assessing the fdic s premium and examination policies using soviet put options abstract the fdic s total liability for insuring a bank s deposits during a fixed period diminishes as the frequency of examinations increases since a marginally solvent bank can be closed while losses are small the paper develops a technique for pricing the insurance liability over a fixed period during which there are multiple examinations under current policy most banks are examined annually and reviewed every six months at which time the fees for insurance may be adjusted since the current schedule of fees allows only a narrow range and a few discrete levels the fdic typically retains some positive or negative residual liability in each six month period and for the entire year we show how to estimate this net liability the calculations of total and net liability are illustrated for a sample of large banks

mark to market accounting for banks and thrifts lessons from the danish experience university of michigan tharvard university we appreciate helpful suggestions received from participants at the stanford summer camp and the price waterhouse symposium workshop participants at the university of chicago cornell university indiana university the ohio state university university of michigan university of pittsburgh university of rochester university of southern california tulane university and university of utah mary barth bill beaver george benston allen berger fisher black paul healy jack hughes robert kaplan richard leftwich jim leisenring niels nielsen finn ostrup bob ruland pete wilson and an anonymous referee we also appreciate the assistance of our contacts in denmark who shared their time and expertise with us so willingly these include mr ole bjarrum and mr lars nielsen of nykredit mr jesper jesperson and mr aksel olsen of kpmg revisionsfirmaet c jespersen mr lars tonnesen and mr birger schmidt of the danish bankers association mr kim hartvig olsen of the danish financial supervisoryauthority mr jorgen kock of den danske bank and professors jens elling merete christiansen finn ostrup and niels nielson of the copenhagen business school we thank professors dwight crane and bob kaplan of the harvard business school and bob swieringa and jim leisenring of the financial accounting standards board for help in conducting this research we are grateful for financial statement data furnished by the danish financial supervisory authority for access to the account database provided by professors elling and christensen of the copenhagen business school and for excellent research assistance by elizabeth andersen christine botosan marlene plumlee and james myers we also appreciate the willingness

doomed from the start what is the value of selecting a future dominant design this study investigates how important it is for a firm to select what turns out to be a dominant design in a technology driven industry using the personal computer industry as a case study this research shows that firms are not doomed when their entry design choices turn out to be wrong for early entrants we found that switching to the dominant design is associated with increased chances of survival and market share contrary to our expectations we found that even later entrants that switched to the dominant design also enjoyed higher survival rates and greater market position copyright 1999 john wiley sons ltd

consequences of bank distress during the great depression the consequences of bank distress for the economy during the depression remain an area of unresolved controversy since john m keynes 1931 and irving fisher 1933 macroeconomists have argued that bank distress magnified the extent of the economic decline during the depression as the intermediaries controlling money and credit banks were in a special position to transmit their distress to other sectors but the mechanism through which banking distress mattered for the economy has been hotly contested milton friedman and anna j schwartz 1963 saw the contraction in the money multiplier driven in their view by panicked depositors withdrawals of deposits as the primary mechanism through which banking distress affected the real economy they described the mechanism transmitting banking distress to the real sector as operating at the national level through changes in the aggregate supply of money and interest rates bank distress reduced the money supply available to the public either through the closure of banks and the consequent freezing of bank deposits or the withdrawals of deposits by depositors that feared bank failure ben s bernanke 1983 building on fisher 1933 emphasized the transmission of monetary shocks via their effects on the balance sheets of borrowers and on the supply of credit by banks borrowers balance sheets were worsened by debt deflation as the result of fixed dollar debt obligations borrowers net worth and cash flow declined with the rising value of debt service costs relative to income borrowers with positive net present value projects but weak balance sheets had less internally generated retained earnings to invest and could not qualify for credit furthermore bernanke argued that the contraction of the money supply produced contraction of nominal income and prices relative to fixed debt service which weakened borrowers balance sheets and in turn weakened banks not only did firms financial distress reduce the number of qualified borrowers the contraction in banks net worth forced a reduction in the supply of bank loans to qualified borrowers many firms and individuals relied on banks for credit and as those banks suffered losses of capital due to asset value declines and contractions in deposits as depositors reacted to bank weakness by withdrawing their funds even borrowers with viable projects and strong balance sheets experienced a decrease in the effective supply of loanable funds bernanke termed the combined weakening of borrowers balance sheets and the contraction in bank credit supply a rise in the cost of credit intermediation the scarcity of perfect substitutes for the positive net present value investments of firms with weak balance sheets and for the credit supplied by existing banks implies that the weakening of firms and banks balance sheets the disappearance of banks and the contraction in surviving banks lending made it more difficult for the economy to channel funds to their best use thus what began as a contraction in aggregate demand became a contraction in aggregate supply which magnified adverse economic shocks and prolonged and deepened the depression the financial distress of firms and banks and the decline in bank lending were not only symptoms of the depression but means for magnifying the shocks that caused the depression bernanke s statistical evidence in support of this story is derived from time series analysis at the national level in calomiris graduate school of business 601 uris hall columbia university 3022 broadway new york ny 10027 and national bureau of economic research e mail cc374 columbia edu mason department of finance drexel university 3141 chestnut street philadelphia pa 19104 e mail joe mason drexel edu we thank valerie ramey david wheelock charles himmelberg steve zeldes gary gorton two referees and seminar participants at columbia university wharton northwestern university and the 2001 economic history association meetings for helpful comments on an earlier draft we gratefully acknowledge support from the national science foundation the university of illinois and the federal reserve bank of st louis

