financial analysts forecast revisions and managers reporting behavior abstract this paper studies an analyst s forecasting strategy and a manager s earnings management policy when reporting earnings the manager trades off the disutility he obtains from falling short of the analyst s forecast against the costs of manipulating earnings the model predicts that i the analyst s forecast exceeds median reported earnings ii the analyst is more likely to revise his forecast downward than upward iii mean and median forecast errors are larger in magnitude when the analyst has less precise information and iv the stock market is on average more sensitive to reported earnings than to the analyst s forecasts

pollution as a source of endogenous fluctuations and periodic welfare inequality in olg economies this article examines the conditions under which endogenous fluctuations and periodic welfare inequality can emerge in olg economies having an environmental dimension

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

a solution concept for majority rule in dynamic settings we define and explore the notion of a dynamic condorcet winner dcw which extends the notion of a condorcet winner to dynamic settings we show that for every dcw every member of a large class of dynamic majoritarian games has an equivalent equilibrium and that other equilibria are not similarly portable across this class of games existence of dcws is guaranteed when members of the community are sufficiently patient we characterize sustainable and unsustainable outcomes study the effects of changes in the discount factor investigate efficiency properties and explore the potential for achieving renegotiation proof outcomes we apply this solution concept to a standard one dimensional choice problem wherein agents have single peaked preferences as well as to one involving the division of a fixed aggregate payoff

endogenous information flows and the clustering of announcements we consider the strategic timing of information releases in a dynamic disclosure model because investors don t know whether or when the firm is informed the firm will not necessarily disclose immediately we show that bad market news can trigger the immediate release of information by firms conversely good market news slows the release of information by firms thus our model generates clustering of negative announcements surprisingly this result holds only when firms can preemptively disclose their own information prior to the arrival of external information these results have implications for conditional variance and skewness of stock returns jel d21 d83 g12 g14 l11

informational constraints and the overlapping generations model folk and anti folk theorems this paper analyses the sustainability of inter generational transfers in samuelson s consumption loan model when agents are imperfectly informed about past events we find that with mild informational constraints transfers cannot be supported by pure strategy equilibria mixed strategies allow transfers to be sustained even if agents have little information so that a version of the folk theorem holds however these equilibria are not robust if each agent s utility function is subjected to a small random perturbation as in harsanyi 1973 these mixed strategy equilibria unravel and only the zero transfer allocation survives as the unique rationalizable outcome this result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified

applying digital analysis to detect fraud an empirical analysis of us marine industry firms have tendency to window dress their financial statements by reporting earnings to achieve reference points represented by n 10 k such practice of reporting rounded earnings is likely due to 1 firms may believe that investors perceive a reported earnings of 1 99 million to be significantly less than 2 0 million and or 2 contracts between firms and stakeholders are likely to express earnings in round numbers auditors have employed more sophisticated digital analysis such as benford s law as part of their fraud detection processes this study investigated the window dressing behaviour among firms in the us marine industry the findings of the study suggest that window dressing is a significant practice among the marine firms however the extent of the pervasiveness of such behaviour is less severe among marine firms than among all publicly listed firms in the entire us economy suggesting that the quality of financial statements of marine companies is higher than the overall population of

politics and efficiency of separating capital and ordinary government budgets we analyze a golden rule that separates capital and ordinary account budgets and allows a government to finance only capital items with debt many national governments followed this rule in the eighteenth and nineteenth centuries and most u s states do today we study an overlapping generations economy where majorities choose durable and nondurable public goods in each period when demographics imply even moderate departures from ricardian equivalence the golden rule substantially improves efficiency examples calibrated to u s demographics show greater improvements at the state level or with nineteenth century demographics than under current national demographics

a positive theory of social security based on reputation we construct a general equilibrium model in which a pay as you go social security system can be adopted and sustained as a political and economic equilibrium we alalyze the welfare implictions of this system and compare general equilibrium welfare measure to the commonly used notion of actuarial fairness

discretionary accounting choices and the predictive ability of accruals with respect to future cash flows using a sample of restatement firms and a meet or beat model to classify firms as making discretionary accounting choices for opportunistic meet or beat op mb reasons we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers we find the opposite is true for firms classified as making discretionary accounting choices for non op mb reasons we consider a number of competing explanations for these latter results our findings are most consistent with the informational hypothesis weakly consistent with conservative motivated efficient contracting hypotheses but inconsistent with opportunistic contracting and misapplication errors of gaap explanations

do pensions foster education an empirical perspective the paper examines the effect of population ageing on public education spending on the one hand ageing is expected to have a negative effect on education as an increasing number of retirees resu

