with entrepreneurship competitiveness and business environment indicators identifying the factors affecting profitability is important from the perspective of market players one of the most important benchmarks of firm performance is accounting profit and effective fact