mitigating the pro cyclicality of basel ii policy discussions on the recent financial crisis feature widespread calls to address the pro cyclical effects of regulation the main concern is that the new risk sensitive bank capital regulation basel ii may amplify business cycle fluctuations this paper compares the leading alternative procedures that have been proposed to mitigate this problem we estimate a model of the probabilities of default pds of spanish firms during the period 1987 2008 and use the estimated pds to compute the corresponding series of basel ii capital requirements per unit of loans these requirements move significantly along the business cycle ranging from 7 6 in 2006 to 11 9 in 1993 the comparison of the different procedures is based on the criterion of minimizing the root mean square deviations of each adjusted series with respect to the hodrick prescott trend of the original series the results show that the best procedures are either to smooth the input of the basel ii formula by using through the cycle pds or to smooth the output with a multiplier based on gdp growth our discussion concludes that the latter is better in terms of simplicity transparency and consistency with banks risk pricing and risk management systems for the portfolio of spanish commercial and industrial loans and a 45 loss given default lgd the multiplier would amount to a 6 5 surcharge for each standard deviation in gdp growth the surcharge would be significantly higher with cyclically varying lgds rafael repullo jesus saurina and carlos trucharte

the hidden persuaders institutions and individuals in economic theory in his classic book the hidden persuaders vance packard claimed that large corporations manipulated consumers using advertising techniques john kenneth galbraith and others have repeated a similar view against this gary becker and george stigler have claimed that advertising is essentially informative rather than manipulative in contrast it is argued here that both of these opposed accounts of human agency neglect the more subtle and undesigned processes by which institutions bear upon and mould individuals this paper proposes a concept of reconstitutive downward causation in which institutions act upon individual habits and dispositions the mechanisms involved do not fall foul of past critiques of holism or methodological collectivism this argument involves a rehabilitation of the concept of habit in social science with far reaching implications

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

pricing risk adjusted deposit insurance an option based model this paper presents a methodology for arriving at empirical estimates of deposit insurance premiums from market data by using isomorphic relationships betweeen equity and a call option and insurance and a put option the data utilizes the market value of equity to solve for the asset value and its volatility market perceptions of fdic bailout policies are explicitly modeled so as to eliminate the bias in inverted values of assets and their volatility sensitivity analyses are performed to show that rank orderings based on premiums are robust to changes in specification thus facilitating allocation of aggregate premium across banks while economists have long argued in favor of risk adjusted deposit insurance as both more equitable and more efficient than the current system of flatrate premiums various recent developments have further contributed to an increasing dissatisfaction with the current system first both the banking industry and the government seem to be tending to the view that deregulation of the banking industry would be necessary in order to meet more sophisticated future demands on the industry as well as desirable as a policy means of stimulating greater competition among banks moreover a sudden rise in the incidence of bank failures 1 and the vulnerability of the u s banks to the socalled international debt crisis have served to bring to the fore concern about the health of the banking industry in the absence of deposit insurance riskier banks will be able to attract deposits only at higher rates and these higher costs of funding serve as built in market regulated incentives to limit excessive risk taking by banks as introduction of deposit insurance makes deposits equally risk free across banks these incentives disappear and regulation and close supervision of the banking industry must necessarily replace them as deterrents to excessive risk taking thus when insurance is offered at a flat premium regulation is designed to ensure that the risk posed to the insurer both asset and financial risk is appropriately uniform

who are the unemployed evidence from the united kingdom using the uk labour force survey 2005 2012 we analyse heterogeneity among non employment subgroups in future employment hazards based on the results we propose alternative measures of unemployment that include out of the labour force subgroups with similar or higher hazards to the officially unemployed

guest editor s introduction to the special issue the evolution of firm capabilities this special issue deals with the question of how it is that over time some firms manage to become successful using their capabilities while other firms do not the articles examine the ways in which firm capabilities emerge develop and change over time and the resulting effects on firm performance conceptual models and analyses based on empirical research deal with market entry and the evolution of firm capabilities adaptation and change in capabilities and heterogeneity of firm capabilities over time within these broad themes specific topics include the role of pre entry experience and initial conditions aspirations and learning dynamic capabilities technological change products and markets mergers and acquisitions and managerial cognition copyright 2000 john wiley sons ltd

too many to fail evidence of regulatory forbearance when the banking sector is weak this paper studies bank failures in 21 emerging market countries in the 1990s by using a competing risk hazard model for bank survival we show that a government is less likely to take over or close a failing bank if the banking system is weak this too many to fail effect is robust to controlling for macroeconomic factors financial crises the too big to fail effect domestic financial development and concerns due to systemic risk and information spillovers the paper also shows that the too many to fail effect is stronger for larger banks and when there is a large government budget deficit

product introduction with network externalities the authors study the introduction of a new product in a market with network externalities there is a common presumption that such markets exhibit excess inertia i e that they are biased toward existing products in contrast the authors provide conditions under which equilibrium involves insufficient friction i e a tendency to rush into new incompatible technologies they also analyze the firms incentives to make their products compatible and they show that the firm introducing the new technology is biased against compatibility copyright 1992 by blackwell publishing ltd

earnings regulatory capital and tax management comments abstract in the preceding papers beaver and engel and adiel investigate managerial discretion in the financial services industry this comment evaluates the contribution and limitations of both papers and suggests avenues for further extensions

