new results on the relationship among risk aversion prudence and temperance abstract this note studies the relationships between different aspects of agent s preferences toward risk we show that under the assumptions of non satiation and bounded marginal utility prudence implies risk aversion imprudence implies risk loving and that temperance implies prudence intemperance implies imprudence the implications of these results for comparing risks in the cases of increase in risk increase in downside risk and increase in outer risk are discussed

an empirical assessment of the residual income valuation model abstract this paper provides an empirical assessment of the residual income valuation model proposed in ohlson ohlson j a 1995 earnings book values and dividends in security valuation contemporary accounting research 11 661 687 we point out that existing empirical research relying on ohlson s model is similar to past research relying explicitly on the dividend discounting model we establish that the key original empirical implications of ohlson s model stem from the information dynamics that link current information to future residual income our empirical results generally support ohlson s information dynamics however we find that our empirical implementation of ohlson s model provides only minor improvements over existing attempts to implement the dividend discounting model by capitalizing short term earnings forecasts in perpetuity

changing risks and optimal effort consider a decision maker who can engage in effort to increase the probability of facing a better risky situation intuition suggests that effort should increase when there is a greater difference between the best risky situation and the worse one we show that this intuition is not necessarily valid and we consider the cases of risk averters and risk lovers

higher order generalizations of arrow pratt and ross risk aversion a comparative statics approach abstract we analyze comparative risk aversion in a new way through a comparative statics problem in which for a cost agents can shift from an initial probability distribution toward a preferred distribution the ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary and the arrow pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean preserving spread and the cost is a utility cost higher order increases in risk lead to higher order generalizations and the comparative statics method yields a unified approach to the problem of comparative risk attitudes

a decomposition of profit loss under output price uncertainty in this paper firm profit loss is decomposed as the sum of two terms related to the output price uncertainty price expectation error and risk preference plus one extra term expressing technical inefficiency we then describe the implementation of our theoretical model in a robust data envelopment analysis dea framework which allows an effective and separate estimation of each term of the decomposition in addition we offer an operational tool to reveal producers risk preferences a 2009 database of french fattening pig farms is used as an illustration our results indicate that risk preference and technical inefficiency are the main sources of profit loss

mixed risk aversion abstract we analyze the class of increasing utility functions exhibiting all derivatives of alternating sign this property that we call mixed risk aversion is satisfied by the utility functions most commonly used in financial economics the utility functions displaying mixed risk aversion can be expressed as mixtures of exponential functions we characterize stochastic dominance and we find conditions for both mutual aggravation and mutual amelioration of risks when agents are mixed risk averse finally the analysis of the distribution function describing a mixed utility allows one to characterize the behaviour of its indexes of risk aversion and to discuss its implications for portfolio selection journal of economic literature classification numbers d81 g11

redistribution and administrative federalism in this paper redistribution is studied in the presence of migration externalities administrative federalism is defined as a constitution where statutory tax and transfer levels are set nationally while local administrations may refuse to pay the transfer or rebate the tax in single cases thereby introducing horizontal inequity with risk aversion this is less attractive than reducing the level of redistribution in a horizontally equal way it is shown that administrative federalism leads to higher transfers and higher utilitarian welfare than decentralized decisions that it may implement the first best solution and that horizontal inequality never occurs in equilibrium

nuclear decommissioning costs the impact of recoverability risk on valuation abstract mounting nuclear plant decommissioning costs and utility deregulation focused attention on accounting for decommissioning liabilities fasb s exposure draft 158 b proposes balance sheet recognition of the projected future decommissioning cost liability at initial plant commission we expect market valuation of each dollar of decommissioning cost apportioned to utilities to vary with utility specific factors related to the probability of cost recovery via rates we find a more negative decommissioning cost firm value association for utilities with higher business or financial risk also equity value is significantly associated with total decommissioning cost across all nuclear units in which a utility has ownership interest

are disclosures about bank derivatives and employee stock options value relevant abstract the papers by venkatachalam 1996 and aboody 1996 provide some interesting evidence on issues that are important to accounting regulators as well as accounting academics however for econometric as well as economic reasons there are limits to what we can learn from this type of research cross sectional levels studies careful attention to methodological issues in this type of research design can reduce but likely will not eliminate these interpretational difficulties

the market valuation implications of net periodic pension cost components abstract this paper examines whether market participants implicitly assign different coefficients to pension cost components when determining security prices the major findings are 1 the pension cost components coefficients generally differ from one another as predicted the transition asset amortization coefficient is lower than other pension coefficients and is insignificantly different from zero 2 consistent with the market viewing pension related income streams as less risky the pension coefficients are generally larger than the nonpension coefficients additional specification tests permitting nonpension coefficients to vary with risk tax payer status and industry membership generally support the basic findings although the significance levels are generally higher

putting risk in its proper place this paper examines preferences toward particular classes of lottery pairs we show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries if preferences are defined in an expected utility framework with differentiable utility the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function what makes our characterization appealing is its simplicity which seems particularly amenable to experimentation

consistency of higher order risk preferences risk aversion a second order risk preference is a time proven concept in economic models of choice under risk more recently the higher order risk preferences of prudence third order and temperance fourth order also have been shown to be quite important while a majority of the population seems to exhibit both risk aversion and these higher order risk preferences a significant minority does not we show how both risk averse and risk loving behaviors might be generated by a simple type of basic lottery preference for either 1 combining good outcomes with bad ones or 2 combining good with good and bad with bad respectively we further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory in addition to our own experimental evidence we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy our own experiment also is the first to look beyond fourth order risk preferences and we examine risk attitudes at even higher orders