a dynamic efficiency rationale for public investment in the health of the young in this paper we assume away standard distributional and static efficiency arguments for public health and instead seek a dynamic efficiency rationale we study a lifecycle model wherein young agents make health investments to reduce mortality risk we identify a welfare rationale for public health under dynamic efficiency and exogenous mortality even when private and public investments are perfect substitutes if health investment reduces mortality risk but individuals do not internalize its effect on the life annuity interest rate the philipson becker effect emerges when the young are net borrowers this works together with dynamic efficiency to support a role for public health resume raisons fondees sur l efficience dynamique pour l investissement public dans la sante des jeunes dans ce memoire on met de cote les arguments conventionnels de sante publique fondes sur la repartition des revenus et l efficience statique pour s interesser a explorer les raisons d efficience dynamique pour ce genre d investissement on etudie un modele de cycle de vie ou les jeunes agents font des investissements en soins de sante pour reduire le risque de mortalite on identifie un raisonnement en termes de bien etre en faveur de depenses en sante publique quand il y a efficience dynamique et mortalite exogene meme quand les investissements prives et publics sont de parfaits substituts si l investissement en soins de sante reduit le risque de mortalite mais que les individus n internalisent pas ses effets sur le taux d interet sur les rentes viageres l effet philipson becker emerge quand les jeunes sont des emprunteurs nets cet effet joue dans le meme sens que l efficience dynamique en faveur d un role pour la sante publique

commodity price instability and economic goal attainment in developing countries abstract this paper reviews the theoretical and empirical micro and macro foundations for the frequent claims that instabilities in international commodity markets have deleterious effects on goal attainment in primary commodity exporting developing countries this review leads to the conclusion that the available evidence does not support these claims the paper concludes with speculation on why such claims are so strong despite the lack of supporting evidence perhaps it is because of measurement problems and perhaps because of small but articulate groups with vested interests in overstating the problem

exploiting ergodicity in forecasts of corporate profitability abstract theory suggests that competition tends to equalize profit rates through the process of capital reallocation and numerous studies have confirmed that profit rates are indeed persistent and mean reverting recent empirical evidence further shows that fluctuations in the profitability of surviving corporations are well approximated by a stationary laplace distribution here we show that a parsimonious diffusion process of corporate profitability that accounts for all three features of the data achieves better out of sample forecasting performance across different time horizons than previously suggested time series and cross sectional models as a consequence of replicating the empirical distribution of profit rates the model prescribes a particular strength or speed for the mean reversion of all returns which leads to superior forecasts of individual time series when we exploit information from the cross sectional collection of firms the new model should appeal to managers analysts investors and other groups of corporate stakeholders who are interested in accurate forecasts of profitability to the extent that mean reversion in profitability is the source of predictable variation in earnings our approach can also be used in forecasts of earnings and is thus useful for firm valuation

the family and the state the immaturity of children sometimes precludes efficient arrangements between children and parents or others responsible for child care the difficulty in establishing efficient relations within families provides the point of departure for our interpretation of the heavy state involvement in the family the authors believe that a surprising number of state interventions mimic the agreements that would occur if children were capable of arranging for their care many regulations of the family improve the efficiency of family activities these interventions include subsidies to education and training social security and other old age support subsidies to births laws that limit access to divorce and the sale of children and laws that require parents permission for early marriage and other choices of children families that leave bequests can force children to repay parents for investments in human capital by reducing bequests therefore these families do not underinvest in childrens human capital by contrast families that do not leave bequests often poorer families do underinvest in children the state may subsidize schools and other training facilities to raise investments in children by poorer families to efficient levels authors modified

cooperation in ongoing organizations this paper argues that overlapping games can provide a natural theory of long lived organizations it shows that participation in organizations of infinite duration changes the incentives of agents with finite lives and will induce more cooperation than a static model would predict after developing the general theory we apply it to the description of career paths in organizations and show that it can be optimal to give the youngest workers the most arduous tasks

religion and income heterogeneity between countries this paper tests whether the behaviour of households in different countries is homogeneous with respect to the influence of religion on income the violation of the homogeneity assumption would have two consequences first results based on country studies might not be applicable to other countries second one should be careful when pooling cross country data in this type of research data at household level from the european and world values survey are pooled for 25 western countries we estimate simultaneously an income and a religion equation to correct for the endogeneity of religiousness we find that estimation outcomes are different for low and high income countries whereas church membership is found to have a positive effect on income for high income countries this effect is negative for low income countries this result is robust to denominational distribution participation effects and alternative measures of religiousness

the political intergenerational welfare state abstract using a three period overlapping generations economy framework we characterize an intergenerational welfare state with endogenous education and pension under voting we show that although politically establishing pay as you go payg social security in isolation in a dynamically efficient economy will always reduce the capital investment and therefore the social welfare as expected in contrast politically implementing education pension policy package instead can improve both human and physical capital accumulation and social welfare over laissez faire however for this the political influence of the old has to be small thus limiting the size of the payg social security program

effects of stabex on acps economic growth further evidence the paper deals with the economic growth of the open and small developing countries which signed the lome convention henceforth acps results showing that earnings instability damages their economic performance can be used to support the eu policy of guaranteeing financial aid to those countries suffering reductions in export proceeds the second section of the paper analysing the workings of stabex however highlights certain weaknesses in the effectiveness of stabex transfers when their impact on economic growth is considered the general conclusion is that if the current eu acp negotiations for lome v are to be successful then some aspects of the scheme eligibility criteria and use of funds will have to be radically changed