installed base and compatibility innovation product preannouncements and predation a good is often more valuable to any user the more others use compatible goods the authors show that this effect may inhibit innovation if an installed base exists and transition to a new standard must be gradual early adopters bear a disproportionate share of transient incompatibility costs this can produce excess inertia the installed base however is stranded if the new standard is adopted this may create excess momentum these dynamic effects have strategic implications temporary price cutting can permanently prevent entry and product preannouncements can be critical in innovation these strategic actions have ambiguous welfare effects

overfunded defined benefit pension plan settlements without asset reversions abstract this study examines why firms settle their overfunded defined benefit pension plans under the new accounting standard fasb statement no 88 companies settling their overfunded pension plan can immediately recognize a portion of deffered pension gain as current earnings focusing on settlement transactions unaccompanied by asset reversions we examine financial characteristics of settlement firms including earnings debt covenants management incentive compensation and firms risk and financial structures our results suggest that firms undertake settlement to offset a decline in earnings and mitigate restrictive debt covenant constraints however a settlement firm s systematic risk beta does not change after settlement

business cycles and bank regulations what happens to bank provisioning a more comprehensive look at 49 countries numerous researchers provide evidence that many banks intend to increase their loan loss provisioning llp when the economy is in a downward trend however the answer whether banks provide sufficient provisions when the economy is in an upturn trend remains unsolved furthermore provisioning must be influenced not only by business cycles and bank earnings but also by the regulatory system nevertheless empirical research on this issue has been scarce thus this study intends to answer two questions shown above the evidence shows that with steady growth in both the economy and bank earnings the bank management will tend to increase llp whereas with a buoyant economy but negative growth in bank earnings the management will exhibit an inclination to reduce llp as regards the influence of bank regulation on provisions the evidence shows that under certain circumstances banks make more provision based on regulatory considerations this explains why bank regulations regarding llp across countries

are unemployment and out of the labor force behaviorally distinct labor force states this paper tests the hypothesis that the classifications unemployed and out of the labor force are behaviorally meaningless distinctions this hypothesis is rejected distinct behavioral equations govern transitions from out of the labor force to employment and from unemployment to employment the evidence reported in this paper is broadly consistent with versions of search theory in which unemployment is a state that facilitates the job search process in an appendix we demonstrate that log concavity of the wage offer distribution implies that the exit rate from unemployment is an increasing function of the rate of arrival of job offers

earnings management under price regulation empirical evidence from the spanish electricity industry abstract this paper analyses the effect of price regulation on the accounting policy of spanish electricity companies over the period 1991 2001 as predicted by the political costs hypothesis watts and zimmerman 1986 watts r l zimmerman j l 1986 positive accounting theory prentice hall englewood cliffs nj managers artificially reduce reported earnings when the government establishes tariff increases in this way companies attempt to diminish their political visibility and counteract social outcry arising from the government s decision several abnormal accruals models existent in the literature are used to obtain a proxy for managerial accounting discretion on earnings

loan loss provisions bank valuations and discretion a comparative study between conventional and islamic banks this study investigates the use of reported loan loss provisions llp by investors in their valuations of banks within the middle east and north africa region between the years 2006 and 2011 we decompose llp into discretionary and non discretionary components to test for differential valuations in the two banking sectors we use alternative criteria to define the components of llp in banks loan quality size and earnings management manipulation incentives we employ a price level valuation model estimated using two stage analyses we find that llp has positive value relevance to investors in both banking sectors investors in islamic banks price the discretionary component relatively lower than their conventional counterparts we attribute this result to differences in product and governance structures as well as to the religious perception of islamic banking in both banking sectors investors construe an increase in the non discretionary component as irrelevant valuation information our results are relevant to bank regulators in showing the signalling effect of llp to bank value and stability

discretionary accounting and the behavior of japanese banks under financial duress abstract this paper investigates utilization of discretionary accounting practices in the context of international bank regulation under the basle accord specifically we explore implications of earnings management as a means of regulatory capital arbitrage by japanese banks during a period of financial duress 1989 1996 using a sample of 607 pooled time series and cross sectional observations we find evidence that japanese banks lending was capital constrained and that banks set gains on securities sales and loan loss provisions in such a way as to smooth reported income and replenish regulatory capital our results support the hypothesis that the form of earnings management examined may have been instrumental in enabling some japanese banks to comply with international capital regulation we contend that this behavior is otherwise inexplicable on the basis of significant informational tax or economic motivations

network effects software provision and standardization in this paper we examine the software provision decision of software firms the provision decision by software firms determines the value and hence the market share of competing hardware technologies we show how the provision decision by software firms determines whether multiple hardware technologies are supported in equilibrium or whether there is de facto standardization with only one hardware technology supplied with software in equilibrium we show that when consumers place a high value on software variety there is a suboptimal amount of standardization by the market

unemployment and nonemployment heterogeneities in labor market states abstract the determination of how to distinguish between unemployment and nonparticipation is important and controversial the conventional approach employs a priori reasoning together with self reported current behavior this paper employs an evidence based classification of labor force status using information about the consequences of the behavior of the nonemployed we find that marginal attachment defined as desiring work although not searching is a distinct labor market state lying between those who do not desire work and the unemployed furthermore important heterogeneities exist within these nonemployment states two subsets of nonparticipants both engaged in waiting display behavior similar to the unemployed