market valuation of employee stock options this study investigates whether investors incorporate the value of a firm s outstanding employee stock options into its stock price i estimate the outstanding options value for a sample of firms for which outstanding fixed options exceed 5 of outstanding common shares in 1988 i find a negative correlation between the value of outstanding options and a firm s share price the correlation is stronger i for the option s intrinsic value than for the option s time value ii for options that are later in their vesting stage than earlier in their vesting stage and iii for large firms than for small firms in addition the fasb s method for calculating compensation expense has no explanatory power in the presence of this paper s calculation of the options value

electric utility stranded costs valuation and disclosure issues we analyze the stock market s valuation of electric utility stranded costs i e costs that might become unrecoverable under deregulation and investigate whether stranded costs that have arisen as a result of voluntary firm business decisions are valued differently from those that are more directly linked to regulatory mandates further we study whether investor valuations differ across jurisdictions finally we examine the relation between investor valuation of stranded costs and the decision by utilities to make stranded cost related disclosures in their financial statements voluntarily we find that investors anticipate that on average approximately 10 of total stranded costs will be borne by utility shareholders stranded costs arising from voluntary operating or investing decisions made by utilities are valued more negatively than those associated with mandatory power purchase contracts consistent with investors assigning a higher recovery probability to the latter investor valuations of stranded costs associated with utility generating investments do not differ systematically across jurisdictions we find that stranded costs are valued less negatively for voluntary disclosers not just in the year of disclosure but also in the preceding two years implying that it is not disclosure per se that favorably influences valuation voluntary disclosers operate in jurisdictions that have more clearly established stranded cost recovery mechanisms suggesting that both stranded cost disclosure and valuation are prompted by reduction in uncertainty about recoverability

fair value disclosures by bank holding companies abstract this paper examines the value relevance of fair value data disclosed under sfas 107 by banks for 1992 and 1993 collectively the evidence suggests differences between fair and book values of financial instruments are associated with market to book ratios however fair value disclosures for financial instruments other than securities are value relevant only in limited settings in addition only in 1992 are fair value variables associated with market to book ratios after incorporating existing historical cost information further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers

risk aversion and the propensities for self insurance and self protection for a risk averse individual the methods for reducing the expected financial impact of a loss include reducing the severity of any loss that occurs self insurance and reducing the probability of the occurrence of a loss self protection the literature on this topic has pointed to several anomalies whereby the use of self protection and self insurance yield quite unsimilar results for example ehrlich and becker 5 show that self insurance is always a substitute for market insurance an insurance company s indemnifying a loss whereas self protection and market insurance might be complements dionne and eeckhoudt 4 show that a more risk averse consumer would always invest more in self insurance activities but not necessarily more in self protection activities they argue 4 42 that this result is counterintuitive and provides an exception to the widely accepted result that increased risk aversion reduces risky activities ehrlich and becker 5 639 argue that the incentive to self protect is not so dependent on attitude towards risk both of the above papers seem to take for granted that self protection activities reduce the riskiness of the final wealth distribution however as we argue below this is not the case if riskiness is defined as in rothschild and stiglitz 14 even if we use the variance as our risk measure we do not always reduce risk via self protection dionne and eeckhoudt suggest that these results might not be robust enough to extend to models that incorporate random initial wealth risk and state dependent preferences we show that the model seems to be very robust we also explain why self protection is not at all an exception to the long standing result of arrow 1 whereby more risk averse individuals undertake a lower

directed credit programs for agriculture and industry arguments from theory and fact the motives behind government programs to provide directed credit to agriculture and industry can be traced to problems of asymmetric information in capital markets and consequently to benefits from relaxing the constraints on financing in agriculture directed credit programs that help farmers accumulate sufficient wealth to own the land they cultivate may improve the allocation of resources in industry the benefits of government credit may include product and factor market externalities as well as the direct benefits from relaxing borrowing constraints in both sectors government credit can be useful in overcoming obstacles faced by private intermediaries when lending entails initial fixed costs that intermediaries cannot recapture whether government intervention in credit markets can achieve legitimate objectives depends on the mechanism chosen to implement directed credit in some cases influence peddling and soft repayment constraints lead to inefficiencies from government involvement in other cases these problems are avoided by establishing credible mechanisms that ensure the proper allocation and repayment of funds evidence on industrial credit programs in japan shows an apparent link between that country s success in directing credit to machine tool producers and the decision making process that governs the distribution of credit

the impact of prudence on optimal prevention revisited this paper re examines the link between absolute prudence and self protection activities we show that the level of efiort chosen by an agent with positive and decreasing absolute prudence is larger than the optimal efiort chosen by a risk neutral agent if the degree of absolute prudence is less than a threshold that is utility independent and empirically veriflable we explain this threshold by a trade ofi between the variation of the variance and the level of the third moment of the loss distribution we also discuss our result in terms of skewness our contribution extends the model of eeckhoudt and gollier 2005

do risk lovers invest in self protection we show that there is a class of risk lovers who optimally choose a positive level of self protection investment in most cases a risk lover increases his self protection investment as he becomes less downside risk averse

productivity and financial sector policies evidence from south east asia this paper uses primary data collected from the central bank reports to examine the influence of financial sector policies on the average productivity of capital in five south east asian economies the data include measures of repressionist policies encompassing interest rate controls directed credit programmes and reserve and liquidity requirements we use time series techniques to examine whether these policies have a statistically significant influence on the average productivity of capital conditioning on variables suggested by economic theory these policies are found to have a significant negative effect on productivity in most cases with the important exception of south korea for which we find significant positive effects