labor unemployment insurance and earnings management abstract we provide new evidence that firms appear to manage long run earnings upward in order to manage rank and file employees perceptions of employment security in particular we exploit exogenous state level changes in unemployment insurance benefits and test for partial unwinding of prior upward earnings management when benefits increase consistent with the hypothesis we find a significant reduction in abnormal accruals increased recognition of special items and write downs and greater likelihood of net income reducing restatements following an increase in state level unemployment benefits a number of cross sectional results are also consistent with the hypothesis

playing the fertility game at work an equilibrium model of peer effects we study workplace peer effects in fertility decisions using a game theory model of strategic interactions among coworkers that allows for multiple equilibria using register based data on fertile aged women working in medium sized establishments in denmark we uncover negative average peer effects allowing for heterogeneous effects by worker type we find that positive effects dominate across worker types defined by age or education negative effects dominate within age groups and among low education types policy simulations show that these estimated effects make the distribution of where women work an important consideration beyond simply if they work in predicting population fertility

analyzing the analysts career concerns and biased earnings forecasts this paper examines the career concerns of security analysts we relate long histories of their earnings forecasts to job separations we find that relatively accurate past forecasts lead to favorable career outcomes such as remaining at or moving up to a high status large prestigious brokerage house controlling for accuracy optimistic forecasts relative to the consensus increase the chances of favorable job separations job separations depend much less on accuracy for analysts who cover stocks that are underwritten by their brokerage houses such analysts are also much more likely to be rewarded for optimistic forecasts than other analysts furthermore job separations were much less sensitive to accuracy and somewhat more sensitive to optimism during the stock market mania of the late 1990s these findings suggest that the well documented analyst forecast optimism bias is likely due to incentives to promote stocks

earnings manipulation and the cost of capital the cost of capital the widespread use of accounting information by investors and financial analysts to help value stocks creates an incentive for managers to manipulate earnings in an attempt to influence short term stock price performance this paper examines the role of earnings management in affecting a firm s cost of capital using an agency model with multiple firms whose cash flows are correlated we demonstrate that the extent of earnings manipulation varies across the business cycle depending on a firm s earnings profile it can have stronger incentives to overstate its performance in good times or in bad times because of this dependence on the state of the economy earnings manipulation can influence a firm s cost of capital despite the forces of diversification

does meeting earnings expectations matter evidence from analyst forecast revisions and share prices this paper investigates whether the market rewards firms meeting current period earnings expectations and whether any such reward reflects the implications of meeting expectations in the current period for future earnings or reflects a distinct market premium we document that abnormal annual returns are significantly greater for firms meeting expectations controlling for the information in the current year s earnings we then test whether firms meeting expectations experience higher returns simply because their expected future earnings are also higher we find firms meeting expectations have significantly higher earnings forecasts and realized earnings than firms that do not we find that controlling for these higher future earnings firms meeting expectations in one or two years do not receive a greater valuation than their fundamentals would suggest we find however that the market assigns a higher value to firms that meet expectations consistently controlling for an estimate of the firm s fundamental value

export instability and the domestic economy questions of causality the conventional view concerning the impact of export instability on the domestic economies of developing countries is one of pessimism export instability is thought to adversely affect the short run stability and longer run growth of income empirical evidence on these matters is however inconclusive this article applies a granger sims reduced form approach to examining whether export instability generates short run instability in domestic income for each of a sample of 20 trade dependent countries the results obtained strongly support the contention that export instability induces short run macroeconomic instability

the family as an incomplete annuities market families can self insure against uncertain dates of death through implicit or explicit agreements with respect to consumption and interfamily transfers interfamily transfers need have nothing to do with altruistic feelings they may simply reflect risk sharing behavior of completely selfish family members although family annuity markets are incomplete even small families can substitute by more than 70 percent for perfect market annuities given adverse selection and transaction costs family risk pooling may be preferred to public market annuities in the absence of public annuities these risk sharing arrangements provide powerful incentives for marriage and family formation

social contracts as assets a possible solution to the time consistency problem this paper presents a new solution to the time consistency problem that appears capable of enforcing ex ante policy in a variety of settings in which other enforcement mechanisms do not work the solution involves formulating a social contract institution or agreement that specifies the optimal ex ante policy the social contract is effectively sold by succesive old generations to successive young generations who pay for the social contract through the payment of taxes both old and young generations have an economic incentive to fulfill the social contract for the old generation breaking the social contract makes the social contract valueless and the generation suffers a capital loss by not being able to sell it for the young generation the economic advantage of purchasing the existing social contract exceeds its price as well as the economic gain from setting up the a new social contract

two sided learning and the ratchet principle i study a class of continuous time games of learning and imperfect monitoring a long run player and a market share a common prior about the initial value of a gaussian hidden state and learn about its subsequent values by observing a noisy public signal the long run player can nevertheless control the evolution of this signal and thus affect the market s belief the public signal has an additive structure and noise is brownian i derive conditions for an ordinary differential equation to characterize equilibrium behavior in which the long run player s actions depend on the history of the game only through the market s correct belief using these conditions i demonstrate the existence of pure strategy equilibria in markov strategies for settings in which the long run player s flow utility is nonlinear the central finding is a learning driven ratchet principle affecting incentives i illustrate the economic implications of this principle in applications to monetary policy earnings management and career concerns