an incentive approach to banking regulation we examine the optimal design of a risk adjusted deposit insurance scheme when the regulator has less information than the bank about the inherent risk of the bank s assets adverse selection and when the regulator is unable to monitor the extent to which bank resources are being directed away from normal operations toward activities that lower asset quality moral hazard under a socially optimal insurance scheme 1 asset quality is below the first best level 2 higher quality banks have larger asset bases and face lower capital adequacy requirements than lower quality banks and 3 the probability of failure is equated across banks perihaps t he most troubling aspect of the current deposit insurance system is the distortions caused by the pervasive use of an insurance premium that is independent of risk the undesirable incentives that result when such a system is employed in a world with imperfect information have long been recognized in the literature of particular concern is the incentive banks have to increase the risk of their portfolio in order to maximize the value of the deposit insurance provided in some respects this problem is similar to the incentives generated by corporate debt however the solution to this problem may be different in a banking context because the creditors include the deposit insurer who has the power to regulate the banks conceivably regulation may be able to mitigate the informational problem at hand in this paper we examine some of the tradeoffs that arise in the design of a regulatory system for banks

does the ilo definition capture all unemployment the labour market status of many non working persons is at the boundary between unemployment and inactivity like the unemployed they seek and are available for work unlike them their last search action was not recent enough to meet the ilo definition of unemployment in this paper we examine by non parametric tests how the transition probabilities of these out of the labour force job seekers differ from those of the unemployed as well as the other non participants first using data from the european community household panel we show that in most eu countries these job seekers constitute a distinct labour market state second we rely on information only available in the italian labour force survey to derive a measure of search intensity which we use to break down the out of the labour force job seekers on the basis of their transition probabilities the most active are indistinguishable from the unemployed

earnings management and auditor specialization in the post sox era an examination of the banking industry abstract this study examines the impact of auditor specialization on bank loan loss provisions for a large cross section of us banks for the period 2002 2006 we find a positive relationship between earning before provision and loan loss provision suggesting that bank managers use llp to smooth earnings in the post sox period however this relationship is significantly moderated by audit industry expertise providing strong evidence that industry specialization constrains income smoothing in further analysis we find some evidence that auditor specialization is more effective in reducing potentially incoming increasing earnings management our results hold after controlling for self selection bias and are robust to alternative measures of industry specialization overall our findings support the conclusion that audit industry expertise plays an effective monitoring role in constraining management s discretionary accounting choices

nonlinear dynamics in discretionary accruals an analysis of bank loan loss provisions abstract several studies have analyzed discretionary accruals to address earnings smoothing behaviors in the banking industry we argue that the characteristic link between accruals and earnings may be nonlinear since both the incentives to manipulate income and the practical way to do so depend partially on the relative size of earnings given a sample of 15 268 us banks over the period 1996 2011 the main results in this paper suggest that depending on the size of earnings bank managers tend to engage in earnings decreasing strategies when earnings are negative big bath use earnings increasing strategies when earnings are positive and use provisions as a smoothing device when earnings are positive and substantial cookie jar accounting this evidence which cannot be explained by the earnings smoothing hypothesis is consistent with the compensation theory neglecting nonlinear patterns in the econometric modeling of these accruals may lead to misleading conclusions regarding the characteristic strategies used in earnings management

how much do your co opetitors capabilities matter in the face of technological change firms often lose their competitive advantage when a technological change renders their existing capabilities obsolete an important question that has received little or no attention is what happens to these firms competitive advantage when the technological change instead renders obsolete the capabilities of their co opetitors the suppliers customers and complementors whose very success may underpin that of the firm and with whom it must collaborate and compete this paper explores the effects on a firm of the impact of a technological change on its co opetitors it argues that a firm s post technological change performance decreases with the extent to which the technological change renders co opetitors capabilities obsolete it uses detailed data on the adoption of risc reduced instruction set computer technology by computer workstation makers to demonstrate the need to view resources as residing in a network and not in the firm alone copyright 2000 john wiley sons ltd

managerial cognition and the mimetic adoption of market positions what you see is what you do managers planning to abandon a market position need to find a promising alternative and face a choice of inventing a new market position or entering an existing one the great uncertainty on the consequences of different actions leads them to rely on other organizations for information on how to compete making adoption of existing market positions likely their wish to avoid direct rivalry and maximize growth leads them to seek out information on new market positions with few incumbents as a result recently innovated market positions are mimetically adopted by organizations that can easily observe previous adoptions and see them as relevant to their market situations increasing the market differentiation this theory is tested and supported by analysis of the spread of new radio formats in the united states 1998 john wiley sons ltd

aggregation of test statistics an evaluation of the evidence on contracting and size hypotheses abstract more powerful tests of a theory of choice of accounting methods and the effect of changes in these choices on equity values are provided the power increase comes from efficiently aggregating results across studies one conclusion is that at least six variables common to more than one study have explanatory power these variables are managerial compensation leverage size risk and constraints on interest coverage and dividends another conclusion is that the posterior probability that the theory taken as a whole has explanatory power is close to one this conclusion includes the effect of variables that only appear in one study

how has the financial crisis affected earnings management a european study the article aims to investigate whether and how in the european union eu the burst of the 2008 financial crisis affected misrepresentation of financial information due to earnings management by analysing a sample of 11 844 firm year observations listed in the eu over the period 2006 2012 an event study methodology allows us to calculate and compare country by country abnormal accruals over the estimation period and over the event period our findings validate our research hypothesis and suggest a decrease of misrepresentation in the large majority of the european countries after the burst of the financial crisis the results take part in the debate in the accounting literature about the change of earnings management over a financial crisis and have several implications for standard setters and regulators that could learn how the common incentives of entities to attract potential investors during a crisis could lead them to provide a high quality financial reporting

the added worker effect abstract this paper uses the gross change data and cointegration error correction modeling to test the hypothesis of added worker effect in the u s labor market it is shown that prime age males unemployment u m and flows from unemployment to out of the labor force un m cause an increase in prime age and young females flows from not in the labor force keeping house to employment and decrease their flows into unemployment

market valuation of bank assets and deposit insurance in canada we examine a sample of canadian banks and use option pricing theory to infer the market value of a bank s assets from the observed market value and volatility of its equity we find that market value estimates are significantly different from corresponding book values these differences vary significantly across banks suggesting that market values provide bank specific information not found in book values we also derive that risk adjusted deposit insurance premia for these banks our results suggest that the current fixed rate deposit insurance premium system has resulted in significant

fair value accounting effects on banks earnings volatility regulatory capital and value of contractual cash flows abstract we investigate fair value accounting critics assertions by restating earnings and regulatory capital to reflect banks disclosed investment securities fair values we find 1 fair value based earnings are more volatile than historical cost earnings but share prices do not reflect the incremental volatility 2 banks violate regulatory capital requirements more frequently under under fair value than historical cost accounting fair value based violations help predict regulatory capital violations but share prices do not reflect this potential increased regulatory risk only historical cost violations are market information events 3 share prices reflect interest rates changes even though investment securities contractual cash flows are fixed

regulatory arbitrage in cross border banking mergers within the eu expanding the cross country footprint of an organization s profit making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe this paper tests and confirms the hypothesis that differences in the size and character of safety net benefits available to banks in individual eu countries help to account for cross border merger activity our results suggest that central bankers need to develop statistical procedures for assessing the consequences of differences in supervisory strength and weakness in partner countries we believe that the methods used here can help in this task

dominance by birthright entry of prior radio producers and competitive ramifications in the u s television receiver industry the u s television receiver industry evolved to be an oligopoly dominated by firms that produced radios prior to tvs data on the experience of all u s radio manufacturers and on the length of survival and rate of innovation of all u s tv entrants are collected to analyze how radio experience influenced entry firm performance and the evolution of market structure in the tv industry consistent with a model of the evolution of an oligopolistic industry more experienced radio firms were more likely to enter tv manufacturing had higher innovation rates and in turn had greater market shares and longer survival suggesting that firm capabilities and the evolution of the tv industry s market structure were critically shaped by firms experience prior to entry copyright 2000 john wiley sons ltd

technological extinctions of industrial firms an inquiry into their nature and causes after a buildup in the number of firms new industries commonly experience a shakeout in which the number of firms declines sharply three theoretical perspectives on how technological change contributes to industry shakeouts are analyzed the theories are used to synthesize predictions concerning technological change and industry evolution the predictions inform an analysis of four us industries that experienced sharp shakeouts automobiles tires televisions and penicillin using data on firm participation and innovation from the commercial inception of the four products through their formative eras we uncover regularities in how the products evolved the regularities suggest that shakeouts are not triggered by particular technological innovations nor by dominant designs but by an evolutionary process in which technological innovation contributes to a mounting dominance by some early entering firms copyright 1997 by oxford university press

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

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

bank valuation and accounting discretion during a financial crisis this paper shows that banks overstate the value of distressed assets and their regulatory capital during the us mortgage crisis real estate related assets are overvalued in banks balance sheets especially those of bigger banks compared to the market value of these assets banks with large exposure to mortgage backed securities also provision less for bad loans furthermore distressed banks use discretion over the classification of mortgage backed securities to inflate their books our results indicate that banks balance sheets offer a distorted view of the financial health of the banks and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules

positive and negative feedback effects in competition for dominance of network business systems this paper extends the existing research on the interplay of positive and negative feedback dynamics in the competition for business system dominance by building on an analysis of the digital television launch in the united kingdom we find that the expectation of network externalities intensifies competition causing strong negative feedback effects to emerge actions aimed at improving one s position are systematically imitated and pre emptied pressure builds up in the business system and only when the weakest firms exit the positive feedback effects are unleashed in their full magnitude our findings contribute to an improved understanding of institutional dynamics in new technology introduction

opaque financial reports r2 and crash risk abstract we investigate the relation between the transparency of financial statements and the distribution of stock returns using earnings management as a measure of opacity we find that opacity is associated with higher r2s indicating less revelation of firm specific information moreover opaque firms are more prone to stock price crashes consistent with the prediction of the jin and myers 2006 r2 around the world new theory and new tests journal of financial economics 79 257 292 model however these relations seem to have dissipated since the passage of the sarbanes oxley act suggesting that earnings management has decreased or that firms can hide less information in the new regulatory environment

disability retirement and unemployment substitute pathways for labour force exit an empirical test for the case of germany this paper studies the determinants of disability retirement and unemployment of older workers two labour market phenomena which the german public discussion combines under the label of early retirement the implicit assumption that these two mechanisms are exchangeable pathways into permanent retirement is tested using panel data the transition rates from employment into disability retirement and into unemploymentare estimated and compared statistical tests reject the hypothesis that disability retirement and unemployment are substitutes

market based risk adjusted examination schedules for depository institutions abstract among deposit insurance reforms considered by economists and policymakers have been prompt resolution of problem institutions risk adjusted deposit insurance premiums and risk adjusted capital requirements some economists have further suggested that risk adjusted deposit insurance premiums or capital ratios be calculated by applying option pricing models to stock market data alternatively the option methodology could be used to establish a risk based examination schedule whereby riskier banks would be examined on a more frequent basis such an examination schedule would be consistent with prompt resolution strategies since it would relate the frequency of examination and closeness of supervision to banks riskness this paper demonstrates how a risk adjusted examination schedule could be derived the paper also considers alternatives to the assumptions regarding examination policies made in standard applications of the option model which may not be valid for the sample periods previously used it discusses potential resulting biases and ways to mitigate their effects