the intergenerational state education and pensions allocation is inefficient when generations overlap this failure can be mitigated by properly designed social arrangements we show that public financing of education and public pensions can be designed to implement an intergenerational transfer scheme supporting the complete market allocation neither the public financing of education nor the pension scheme we consider resemble standard ones in our mechanism via the public education system the young borrow from the middle aged to invest in human capital they pay back the debt via a social security tax the proceedings of which finance pension payments when the complete market allocation is achieved the rate of return implicit in this borrowinglending scheme should equal the market rate of return

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

resource intensity institutions and development summary we examine the relationship between resource abundance and several indicators of human welfare consistent with the existing literature on the relationship between resource abundance and economic growth we find that given an initial income level resource intensive countries tend to suffer lower levels of human development while we find only weak support for a direct link between resources and welfare there is an indirect link that operates through institutional quality there are also significant differences in the effects that resources have on different measures of institutional quality these results imply that the resource curse is a more encompassing phenomenon than previously considered and that key differences exist between the effects of different resource types on various aspects of governance and human welfare 2005 elsevier ltd all rights reserved

the intergenerational case of missing markets and missing voters a simple game formulation is used to examine the possibility of linking generations when a future generation will confront a risk that can be alleviated by an earlier generation s investment an insurance market will function provided that the overlapping generations are sufficiently near in time and share risks without propinquity or shared risks there is a need for intervention to overcome the problems of missing markets and missing voters this intervention should take the form of minimum environmental standards based on a notion of sustainability that is constitutionally enforced

debt covenant violation and manipulation of accruals abstract this paper examines the abnormal accruals of a sample of 94 firms that reported debt covenant violations in annual reports we expect debt covenant restrictions to influence accounting choices in the year preceding and the year of violation time series and cross sectional models are used to estimate normal accruals in the year prior to violation both models indicate that abnormal total and working capital accruals are significantly positive in the year of violation there is evidence of positive abnormal working capital accruals after controlling for management changes and auditor going concern qualifications

ageing government budgets retirement and growth we analyze the short and long run effects of demographic ageing increased longevity and reduced fertility on per capita growth the olg model captures direct effects working through adjustments in the savings rate labor supply and capital deepening and indirect effects working through changes of taxes government spending components and the retirement age in politico economic equilibrium growth is driven by capital accumulation and productivity increases fueled by public investment the closed form solutions of the model predict taxation and the retirement age in oecd economies to increase in response to demographic ageing and per capita growth to accelerate if the retirement age were held constant the growth rate in politico economic equilibrium would essentially remain unchanged due to a surge of social security transfers and crowding out of public investment

toward a new welfare economics for sustainability the debate over various definitions of sustainability has for the most part been conducted within the framework of traditional welfare economics discussion has centered on technical issues imbedded within the functional forms of various optimization models especially the coefficient of the elasticity of substitution and the social discount rate two more basic problems are 1 intractable theoretical difficulties within welfare economics call into question the results of traditional models of sustainability regarding intergenerational welfare and 2 equating per capita consumption with welfare contradicts empirical evidence suggesting that the link between happiness and wealth income is relatively weak alternative approaches to measuring well being are being developed and these have great potential to move the sustainability debate forward

millian efficiency with endogenous fertility should governments implement policies that affect fertility decisions on efficiency grounds what is the correct notion of efficiency to use to address these issues this paper develops an extension of the notion of pareto efficiency referred to as millian efficiency to evaluate symmetric allocations in an overlapping generations setting with endogenous fertility this extension is based on preferences of those agents who are actually alive and exclusively allows for welfare comparisons of symmetric allocations first we provide necessary and sufficient conditions to determine whether an allocation is millian efficient or not and we show that the sufficient conditions for dynamic efficiency offered by cass 1972 and balasko and shell 1980 cannot be directly applied when fertility decisions are endogenous second we characterize millian efficient allocations as the equilibria of a decentralized price mechanism and we present a sufficient condition for dynamic efficiency that uses the sequence of prices associated to such decentralized equilibria finally we analyse how intergenerational policies should be designed to restore efficiency and achieve net welfare gains in two different settings in which markets yield inefficient allocations dynamic inefficiencies and financial market incompleteness regarding human capital in the former a pay as you go social security system eliminates dynamic inefficiencies provided pensions are explicitly linked with fertility decisions in the latter a specific link between social security and public education becomes a necessary condition for millian efficiency copyright wiley blackwell

the rewards to meeting or beating earnings expectations abstract this paper finds that firms that meet or beat current analysts earnings expectations mbe enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations further such a premium to mbe although somewhat smaller exists in the cases where mbe is likely to have been achieved through earnings or expectations management the findings also indicate that the premium to mbe is a leading indicator of future performance this premium and its predictive ability are only marginally affected by whether the mbe is genuine or the result of earnings or expectations management

the fiscal effects of immigration to the uk we investigate the fiscal impact of immigration on the uk economy with a focus on the period since 1995 our findings indicate that when considering the resident immigrant population in each year from 1995 to 2011 immigrants from the european economic area eea have made a positive fiscal contribution even during periods when the uk was running budget deficits while non eea immigrants not dissimilar to natives have made a negative contribution for immigrants that arrived since 2000 contributions have been positive throughout and particularly so for immigrants from eea countries notable is the strong positive contribution made by immigrants from countries that joined the eu in 2004

predicting individual analyst earnings forecasts in this study i propose and test a model that predicts individual analyst forecasts of corporate earnings per share eps using the change in the mean consensus forecast of other analysts since the date of the analyst s current outstanding forecast the deviation of the analyst s current forecast from the consensus forecast and cumulative stock returns since the date of the analyst s current forecast i find that these three variables explain about 38 of the variability in analyst forecast revisions while there is evidence of a relation between changes in earnings expectations and price changes virtually all of the explanatory power of my model arises from other analyst forecasts section 2 describes the data bases used and the sample selection process section 3 presents the model and method for predicting individual analyst forecasts section 4 reports the bias and accuracy of the predicted forecasts conclusions are in section 5

multimarket contact and collusive behavior traditional analyses of industrial behavior typically link the exercise of market power in an industry to internalfeatures such as demand conditions concentration and barriers to entry nevertheless some economists have remained concerned that external factors such as contact across markets may also play a significant role in determining the level of competitiveness in any particular industry in this article we examine the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition we isolate conditions under which multimarket contact facilitates collusion and show that these collusive gains are achieved through modes of behavior that have been identified in previous empirical studies of multimarketfirms

self selection and analyst coverage this paper examines the relation between analysts information about a stock s future prospects and their decisions to issue investment recommendations and earnings forecasts for that stock and the implications of this relation for the observed distribution of recommendations and earnings forecast errors articles in the financial press have long argued that analysts are reluctant to issue unfavorable investment information perhaps because they fear jeopardizing potential investment banking

earnings management behaviors under different monitoring mechanisms the case of islamic and conventional banks abstract we investigate the impact of organizational religiosity on the earnings quality of listed banks in the middle east and north africa region we analyze islamic banking institutions which operate within strict religious norms and extended accountability constraints and compare them with their conventional counterparts during 2008 2013 we find that islamic banks are less likely to manage earnings and that they adopt more conservative accounting policies based on these findings we argue that religious norms and moral accountability constraints in these organizations have a significant impact on financial reporting quality and agency costs which have implications for both regulators and market participants

earnings quality evidence from the field abstract we provide insights into earnings quality from a survey of 169 cfos of public companies and in depth interviews of 12 cfos and two standard setters cfos believe that i above all high quality earnings are sustainable and repeatable specific characteristics include consistent reporting choices backing by actual cash flows and absence of one time items and long term estimates ii about 50 of earnings quality is driven by non discretionary factors such as industry and macro economic conditions iii in any given period about 20 of firms manage earnings to misrepresent economic performance and for such firms 10 of eps is typically managed iv earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags in addition cfos disagree with current standard setting on a number of issues including the sheer number of promulgated rules the top down approach to rule making the neglect of the matching principle and the emphasis on fair value accounting they indicate that a rules based culture makes the audit function centralized and mechanical and hinders the development of audit professionals a summary impression from our work is that cfos view earnings quality as more of a single and unconditional characteristic in contrast to current research where measures of earnings quality are strongly conditional on the decision setting this cfo view is related to their idea of one number a single earnings metric that shapes both their interactions with external stakeholders and internal decision making

reputation and performance among security analysts members of the institutional investor all american research team supply more accurate earnings forecasts than other analysts when forecasts are matched by the corporation followed and by the date of brokerage house issuance this contemporaneous advantage is complemented by a timing advantage all americans supply forecasts more often than other analysts stocks returns immediately following large upward forecast revisions suggest that all americans impact prices more than other analysts however there is virtually no difference in returns following large downward revisions nevertheless the collective results suggest a positive relation between reputation and performance and assuming that all americans are better paid pay and performance

export instability and the economic performance of developing countries abstract this paper explores the economic consequences of export instability by developing a stochastic optimal control model that is based on the maximizing behavior of a risk averse representative agent the model offers an analytical framework that can predict the consequences of export instability for the intertemporal choices of consumption saving and investment the model s results are then used to interpret the large existing body of empirical findings on the relation between export instability and savings investment and output growth rates

a repeated game with finitely lived overlapping generations of players abstract this paper analyzes infinitely repeated noncooperative games where the players have finite but overlapping terms thus the nature of the game remains constant but the identity of the players changes over time this type of scenario depicts the situation facing firm managers in regulated or oligopolistic environments despite finite lives which lead players to always choose opportunistic actions at the end of their careers it is shown that there are equilibria where cooperative behavior emerges in this noncooperative setting further a folk theorem result is obtained any individually rational payoffs can be realized as a subgame perfect equilibrium journal of economic literature classification numbers 022 026

the future of social security we analyze the effect of the projected demographic transition on the political support for social security and equilibrium outcomes embedding a probabilistic voting setup of electoral competition in the standard olg model with capital accumulation we find that intergenerational transfers arise in the absence of altruism commitment or trigger strategies closed form solutions predict population ageing to lead to higher social security tax rates a rising share of pensions in gdp but eventually lower social security benefits per retiree the response of equilibrium tax rates to demographic shocks reduces old age consumption risk calibrated to match features of the u s economy the model suggests that in response to the projected demographic transition social security tax rates will gradually increase to 16 other policies that distort labor supply will become less important labor supply therefore will rise in contrast with frequently voiced fears

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

do bright line earnings surprises really affect stock price reactions several influential studies have concluded that earnings surprises just to the right or to the left of a hypothesized bright line produce distinct price reactions compared with surrounding earnings surprises because they convey special meaning in this study we examine whether previous inferences of asymmetric stock price reactions to bright line surprises are observed when empirical tests are designed to be consistent with a rational expectations equilibrium focusing on a small range of earnings surprises around hypothesized bright lines we find no evidence of asymmetric price reactions once investors ex ante expectation of bias in earnings surprises is controlled results from additional tests yield support for the external validity of the theoretical framework underlying our bright line pricing tests our findings suggest simple refinements to traditional bins comparison and regression tests for asymmetric price reactions to bright line earnings surprises which account for necessary conditions imp

a new look at the effects of export instability on investment and growth abstract this paper is concerned with the effects of export instability on investment and growth it is shown that past cross sectional empirical studies on the effects of export instability either in prices or in value terms used an incorrect measure of instability that does not properly take account of the share of exports in gdp using a new instability index and a broad set of conditioning variables it is shown that export instability was positively associated with investment but negatively associated with growth in a large sample of countries during the period from the early 1970s to the mid 1980s

international tourism and export instability export diversification has been suggested as a strategy for decreasing the level of export earnings instability which is experienced by many developing countries in recent years the international tourism sector has made an increasingly important contribution to the economies of many low income countries this article examines whether diversification into the non traditional tourism sector has succeeded in decreasing the instability of export earnings it was found that although tourism has the advantage of high growth rates and is a major source of foreign currency receipts earnings from international tourism did not bring about a significant decrease in the instability of export earnings of most of the developing and industrialised countries considered furthermore a net increase in the instability of earnings from tourism and merchandise exports occurred in a number of countries and may be a particular problem in small open developing economies

two sided intergenerational transfer policy and economic development a politico economic approach we consider an overlapping generations model with public education and social security where the overall size of these policies is determined in a repeated voting game we investigate the interaction between the politically determined policies and economic development in a markov perfect equilibrium the following results are obtained first the level of human capital determines whether these policies are sustained in the markov perfect equilibrium second if the level of initial human capital is sufficiently high human capital grows forever in contrast if the level of initial human capital is low the economy might be caught in a poverty trap

self enforcing intergenerational social contracts for pareto improving pollution mitigation we consider in an overlapping generations model with an environmental externality a scheme of contracts between any two successive generations under each contract agents of the young generation invest a share of their labor income in pollution mitigation in exchange for a transfer in the second period of their lives the transfer is financed in a pay as you go manner by the next young generation different from previous work we assume that the transfer is granted as a subsidy to capital income rather than lump sum we show that the existence of a contract which is pareto improving over the situation without contract for any two generations requires a sufficiently high level of income in a steady state with social contracts in each period the pollution stock is lower compared to a steady state without contracts analytical and numerical analysis of the dynamics under nash bargaining suggests that under reasonable conditions also steady state income and welfare are higher delaying the implementation of a social contract for too long or imposing a contract with too low mitigation can be costly net income may inevitably fall below the threshold in finite time so that pareto improving mitigation is no longer possible and the economy converges to a steady state with high pollution stock and low income and welfare in the second part of the paper we study a game theoretic setup taking into account that credibly committing to a contract might not be possible we show that with transfers granted as a subsidy to capital income there exist mitigation transfer schemes which are both pareto improving and give no generation an incentive to deviate from any of its contracts even in a dynamically efficient economy social contracts coexist with private savings

forward and backward intergenerational goods why is social security good for the environment this paper studies the ability of nonmarket institutions to invest optimally in forward intergenerational goods figs such as education and the environment when agents are selfish or exhibit paternalistic altruism we show that backward intergenerational goods bigs such as social security play a crucial role in sustaining investment in figs without them investment is inefficiently low but with them optimal investment is possible we also show that making the provision of bigs mandatory crowds out the voluntary provision of figs and that population aging can increase investment in figs

repeated games played by overlapping generations of players the present paper tries to explain cooperative behaviour in an organization run by a sequence of long but finitely lived agents we show that the folk theorem holds for infinitely repeated games with overlapping generations of finitely lived players any mutually beneficial outcome can approximately be sustained if the player s life span and the overlapping periods are long enough the result is stronger than the usual folk theorems in that it employs no assumption on the stage game such as the full dimensionality of payoff set or multiplicity of equilibria

the allowance for uncollectible accounts conservatism and earnings management we study the interrelation between conservatism and earnings management by examining the allowance for uncollectible accounts and its income statement counterpart bad debt expense we find that the allowance is conservative and that it has become more conservative over time conservatism may however facilitate earnings management we find that firms manage bad debt expense downward and even record income increasing bad debt expense to meet or beat analysts earnings forecasts and that conservatism accentuates the extent to which firms manage bad debt expense further we find that firms manage bad debt expense downward by drawing down previously recorded over accruals of bad debt expense that have accumulated on the balance sheet an implication of our study is that tighter limits on the amount by which firms are permitted to understate net assets may reduce their ability to manage earnings

parental altruism and inter vivos transfers theory and evidence this paper uses psid data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism specifically the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one dollar reduction in that child s income results in the parents increasing their transfer to the child by one dollar this restriction on parental and child transfer income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints these additional elements pin down the timing of inter vivos transfers the method used to estimate income transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism the findings strongly reject the altruism hypothesis redistributing one dollar from a recipient child to donor parents leads to less than a 13 cent increase in the parents transfer to the child far less than the one dollar increas

rationality and analysts forecast bias this paper proposes and tests a quadratic loos utility function for modeling corporate earnings forecasting where financial analysts trade off bias to improve management access and forecast accuracy optimal forecasts with minimum expected error are optimistically biased and exhibit predictable cross sectional variation related to analyst and company characteristics empirical evidence from individual analyst forecasts is consistent with the model s predictions these results suggest that positive and predictable bias may be a rational property of optimal earnings forecasts prior studies using classical notions of unbiasedness may have prematurely dismissed analysts forecasts as being irrational or inaccurate

partnership firms reputation and human capital in human capital intensive industries where it is difficult to contract upon the training effort of skilled agents a socially suboptimal level of training may occur we show how partnership organisations can overcome this problem by tying human and financial capital partnerships are opaque so that the willingness of clients to pay depends upon reputation partnerships are illiquid and partners must stay with the firm until clients discover their type and update the firm s reputation this renders unskilled agents who will aversely affect reputation unwilling to accept partnerships skilled agents therefore train the next generation so as to ensure that there is an adequate market for their own shares we comment upon the salient differences between partnerships and joint stock firms

the intergenerational welfare state and the rise and fall of pay as you go pensions this article develops a theory of the two armed intergenerational welfare state consistent with key features of modern welfare arrangements and uses it to rationalise the rise and fall in generosity of pay as you go pensions solely on efficiency grounds by using the education arm a dynamically efficient welfare state is shown to improve upon long run laissez faire even when market failures are absent to release these downstream welfare gains without hurting any transitional generation help from the pension arm is needed in the presence of an intergenerational education externality pensions initially rise in generosity but can be replaced by fully funded pensions eventually

opportunity inequality and the intergenerational transmission of child labour this paper presents a model in which opportunity differences within society result in child labour where opportunity is broadly defined but can include school quality access to higher paying jobs access to information about the returns to education and actual discrimination if opportunity differences exist child labour and poverty are shown to be symptomatic of this underlying socioeconomic condition it is then shown that policies that ban child labour and or introduce compulsory education laws can actually reduce dynastic welfare increase poverty and further exacerbate income inequality within society because they treat the symptom rather than the disease the lack of opportunity

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

perspectives on positive political economy this volume serves as an introduction to the field of positive political economy and the economic and political processes with which it is concerned this new research tradition is distinct from both normative and historical approaches to political economy grounded in the rational actor methodology of microeconomics positive political economy is the study of rational decisions in a context of political and economic institutions more analytical than traditional approaches it is concerned with the derivation of principles and propositions against which real world experience may be compared its focus is on empirical regularities and its goal is theoretical explanation the field has focused on three main areas of research models of collective action constraints on competitive market processes and the analysis of transaction costs developments in all of these areas are covered in the book the first part of the volume surveys the field while the second part displays positive political economy at work examining a variety of subjects the final part contains essays by leading political economists on the theoretical foundations of the field

how to protect future generations using tax base restrictions this paper studies how to protect future generations from expropriation and to induce optimal investment in intergenerational public goods ipgs by introducing constitutional restrictions on the tax base the type of tax base restrictions that we consider places limits on the tax instruments that the government can use to raise revenue but not on the level of expenditures or debt we show that the introduction of a constitutional amendment requiring that ipgs and debt be financed with land taxes makes intergenerational expropriation impossible and for many cases of interest induces optimal investment in ipgs we also show that a weaker constitutional amendment requiring that ipgs be financed with land taxes but imposing no restrictions on how to finance the debt has a positive impact on ipgs but not on expropriation the paper also studies the political feasibility of these reforms we show that the first reform is not politically feasible since it hurts current generations but the weaker reform can induce a pareto improvement jel d1 d7

effect of investor speculation on earnings management this paper considers how the presence of a speculative investor who bets on a firm s future earnings report affects how the firm s management manipulates that report we examine the influence of the speculator s information on earnings management behavior quality of reported earnings and stock price efficiency we also provide predictions for and interpretations of short window event studies and long window association studies

climate change population ageing and public spending evidence on individual preferences abstract economic theory as well as empirical research suggest that elderly people prefer public spending on policies yielding short term benefits this might be bad news for policies aimed at combating climate change while the unavoidable costs of these policies arise today the expected benefits occur in the distant future drawing on data from over 12 000 households and using the ordered logit and the generalized ordered logit model we analyze whether attitudes towards climate change and climate policies as well as public spending preferences differ with respect to age our estimates show that elderly people are less concerned about climate change but more concerned about other global challenges furthermore they are less likely to support climate friendly policies such as the subsidization of renewables allocate less public resources to and have lower willingness to pay for environmental policies thus our results suggest that the ongoing demographic change in industrialized countries may undermine climate policies

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

pension design when fertility fluctuates the role of education and capital mobility this study compares alternative designs of an unfunded pension system convex combinations between a fixed contribution rate and a fixed benefit rate are considered the objective is to maximize the expected ex ante welfare under stochastic fertility the model is a three period cge framework where the financing of education and effects on factor prices are accounted for factor prices depend on the degree of capital mobility for low degrees of capital mobility it is optimal to have a fixed benefit rate in the pension system but for the small open economy a fixed contribution rate is optimal if the education system has a fixed benefit rate in this case individuals in the small open economy are unaffected by fertility fluctuations

a temporal analysis of earnings surprises profits versus losses i show that median earnings surprise has shifted rightward from small negative miss analyst estimates by a small amount to zero meet analyst estimates exactly to small positive beat analyst estimates by a small amount during the 16 years 1984 to 1999 i show that a rightward temporal shift in median surprise from negative to positive describes earnings but neither profits nor losses median profit surprise shifts within the positive quadrant from zero to one cent per share median loss surprise shifts within the negative quadrant from extreme negative about 33 cents per share to zero i show that the median surprise for profits exceeds that for losses in every year i document significant positive temporal trends in both meet and beat analyst estimates for both profits and losses but i find a greater frequency of profits that either meet or beat analyst estimates in every year i find a significant positive temporal trend in positive profits that are a little bit of good news and a significant negative temporal trend in managers who report losses that are an extreme amount of bad news my results are robust to the four internal validity threats i consider namely temporal changes in 1 analyst forecast accuracy 2 the mix of earnings of one sign preceded by earnings of another sign four quarters ago 3 the timeliness of the most recent analyst forecast and 4 the i b e s definition of actual earnings i find that managers of growth firms are relatively more likely than managers of value firms to report good news profits i show that when they do report positive profit surprises managers of growth firms are more likely to report a little bit of good news in every year

social security as trade among living generations we model u s social security that is legislated endogeneously by living generations specifically we consider the effects of social security on resource allocation and pareto optimality examining which generations gain from social security and whether some generations lose because saving and transfer decisions are made sequentially in the real world we use an infinite horizon overlapping generations framework in which life cycle saving and transfers to the old are determined by living agents we focus on the case in which agents are altruistic but place sufficiently greater weight on own comsumption than on the consumption of agents in other generations so that starting from a steady state without social security living agents would gain utility if consumption were shifted marginally to them from later generations excerpt

export instability export growth and gdp growth abstract the positive correlation between export instability and export expansion reported by lam in a recent paper is shown to be the result of a bias caused by the manner in which the instability index was calculated and by using data series which end in a year of unusually high exports it is shown that when correction is made for these factors there is no statistically significant correlation between export instability and export expansion or domestic income expansion

is the extended family altruistically linked direct tests using micro data this paper uses panel study of income dynamics data on parents and their adult children to test the standard altruism model this model predicts that within the extended family the distribution of consumption is independent of the distribution of resources the authors findings strongly reject this prediction copyright 1992 by american economic association

do analysts sacrifice forecast accuracy for informativeness analysts deviate from management guidance to correct for perceived earnings management although the deviations reduce forecast accuracy they improve forecast informativeness bringing the forecasts closer to the unmanaged earnings and reducing accruals mispricing an implicit assumption in the literature is that more accurate analyst forecasts i e estimates that are closer to the reported earnings are better for investors and that analysts objective is to forecast the reported managed earnings accurately our analysis suggests that this is not necessarily the case and that an inaccurate forecast can actually be more informative than an accurate one prior studies on analysts deviations from management guidance focus on analysts incentives to issue estimates that managers can beat these studies implicitly assume that analysts side with management against the interests of their clients our analysis indicates that analysts could also deviate from management guidance to provide useful valuation

public education and pensions in democracy a political economy theory a dynamic political economy theory of scal policy is presented to explain the simultaneous existence of public education and pensions in modern democracies the driving force of the model is the intergenerational conict over the allocation of the public budget successive generations of voters choose scal policies through repeated elections the political power of elderly voters creates the motive for adults to support public investment in the human capital of future generations since it expands future pension possibilities we characterize the markov perfect equilibrium of the voting game in a small open economy the equilibrium reproduces salient features of intergenerational