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

technology success and failure in winner take all markets the impact of learning orientation timing and network externalities in industries characterized by network externalities a single technology standard often rises to dominance locking out competing technologies this research demonstrates that despite path depend

capital adequacy ratio regulations and accounting choices in commercial banks abstract this study examines a commercial bank manager s incentives to reduce regulatory costs imposed when the bank s capital adequacy ratio falls below its regulatory minimum it also tests the general political sensitivity hypothesis that a manager seeks to reduce political costs incurred when revenue is unusually large tests of adjustments to the loan loss provision loan charge offs and securities gains and losses attempt to control for exogenous economic conditions and previous investing decisions results are consistent with hypotheses associating accounting adjustments with capital adequacy ratio guidelines but fail to support the political sensitivity hypothesis

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

managing interacting accounting measures to meet multiple objectives a study of lifo firms abstract using a sample of lifo users we examine the strengths and weaknesses of adopting a simultaneous equations approach to study managers adjustments of interacting accounting measures that meet multiple objectives we focus on the importance of considering differences in the costs and the effectiveness of adjusting accounting measures in addition we examine managers objectives in subsequent years and how adjustments reversals affect those objectives although generally consistent with earlier studies of lifo inventory adjustments our results indicate that modelling interacting accounting measures such as other current accruals and depreciation leads to differing conclusions about the role of taxes

the valuation of fdic deposit insurance using option pricing estimates when congress set the premium rate for fdic deposit insurance in the banking act of 1935 which authorized a permanent federal insurance system neither experience nor theory could offer much guidance regarding an appropriate fee structure although rates have since been periodically revised the fdic has yet to attempt to set the insurance rate at a ifair level that is a level equal to administrative costs plus the ex ante value of the insurance such a premium is the rate that would be charged by competitive private insurers however7 the garn st germain act of 1982 directed the fdic to consider the feasibility of a risk based premium structure in response the fdic has suggested a trial system in which each insured bank will be placed in one of three risk classes based on credit and interest rate risk relative to capital and a premium rate will be assigned to each group those rates will be determined in part by the loss experience of the entire banking system fdic 1983 another approach to the determination of the appropriate insurance premium has been offered by merton 1977 who suggested using the analogous relationship between deposit guarantees and put options to value fdic insurance in this paper we follow merton s suggestion and calculate bank specific estimates of the proper premium for deposit insurance for the banks in our sample we find that fdic rates greatly exceed estimates of the fair value of the insurance derived from the blackscholes 1972 option pricing model

making sense of institutions as a factor shaping economic performance abstract there has recently been a resurgence of interest in how institutions affect economic performance a review of this literature reveals that the concept of an institution means different things to different scholars both within economics and across the social sciences we discuss what factors unify the different definitions of institutions and develop a concept of institutions useful for the analysis of economic performance and economic growth in particular specifically we develop the notion of institutions as standard social technologies economic growth results from the co evolution of physical and social technologies

are unemployment and out of the labor force behaviorally distinct labor force states abstract this paper uses the j test developed by mackinnon et al 1983 and us gross change data for six age sex demographic groups to test the hypothesis that unemployment and out of the labor force are behaviorally meaningless distinctions results obtained with these data and test confirm those obtained by flinn and heckman 1983 we found that for young ages 16 19 and young adult ages 20 24 males and females the two states are distinct whereas for prime age males and females ages 25 44 this distinction is meaningless

the red queen in organizational creation and development we synthesize organization learning theory and organizational ecology to predict systematic patterns in the founding and growth of organizations over time our central argument is that competition triggers organizational learning which in turn intensifies competition that again triggers an adaptive response we model this self exciting dynamic sometimes referred to as the red queen in general evolutionary theory to explain organizational founding and growth rates among the thousands of retail banks that have operated in illinois at any time from 1900 1993 we find strong evidence that red queen evolution led some organizations to grow quickly and to place strong competitive pressure on rivals red queen evolution also helped establish barriers to entry however this same evolutionary process appears to make organizations more susceptible to competency traps ultimately slowing their growth rates and inviting new market entry organizations confronted by a widely varying distribution of competitors grow more slowly and are more likely to face new entrants overall the results suggest that processes of organizational creation and growth emerge from ecologies of learning organizations more generally we discuss the use of ecological theory and models to study the empirical consequences of organizational learning opyright 2002 oxford university press

wealth and risk effects of adopting deposit insurance in canada evidence of risk shifting by banks and trust companies this paper confirms that adopting explicit deposit insurance expanded risk shifting incentives for canadian banks and trust companies by transferring responsibility for monitoring non systematic risk to the canadian deposit insurance corporation cdic deposit insurance eliminated the compensation previously paid to large block stockholder monitors this transfer fueled a redistribution of insured institution stock from poorly diversified large block shareholders to diversified investors also subsequent changes in market volatility support the hypothesis that cdic insurance and the absorption of catastrophic risk it provided reduced systematic risk in the stock market as a whole even as it increased non systematic risk in the banking and trust company sector

modeling the evolution of markets with indirect network externalities an application to digital television the usefulness of a technology product for an end user often depends on the availability of complementary software products and services computers require software cameras require film and dvd players require movie programming in order for customers to value the whole product this phenomenon where the demand for hardware products is mediated by the supply of complementary software products is called an indirect network externality indirect network externalities create a two way contingency between the demand for the hardware product and the supply of software products and result in a strategic interdependence between the actions of hardware manufacturers and the actions of software providers indirect network externalities are gaining economic significance in technology markets because hardware and software are typically provided by independent firms and both sets of firms have an incentive to free ride on each others demand creation efforts despite the ubiquity of this phenomenon it has largely been ignored in the marketing science literature we present a conceptual and operational model for the evolution of markets with indirect network externalities the key feature of our framework is to model the market mediated dependence between the actions of hardware manufacturers and software complementors created by the direct dependence of consumer demand for the whole product on the actions of manufacturers as well as complementors in addition we incorporate marketing mix effects on consumer response aswell as heterogeneity in consumer preferences for hardware and software attributes we model consumer response usinga latent class choice model to estimate the complementor response functions we use a modified delphi technique that allows us to convert qualitative response data into quantitative response functions we integrate the consumer and complementor response models to create a simulation modelthat generates forecasts of market shares and sales volumes for competing technologies as a function of marketing mix effects and exogenously specified regulatory scenarios the modeling framework is of interest to new product modelers interested in creating empirical models and decision support systems for forecasting demand in technology markets characterized by indirect network externalities the decision support aspects of the modeling framework should appeal to managers interested in understanding and quantifying the complex interplay between hardware manufacturers and software complementors in the evolution of markets with indirect network externalities we present an application of the modeling framework to the u s digital television industry and use the framework to characterize the competition among analog and digital tv technologies our results suggest that complementor actions play an important role in the acceptance of digital tv technologies in general and high definition television hdtv in particular we find that forecasts that ignore the influence of indirect network externalities would be seriously biased in favor of hdtv we illustrate how the modeling framework can be used to identify and profile customer segments in the digital tv market based on their utility for hardware related features as well as programming related features we also illustrate the decision support capabilities of the modeling framework by evaluating the sensitivity of the forecasts to varying marketing regulatory and complementor response scenarios we derive implications for marketing and public affairs policies of the hardware manufacturers the developments in the digital tv industry generally support our finding that hdtv will be a niche product and will diffuse slower than originally expected due in part to the lack of programming the delays in the introduction of digital tv to the marketplace also suggest that most forecasts for infrastructure intensive technologies like digital tv may be too optimistic simply because they underestimate the delays in agreeing upon technology standards and resolving regulatory debates

discretionary behavior with respect to allowances for loan losses and the behavior of security prices abstract the study examines the capital market pricing of discretionary and nondiscretionary components of a major accrual in the banking industry the allowance for loan losses the analysis employs a two stage approach in which the allowance account is first decomposed into estimates of its nondiscretionary and discretionary components the second stage evaluates the market s valuation of the estimates of the components evidence suggests that the capital market perceives the allowance to be comprised of two components a nondiscretionary component which is negatively priced and a discretionary component whose incremental pricing coefficient is positive

a market evaluation of the risk based capital standards for the u s financial system abstract this paper evaluates u s risk based capital guidelines by comparing stock market measures of institutions risk with current regulatory risk based capital measures the first part of the evaluation compares overall market and regulatory risk based capital measures of current capital adequacy required capital and the capital infusion required to meet the capital requirement the second part compares regulatory risk weights on individual risk categories with market determined risk weights the results suggest that the market and risk based capital standards agree to some extent on the adequacy of institutions current capital and required capital infusion but that their measures of asset risk are not positively correlated further the 100 percent risk category for banks and the 50 and 200 percent categories for s ls do distinguish activities that are riskier by market measures however the market model makes limited distinctions among the other categories in addition the results suggest that some off balance sheet activities for banks may reduce asset risk

does basel ii affect the market valuation of discretionary loan loss provisions we use a sample of banks from 24 european countries to investigate whether the adoption of the basel ii capital accord in 2008 affects the market valuation of discretionary loan loss provisions dllps although basel ii lowers the incentives of internal ratings based irb banks to recognize income increasing dllps in an opportunistic manner it has no such impact on the remaining banks which adopt the standardized methodology we use this setup in a difference in difference did design where standardized banks act as a control group our evidence supports the three hypotheses that for irb relative to standardized banks basel ii is associated with i less income increasing dllps and ii less income smoothing via dllps which enhances the informational content of dllps about future loan losses and leads to iii higher market valuation of dllps our findings are timely and have policy implications for future regulatory developments in the banking industry

a reexamination of the over or under pricing of deposit insurance this study shows how fair deposit insurance premia can be calculated using data on bank stock prices interest rate movements and income and balance sheet accounts fair insurance premia are estimat ed under the alternative assumptions that the fdic provides either a limited term variable rate or unlimited term insurance cont ract to banks the paper s results suggest that for nearly all of the large commerical banks in the sample the actual insurance premium c harged by the fdic falls between the bounds of fair limited term and unlimited term insurance premia copyright 1987 by ohio state university press

the life cycle of a competitive industry firm numbers first rise then later fall as an industry evolves this nonmonotonicity is explained using a competitive model in which innovation opportunities fuel entry and relative failure to innovate prompts exit equilibrium time paths for price and quantity also share features of the data the model is estimated using data from the u s automobile tire industry a particularly dramatic example of the nonmonotonicity in firm numbers

the measurement of unemployment an empirical approach although the unemployment rate is one of the most widely cited and closely monitored economic statistics the definition and measurement of unemployment remain controversial an important issue is whether non employed persons who display a marginal attachment to the labor force for example those who are available for and desire work but are not searching for work should be classified as unemployed or non participants although this issue has been extensively debated it has never been tested empirically this paper carries out empirical tests of this and related hypotheses using a unique longitudinal data set from canada we find within the marginally attached a waiting group whose behavior indicates that they would be more appropriately classified as unemployed rather than out of the labor force the remainder of the marginally attached exhibit behavior between that of the unemployed and the balance of non participants suggesting that the desire for work among non searchers conveys substantial information about labor force attachment and future employment status our methods also apply to heterogeneity within the unemployed and we investigate behavioral variation linked to differences in job search methods and reasons for entry into unemployment although those using passive job search do exhibit behavior somewhat distinct from active searchers our results reject the practice of classifying passive job searchers as out of the labor force overall our results indicate that the non employed are very heterogeneous so that any single division into unemployment and out of the labor force is unlikely to fully capture the variety of degrees of labor force attachment this abstract was borrowed from another version of this item

detailed estimation of worklife expectancy for the measurement of human capital accounting for marriage and children abstract measuring an individual s human capital at a point in time as the present actuarial value of expected net lifetime earnings has a lengthy history calculating such measures requires accurate estimates of worklife expectancy here worklife estimates for men and women in the usa categorized by educational attainment race marital status parental status and current labour force status are presented race has a much larger impact on the worklife expectancy of men than women education is associated with larger worklife differentials for women the association between marriage and worklife expectancy is significant but of opposite sign for men and women married women men have a lower higher worklife expectancy than single women men parenthood is associated with a reduction in the worklife expectancy of women the association is smaller and varies from positive for some education marital status groups to negative for others for men

maintaining adequate bank capital an empirical analysis of the supervision of european banks abstract during the recent financial crisis many large banks losses were absorbed by their sponsoring governments despite the fact that these banks complied with basel standards for adequate capital we illustrate a serious supervisory problem by demonstrating that large european banks reported regulatory capital measures often far exceeded their loss absorbing capacity during 1997 2011 the cumulative value of government guarantees thereby extended to the largest 25 european banks over that period amounts to nearly 1 4 trillion corresponding to an average of 28 5 of the banks equity market values we show that early regulatory attention to declining equity value can substantially reduce the social cost of dealing with bank losses this research is particularly relevant for european institutions at the present time as the european union deals with joint solvency concerns about its banks and its governments

the red queen effect competitive actions and firm performance we investigate the red queen effect as a contest of competitive moves or actions among rivalrous firms the results from a multi industry study of over 4 700 actions confirms the existence of red q

systems competition and network effects this paper discusses firm behavior market performance and the public and private institutions that arise in systems markets i e markets where consumers use compatible components together to generate benefits in such markets which include communications networks and hardware software networks popular products are inherently more valuable these network effects can drive corporate strategies and are critical in understanding innovation in many high technology markets the discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects competition between incompatible systems and how suppliers choose which components are compatible and which are not

why bank credit policies fluctuate a theory and some evidence in a rational profit maximizing world banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit this paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions this leads to a theory of low frequency business cycles driven by bank credit policies evidence from the banking crisis in new england in the early 1990s is consistent with the assumptions and predictions of the theory

stock market valuation of gains and losses on commercial banks investment securities an empirical analysis abstract prior studies document an insignificant effect of unrealized gains losses urgl and a negative effect of realized gains losses sgl on bank stock returns we argue that these results may reflect the omission of changes in value of other net assets resulting from interest rate changes we find that after controlling for effects of other on balance sheet net assets both urgl and sgl have significant positive effects on bank returns in normal periods but the sgl effect is significantly lower in periods of low capital and earnings these findings are relevant to the market value accounting debate

on the origin of strategy action and cognition over time we develop a perspective on how managers search for a strategy in the spirit of cyert and march 1963 we aim for a perspective that reflects the reality of managerial behavior that respects both the reasoning power of managers and the bounds on their rationality and that permits organizations to change but within realistic limits our perspective employs the variable time to frame the question of strategy s origins in a distinctive way over time the cognitive and physical elements that make up a strategy become less plastic while mechanisms to search rationally for a strategy become more available this generates a fundamental tension in the origin of strategy managers struggle to understand their environment well enough to search rationally for an effective strategy before their firms lose the plasticity necessary to exploit that understanding a focus on time allows us to synthesize and extend the evolutionary and positioning models of strategic search toward this end we couple induction and deduction the inductive part of the paper uses detailed observation of the search for a strategy at one firm to identify constructs that play a crucial role in strategic search the deductive part steps beyond our focal firm and uses these constructs to derive theoretical propositions about the typical path of strategic search and the mortality associated with different approaches to search

banks non traditional activities under regulatory changes impact on risk performance and capital adequacy using the big six canadian chartered banks quarterly financial statements and daily stock market data from 1982 to 2018 we examine the impact of non interest income on canadian banks risk perfor

regulatory incentives and the thrift crisis dividends mutual to stock conversions and financial distress during the 1980s insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems lacking cash to close insolvent thrifts regulators induced nearly 10 billion of private capital to flow into the industry through mutual to stock conversions we test a theory of how regulators encouraged capitalimpaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital we estimate the costs of this policy and interpret the 1991 federal deposit insurance corporation improvement act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress