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

corporate pension policy an empirical investigation an empirical investigation of pension funding levels and plan asset allocations suggests that corporations manage their pension funds as if they are an integral part of overall corporate financial policy this corporate financial perspective contrasts with the traditional view of pension management whereby pension assets are seen as a separate pool to be managed in the best interests of beneficiaries the primary evidence concerns the links between corporate profitability and pension policies first reported pension fund liabilities are linked systematically to company profitability by management s choice of a discount rate more profitable firms tend to choose lower discount rates hence to overstate their pension liabilities relative to those of less profitable firms second profitability has a strong positive association with funding level the proportion of pension assets invested in fixed income securities also has a positive association with funding level corporations with taxable income can maximize tax savings by having fully funded plans invested in heavily taxed securities such as bonds evidence regarding specific motivations behind the corporate pension perspective emerges when the sample is investigated more closely for example the subsample of firms with the heaviest tax burdens exhibits a significant relation between level of funding and tax paying status similarly the subsample of riskiest firms tends to hold underfunded portfolios invested in riskier assets stocks rather than bonds this is consistent with the presence of a pbgc insurance effect the tendency of less financially sound firms to lay off their pension burden on the pension benefit guaranty corporation

transparency and economic policy we provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary government spending is larger than in a world of perfect observability transfers are partly financed through government debt and the size of the debt is higher in less transparent political systems the model provides an explanation of fiscal churning it also predicts that groups whose transfers are less visible to others receive higher transfers and that imperfect transparency of transfers may lead to underprovision of public goods from the policy perspective the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues we show that the transparency of the political system does not unambiguously improve efficiency transparency of spending is beneficial but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending

a comment on excess asset reversions and shareholder wealth this study re examines the earlier finding of alderson and chen 1986a that financial markets do not consider excess pension assets in determining share prices and that significant increases in shareholder wealth occur when an overfunded pension plan is terminated the results document that specific event time contamination corporate restructuring announcements provides the driving force for all the earlier findings alderson and chen ac 1986a attempt to empirically determine whether the reversion of the excess pension assets represented by overfunded definedbenefit pension plans leads to increases in the market value of the reverting firms ac s results suggest support for those who maintain that the assets of a firm s pension funds are separate and distinct from the assets of the sponsoring firm the separation hypothesis rather than those who maintain that pension assets are priced prior to reversion the integration hypothesis this comment modifies ac s study for the purpose of strengthening their approach in terms of its agreement with both known corporate behavior and conventional event study methodology following these modifications no evidence remains that share prices are significantly affected by pension terminations

oil price inflation pass through in romania during the inflation targeting regime abstractin the wake of the inflation targeting strategy in romania we estimate the impact of international oil prices upon the consumer price index cpi and core inflation the inflation target was systematically missed by the monetary authorities who explain this failure by exogenous factors using a frequency domain framework we show that the oil price inflation pass through can be observed only for those components of inflation which include volatile prices and only in the medium run our results put forward that the constant missing of the target cannot be explained by the oil price inflation pass through and the credibility of the strategy is put into question

tax induced earnings management by firms with net operating losses this paper investigates tax induced intertemporal income shifting by firms with net operating loss nol carrybacks for several years following the tax rate reductions of the tax reform act of 1986 tra 86 these firms had incentives to shift recognition of revenues and expenses across years to increase their nol carrybacks by examining how nol firms shift income and cross sectional variation in the extent to which they do so this research extends prior examinations of intertemporal income shifting by profitable firms see scholes wilson and wolfson 1992 and guenther 1994 1

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

the timing and substance of divestiture announcements individual simultaneous and cumulative effects this paper examines differences in announcement day effects among firms engaged in voluntary sell offs while on average an initial sell off announcement results in a significant positive excess return not all divestiture announcements are accompanied by positive price movements dividing the sample into two subsamples based on whether the transaction price is announced shows that the announcement day effect is significantly positive for the price group but not statistically different from zero for the noprice group in addition a positive relation is found between the relative size of the selloff and the announcement day return recent published studies of spin offs show evidence of positive announcement day and pre announcement day stock price effects however empirical studies on voluntary sell offs have not produced uniform positive or negative price movements 2 instead they show positive or zero announcement day cumulative average returns cars and mixed i e positive negative or zero preand post announcement day share price changes the purpose of this paper is to examine the discrepancies in announcement day excess returns for the selling firms engaged in voluntary sell offs and to isolate factors behind the differences in share price responses as we show two such factors are the relative size of the divestiture and whether the sales transaction price is initially announced examining the samples of recent divestiture event studies support these findings previous papers that restrict their samples to initial announcements containing transaction price or relatively large divestitures report significantly positive announcement day returns studies that do not discriminate among price or relative size find smaller or insignificant announcement days returns this of course does not imply that price disclosure and size are the sole factors in determining announcement day effects however these findings are consistent with the results reported in this paper this study is divided into six sections section i presents the research design

stock market valuation of joint venture sell offs this article examines the stock market performance implications of joint venture jv partner sell offs using a resource based view and an event study methodology more specifically it proposes hypotheses putting into evidence the stock market valuation of different reasons for jv sell offs refocusing of a business debt reduction and jv failure abnormal returns ars from jv sell offs are estimated for a sample of 151 european selling partners first the results show that stock market reactions observed around the date of announcement are significant and positive this finding is consistent with that of finance research literature on stock market reactions to ordinary asset sales this leads us to discount the idea that stock markets place a specific valuation on jv sell offs second the results indicate that the reasons for jv sell offs are a determinant of ars of selling partners

research in accounting for income taxes abstract this paper comprehensively reviews the accounting for income taxes afit literature we begin by identifying four distinctive aspects of afit and briefly covering the rules surrounding afit we then review the existing studies in detail and offer suggestions for future research we emphasize the research questions that have been addressed most of which relate to whether the tax accounts are used to manage earnings and whether the tax accounts are priced by equity market participants we also highlight areas that have not received much research attention and that warrant future analysis

the perils of transparency in bureaucracies many countries have recently enacted or proposed reforms aimed at increasing citizens information on the quality of some public sector services disclosure of schools and teachers quality is the case that has generated the biggest public debate in the us the no child left behind act nclb requires learning progress to be measured for every child and results from students tests be made available in annual report cards so that parents can evaluate schools performances similar reforms have also been proposed for many other public services in the uk legislation introduced in the year 2000 now requires that the performance of each local government is reviewed and made public with regards to provision of services such as re police housing social services and education but also like the condition of roads the

the role of energy in real business cycle models abstract this paper modifies hansen s 1985 analysis of a real business cycle mode with indivisible labor by explicitly including energy as a productive input and modelling the relative price of energy as an exogenous random process one goal is to determine the extent to which the introduction of energy price shocks reduces the reliance of the real business cycle model on unobserved technology shocks the other goal following christiano and eichenbaum 1991 is to compare the correlation between real wages and hours predicted by the energy inclusive model to that predicted by hansen s model

oil price shocks and real gdp growth empirical evidence for some oecd countries this study assesses empirically the effects of oil price shocks on the real economic activity of the main industrialized countries multivariate var analysis is carried out using both linear and non linear models the latter category includes three approaches employed in the literature namely the asymmetric scaled and net specifications evidence of a non linear impact of oil prices on real gdp is found in particular oil price increases are found to have an impact on gdp growth of a larger magnitude than that of oil price declines with the latter being statistically insignificant in most cases among oil importing countries oil price increases are found to have a negative impact on economic activity in all cases but japan moreover the effect of oil shocks on gdp growth differs between the two oil exporting countries in the sample with the uk being negatively affected by an oil price increase and norway benefiting from it

oil shocks and external balances abstract we provide estimates of the effects of demand and supply shocks in the global crude oil market on several measures of oil exporters and oil importers external balances including the oil trade balance the non oil trade balance the current account capital gains and changes in net foreign assets nfa first we show that the effect of oil demand and supply shocks on the merchandise trade balance and the current account which depending on the source of the shock can be large depends critically on the response of the non oil trade balance our results provide evidence of an intermediate degree of international financial integration second we document the presence of large and systematic valuation effects in response to these shocks valuation effects overall tend to cushion the effect of oil demand and supply shocks on the nfa positions of oil exporters and oil importers third we quantify the overall importance of global business cycle demand shocks as well as oil market specific demand and supply shocks for external balances

decision making in committees transparency reputation and voting rules in this paper i analyze the effect of the transparency of the decision making process in committees on the decisions that are eventually taken i focus on committees whose members are motivated by career concerns so that each member tries to enhance his own reputation when the decision making process is secretive the individual votes of the committee members are not exposed to the public but only the final decision thus individuals are evaluated according to the group s decision i find that in such a case group members are induced to comply with preexisting biases for example if the voting rule demands a supermajority to accept a reform individuals vote more often against reforms and exacerbate the conservatism of the voting rule when the decision making process becomes transparent and individual votes are observed this effect disappears and such committees are then more likely to accept reforms i also find that coupled with the right voting rule a secretive procedure may induce better decisions than a transparent one

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

world oil market or mayhem the world oil market is regarded by many as a puzzle why are oil prices so volatile what is opec and what does opec do where are oil prices headed in the long run is peak oil a genuine concern why did oil prices spike in the summer of 2008 and what role did speculators play any attempt to answer these questions must be informed and disciplined by economics such is the purpose of this essay to illuminate recent developments in the world oil market from the perspective of economic theory

the effect of long term performance plans on corporate sell off induced abnormal returns this study examines the association between long term performance plans and wealth effects accruing to stockholders of divesting firms at announcements of sell off proposals the results indicate that divesting companies with long term performance plans experience a more favorable stock market reaction at the announcement of sell off proposals relative to firms without long term performance plans the findings imply that long term performance plans serve as an effective mechanism to motivate managers to make better decisions substantial research has been undertaken on restructuring corporate assets liabilities and ownership of publicly traded corporations with regard to asset restructuring most of the literature analyzes mergers and tender offers but recently attention has been given to divesting activities divestiture is a modification of the firm s productive assets and comes in the form of sell offs or spin offs in sell offs the parent company sells part of its assets for cash assets or securities of the acquiring firm spin offs involve transfers of assets to a newly organized firm whose shares are distributed to stockholders of the parent firm or involve the distribution of shares of a subsidiary to the parent firm s shareholders while recent studies1 provide evidence that spin off announcements are associated with significant positive abnormal returns to parent firms around the day of the event the studies on voluntary sell offs report mixed results 2 these results raise questions about management s motivation to sell part of the firm s assets prior research assumes that corporate sell offs are activities consistent with stockholders interests however sell offs can be motivated by managerial selfinterest particularly when sell offs increase reported profits and hence management compensation recent articles in the financial press3 suggest that firms

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

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

corporate investment with financial constraints sensitivity of investment to funds from voluntary asset sales we examine the importance of financial constraints for firm investment by looking at the relationship between investment expenditures and proceeds from voluntary asset sales asset sales provide a cleaner indicator of liquidity than cash flows since it appears not to be positively correlated with investment opportunities the cross sectional differences in firm investment are examined using an endogenous switching regression model with unknown sample separation we find that cash obtained from asset sales is a significant determinant of corporate investment and that the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be financially constrained

economic growth inflation and oil shocks are the 1970s coming back this article analyses the relationship between oil price shocks and the macroeconomic evolution of the group of seven g7 countries using the qu and perron 2007 methodology we endogenously identify three breaks in the nonlinear relationship across our 1970 to 2008 sample we compute long term multipliers and find that the response of output and inflation to oil price shocks is greatest in the 1970s and progressively disappears until the late 1990s in contrast to the previous literature we observe that both effects reappear in the 2000s especially on inflation nevertheless the transmission of oil price shocks to the economy is weaker than in the 1970s which means that oil price shocks have lost some of their explanatory power precisely identifying these effects is crucial for the design of adequate economic measures to control or smoothen them

imperfect competition and the effects of energy price increases on economic activity the authors show that modifying the standard neoclassical growth model by assuming that competition is imperfect makes it easier to explain the size of the declines in output and real wages that follow increases in the price of oil plausibly parameterized models of this type are able to mimic the response of output and real wages in the united states the responses are particularly consistent with a model of implicit collusion where markups depend positively on the ratio of the expected present value of future profits to the current level of output copyright 1996 by ohio state university press

political accountability and sequential policymaking abstract we develop a model of political accountability with sequential policymaking when a bureaucrat s actions are transparent his overseer faces a political time inconsistency problem she is tempted to revise her retention rule in the middle of the policymaking process as a result the bureaucrat s equilibrium behavior overemphasizes later tasks if the overseer knows the technology by which policies translate into outcomes then she can eliminate these distortions using task specific budget caps however if the overseer is uncertain about this technology such budget caps introduce ex post inefficiency when uncertainty is sufficiently large and consequential the overseer prefers an institutional environment with a fungible budget and no transparency such an environment allows the overseer to exploit the bureaucrat s expertise though at the cost of weaker overall incentives

oil prices and the terms of trade abstract the combination of substantial terms of trade variability and unstable correlation patterns of trade prices with output and trade volumes has led some to suggest a break in the link between trade volumes and prices we find that oil accounts for much of the variation in the terms of trade over the last twenty five years and its quantitative role varies significantly over time and since our dynamic general equilibrium model predicts that the economy responds differently to oil supply shocks than to other shocks changes in their relative importance helps to account for the unstable correlations in the data

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

oil shocks and monetary policy rules in emerging economies we examine the effects of shocks in the oil market on key macroeconomic variables in small open economies using a dynamic stochastic general equilibrium model with sticky prices and imperfect competition under different monetary policy rules the numerical solutions show that the types of exchange rate regimes and monetary policies could partly explain the trends in macroeconomic volatilities considering negative shocks to oil supply hamilton 1983 and positive shocks to oil demand kilian 2009 these findings are confirmed in vector autoregressive responses for chile and israel with inflation targeting under flexible exchange regimes and hong kong with fixed regime

the investment opportunity set and accounting procedure choice abstract this paper provides evidence on the cross sectional relation between firms investment opportunities their debt and compensation contracts their size and financial leverage and their accounting procedure choices this evidence is important because previous studies hypothesize that the link between firms investment opportunities and their accounting choices helps explain extant results on the size debt equity and bonus plan hypotheses however while i find that firms investment opportunities do affect the nature of their contracts i also find that the traditional explanations for accounting choice are important after controlling for the effects of the investment opportunity set

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

the market for interfirm asset sales partial sell offs and total liquidations abstract we investigate the valuation consequences of voluntary proposals to sell part or all of a corporation s assets for partial sell offs successful sellers and buyers reap statistically significant abnormal returns of 1 66 and 0 83 respectively unsuccessful sellers realize gains at the bid announcement of 1 41 that are lost at the offer termination in contrast proposals to liquidate the firm are associated with significant average abnormal returns of 12 24 we interpret these findings as evidence that asset sales are associated with the movement of resources to higher valued uses rather than as evidence of market mispricing before the divestiture announcements

terms of trade and exchange rate regimes in developing countries abstract since friedman essays in positive economics university of chicago press chicago 1953 157 203 an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks i use a post bretton woods sample 1973 96 of 75 developing countries to assess whether the responses of real gdp real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes i find that responses are significantly different across regimes in a way that supports friedman s hypothesis the paper also examines the importance of terms of trade shocks in explaining the overall variance of output and prices in developing countries

managerial reputation and divisional sell offs a model and empirical test abstract this paper presents a reputation model of divestiture activity that yields a sharp cross sectional implication for event studies of sell off announcements a decision to divest a division that is known to be successful conveys good news about the division in contrast a decision to divest a division that is known for underperformance conveys no news about the division we test these hypotheses on a sample of sell off announcements for which we find stories in the wall street journal unambiguously characterizing the division being sold as either a winner or a loser the stock price reaction to the sell off of losers is indistinguishable from zero while the stock price reaction to the sell off of winners is a statistically significant 2 5 these results are strengthened when we expand the sample to include divisions whose profitability was announced in the company s annual report for this expanded sample the average stock price reaction to the announcements of sell offs of losers remains indistinguishable from zero while returns from the sell offs of winners average a highly significant 3 4

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

the rationale behind interfirm tender offers information or synergy this paper investigates the rationale behind interlirm tender offers by examining the returns realized by the stockholders of lirms that were the targets of unsuccessful tender offers and lirms that have made unsuccessful offers our results suggest that the permanent positive revaluation of the unsuccessful target shares documented by dodd and ruback 1977 and bradley 1980 is due primarily to the emergence of and or the anticipation of another bid that would ultimately result in the transfer of control of the target resources we also find that the rejection of a tender offer has differential effects on the share prices of the unsuccessful bidding firms depending upon whether the tender offer process results in a change in the control of target resources on the basis of these results we conclude that acquisitions via tender offers are attempts by bidding firms to exploit potential synergies not simply superior information regarding the true value of the target resources

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

the political economy of government responsiveness theory and evidence from india the determinants of government responsiveness to its citizens is a key issue in political economy here we develop a model based on the solution of political agency problems having a more informed an politically active electorate strengthens incentives for governments to be responsive this suggests that there is a role both for democratic institutions and the mass media in ensuring that the preferences of citizens are reflected in policy the ideas behind the model are tested on panel data from india we show that public food distribution and calamity relief expenditure are greater controlling for shocks where governments face greater electoral accountability and where newspaper circulation is highest

reversions of excess pension assets after takeovers this article evaluates pension asset reversions as a source of takeover gains in our sample of 413 takeovers pension funds were reverted by 15 1 of acquirers in the two years following hostile takeovers compared to 8 4 in the two years following friendly takeovers reversions following takeovers tend to occur in unit benefit plans where the potential for wealth transfer is the greatest these results are consistent with the view that hostile takeovers breach implicit contracts between firms and employees we estimate that the reversions can on average explain approximately 11 of the takeover premium in cases where they actually occur reversions are too small to be the sole or even dominant source of takeover gains

determinants of corporate pension funding strategy abstract several hypotheses concerning pension funding strategy are tested in a cross sectional regression model on a sample of 255 firms results are consistent with the following explanations 1 finance incentives tax benefits and financial slack for high level funding 2 labor incentives for low level funding and 3 financial statement incentives relating to political costs for high level funding and debt contracting costs for low level funding pension funding strategy appears to be complex involving tradeoffs between funding incentives the nature of these interactions and tradeoffs remains to be clarified through future research

what happened to the oil price macroeconomy relationship abstract strong evidence is found that oil prices no longer granger cause many u s macroeconomic indicator variables in data after 1973 a number of potential explanations are explored that sample stability issues are responsible that oil prices are now endogenous and that linear and symmetric specifications misrepresent the form of the oil price interaction none of these hypotheses are supported by the data the opec price increases do appear to have had significant impacts while the effects of the price declines of the 1980s are smaller and harder to characterize these results have potentially important implications for the large body of research which utilizes oil prices as an instrumental or explanatory variable

choice of inventory accounting methods comparative analyses of alternative hypotheses in the past decade hundreds of firms switched to the lifo accounting method for their inventories in response to high rates of inflation nevertheless many others continue to use the fifo method biddle 1980 estimated that each of the 105 fifo firms in his study paid an average of nearly 26 million in additional federal income tax what makes these fifo firms so reluctant to switch accounting methods a review of the literature provides three possible explanations for inventory accounting choices political costs agency costs and divergent production and investment characteristics because the required economic variables to test these three alternative explanations are not observable the empirical tests are based on examination of proxy variables many of the proxy variables of the first and third explanations are the same so it is difficult to discriminate one from the other using univariate statistical methods for example there is consistent evidence of an association between size and inventory accounting choices but size can serve as a proxy for either political costs or divergent production and investment opportunities or both similarly there is also strong evidence that the type of industry is associated with inventory choice which could also be consistent with both explanations the major purpose of this paper is to test the three explanations cited above in a simultaneous manner using multivariate probit methods

the effect of owner versus management control on the choice of accounting methods abstract this paper examines the relationship between the ownership control status of firms and the accounting methods they adopt the arguments of watts and zimmerman s positive theory are integrated with those of managerial economists to generate the prediction that management controlled firms are more likely than owner controlled firms to adopt accounting methods which increase reported earnings this prediction is inconsistent with fama s hypothesis that the market for managerial talent will prevent management controlled firms from acting differently than owner controlled firms this paper compares the depreciation methods used by a sample of management and owner controlled firms for financial reporting purposes the comparison considers and controls for the factors of firm size leverage and the depreciation method used for tax reporting purposes the comparison reveals that there is a significant difference in the depreciation methods adopted by management controlled and owner controlled firms for financial reporting purposes

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

quality disclosure and certification theory and practice this essay reviews the theoretical and empirical literature on quality disclosure and certification after comparing quality disclosure with other quality assurance mechanisms and describing a brief history of quality disclosure we address two sets of theoretical issues first why don t sellers voluntarily disclose through a process of unraveling and given the lack of unraveling is it desirable to mandate seller disclosure second when we rely on certifiers to act as the intermediary of quality disclosure do certifiers necessarily report unbiased and accurate information we further review empirical evidence on these issues with a particular focus on healthcare education and finance the empirical review covers quality measurement the effect of third party disclosure on consumer choice and seller behavior as well as the economics of certifiers jel d18 k32 l15 m31

the intra industry effects of going private transactions we demonstrate that bids to take firms private generate significantly positive valuation effects for industry rivals of target firms these valuation effects cannot reflect either synergy or monopoly since no consolidation of operating firms is involved in such transactions participation by buyout specialists in the bid does not significantly affect these gains bids by outsiders and bids by incumbent managers generate similar valuation effects for industry rivals the effect on share prices of industry rivals is inversely related to the capitalized values of rival firms relative to the target firm we also report valuation effects for target firms we examine the implications of going private bids for the valuation of horizontal rivals of target firms we hypothesize that going private transactions reflect in part private information held by the bidder about the target firm we argue that if the financial market perceives that elements of this private information are industry wide rather than firm specific the value of the target firm s horizontal rivals should change in response to the goingprivate bid announcement 1 unlike interfirm mergers and acquisitions going private transactions do not involve a consolidation of separate operating firms consequently changes in the value of rival firms induced by goingprivate bids are due neither to the demonstration of synergies associated with a consolidation of operating firms nor to the effects of induced monopoly or collusion 2 we also report valuation effects on target firms we find that announcements of going private bids generate statistically significant positive intra industry effects industry rivals of targets of goingprivate bids receive a positive 2 day average excess return of 1 32 which is statistically significant the average 2 day excess return to target firms is 17 35 and is statistically significant we test whether participation of

management buyout proposals and inside information this paper explores stock price behavior surrounding withdrawn buyout proposals to determine whether managers proposal announcements reveal any information which is unrelated to the efficiency gains associated with completed buyouts on average firms whose managers withdraw buyout proposals do not sustain significantly positive stock price effects unless they receive subsequent acquisition bids in addition managers of firms with completed buyouts are no more likely to have access to inside information than managers who withdrew proposals i interpret this evidence as inconsistent with the notion that inside information commonly motivates management buyout proposals management buyouts occur when a group of investors including some incumbent managers buy all of a firm s outstanding common stock with the intent of taking it private critics of management buyouts argue that managers access to inside information allows them to time their proposals to expropriate the wealth of outside shareholders these opponents generally cite anecdotal evidence that favorable inside information motivates management buyout proposals 1 managers themselves suggest that their proposals are motivated at least in part by their information advantage 2 however assistant professor of finance texas a m university this paper is based on my univer

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

voluntary corporate liquidations abstract this paper examines possible motives for and consequences of voluntary corporate liquidations specifically the procedural and tax differences between voluntary liquidations and other control changing transaction devices are analyzed an empirical investigation of successful liquidations shows that the announcement of liquidation reduces the risk of liquidating shares that the shareholders receive substantial gains from successful liquidations and that the average gains to the acquiring shareholders are not significantly different from zero these findings suggest that the liquidating firms assets have been underutilized before liquidation and that voluntary liquidations lead to higher valued reallocations of corporate resources

the effect of book income adjustment in the 1986 alternative minimum tax on corporate financial reporting abstract this study examines the effect of the book income adjustment provision in the 1986 alternative minimum tax amt on financial accounting practices a model is developed to identify firms that are more susceptible to the book income adjustment the changes in financial accounting practices for firms affected by the amt are then examined our results indicate that firms that are likely to be affected by the book income adjustment shift timing and permanent differences across years to reduce the impact of the amt

the effect of corporate divestments on shareholder wealth the uk experience this is the first known study of stockmarket reaction to u k sell off announcements earlier u s studies have found positive market reaction to sell off announcements various of these have aimed to relate the magnitude of marketreaction to factors such as price declaration completion of agreement and financial strength of divestor this study also explores the impact of the above factors and their inter relationships typical event study methodology is used in estimating the size of the unexpected market reaction the so called abnormal return separate analysis of sub samples is undertaken in this study to help enhance our understanding of market response to corporate sell offs examples of such sub samples are price no price groups and completion intention groups this analysis provides explanations for some of the seemingly contradictory u s study results a measure of financial distress namely the z score is introduced to explore the bankruptcy avoidance hypothesis we find a degree of financial distress prior to divestment to be inversely related to abnormal return a result consistent with market approval for such distress sales relative size of divested part to parent is also shown to be positively related to abnormal returns price declaration seems to be vitally important in generating positive market response announcements of completed sell offs along with the price is even more welcome by the market announcement of completed sell offs with undisclosed price seems to induce market uncertainty and thus negative abnormal returns announcement of intended sell offs with price disclosure as well as our overall sample results both provide statistically significant positive shareholder gains this latter finding is in harmony with u s studies

proxies for the corporate marginal tax rate abstract this paper focuses on how best to measure the corporate marginal tax rate which is an important input into financial analysis of the cost of capital financing policy corporate hedging and corporate reorganizations the results indicate that the simulated tax rate used by shevlin 1990 and graham 1996 although difficult to calculate is the best available proxy for the true marginal tax rate if the simulated rate is unavailable an easy to calculate trichotomous variable or the statutory marginal tax rate which captures the progressivity in the tax schedule are reasonable alternatives better than most commonly used tax variables

tax planning regulatory capital planning and financial reporting strategy for commercial banks we test whether banks investment and financing policies can be explained by tax status we document changes in bank holdings of municipal bonds in response to changes in tax rules relating to deductibility of interest expense we also document an association between banks marginal tax rates and their investment and financing decisions which is consistent with the existence of tax clienteles however banks do not sort themselves perfectly into investment and financing clienteles because of adjustment costs we posit specific types of transaction cost impediments to tax planning and document that banks apparently trade off these costs against tax planning benefits article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the impact of taxes on the choice of divestiture method abstract this paper estimates the magnitude of tax costs and their impact on the decision to divest assets via a taxable sale rather than a tax free spin off we find that the tax costs are substantial averaging 8 of market value of the divested assets and that cross sectional variation in tax costs has a large impact on managers choice of divestiture method our results are consistent with two explanations first managers are willing to incur avoidable tax costs to gain earnings and cash flow benefits second managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs

income misattribution under formula apportionment abstract alternatives to the current system of separate tax accounting such as the proposed common consolidated corporate tax base in europe would apportion a firm s worldwide profits using formulas based on the location of employment capital or sales this paper offers a new method of evaluating the accuracy of these apportionment rules and the ownership distortions they create evidence from european company accounts indicates that apportionment formulas significantly misattribute income since employment and other factors on which they are based do a very poor job of explaining a firm s profits for example the magnitude of property employment and sales explains less than 22 of the variation in profits between firms and the prediction estimates from using such a formula exceed half of predicted profits 64 of the time and exceed twice predicted income 11 of the time as a result the use of formulas rewards or punishes international mergers and divestitures by reallocating taxable income between operations in jurisdictions with differing tax rates the associated ownership distortion is minimized by choosing factor weights to minimize weighted squared prediction errors for which based on the european evidence labor inputs should play little if any role in allocation formulas but even a distortion minimizing formula creates large incentives for inefficient ownership reallocation due to the enormous variation in profitability that is unexplained by formulary factors implying that significant resource allocation costs would accompany european adoption of formulary apportionment methods

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

taxes and firm size abstract firm size has been used as a proxy for the firm s political costs and hence managers proclivity to choose income reducing accounting procedures this study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates the latter are one component of a firm s political costs the roughly fifty largest u s exchange listed firms in particular oil and gas companies and manufacturing firms have significantly higher worldwide tax rates than other firms these higher tax rates are observed primarily after the implementation of the u s 1969 tax reform act and after the opec countries raised their tax rates on u s oil producers the findings which are insensitive to alternative sources of data alternative measures of firm size and alternative measures of effective tax rates are consistent with the use in previous studies of firm size as a proxy for the firm s political costs

double edged transparency in teams abstract in a team project with significant complementarities between various players individual tasks news of early success by some encourages others to push ahead with their own tasks while lack of success has the opposite effect this ex post disparity in incentives created gives rise to two differing implications ex ante for an ideal team transparency sometimes it is better to commit to complete secrecy within the team of the various participants interim progress as it mitigates the negative effect of failures in some other situations commitment to full disclosure is better as players are then encouraged to be proactive by exerting efforts in the early rounds and motivate other team members into continued activities by way of interim progress transparency of outcomes has thus double edges it can boost incentives or dampen incentives

differential tax benefits and the pension reversion decision abstract we document that tax considerations influence whether and when a firm withdraws excess assets in its defined benefit pension plan through a reversion since a reversion impacts taxable income over many years and alternative methods of withdrawing excess assets exist we argue that the economically relevant tax based decision criterion is its differential tax benefit defined as the difference between the discounted tax savings of reversion versus those of the best alternative withdrawal method we develop a technique for directly estimating this decision criterion and document that differential tax benefits are strongly correlated with the reversion decision and its timing

pension reversions and worker stockholder wealth transfers this paper examines the relative importance of transfers from workers to shareholders in the firm s decision to terminate their overfunded defined benefit pension plans in contrast to earlier studies i find evidence that firms terminate their pension plans to relieve themselves of implicit promises to workers of future compensation in addition financing and tax considerations influence the reversion decision the results suggest that the 1986 excise tax on asset reversions reduced termination for reversion by 36 percent in 1986

security price reactions around corporate spin off announcements abstract we examine security price reactions around the announcements of 123 voluntary spin offs by 116 firms between 1963 and 1981 involving a pro rata distribution of the common stock of a subsidiary to the stockholders of the parent firm the median spin off in the sample is 6 6 of the original equity value and is associated with an abnormal return of 7 0 from 50 days prior to the announcement through completion of the spin off no evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders over the entire event period we find positive gains for firms engaging in spin offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and or regulatory difficulties in the two day interval surrounding the first press announcement we find positive average excess returns for all groups

additional evidence on the relation between divestiture announcements and shareholder wealth this paper presents estimates of the effect of voluntary divestiture announcements on shareholder wealth the results show that both spin off and sell off announcements tend to have a positive influence on the stock prices of the divesting firms and that the spin offs outperform the sell offs on the day of the event we also find that the economic gains to the shareholders of the selling and acquiring firms are nearly identical suggesting that the sell off decision is perceived by both investor groups as a positive net present value npv transaction

mass media competition political competition and public policy if better informed voters receive favourable policies then mass media will affect policy because mass media provide most of the information people use in voting this paper models the incentives of the media to deliver news to different groups the increasing returns to scale technology and advertising financing of media firms induce them to provide more news to large groups such as taxpayers and dispersed consumer interests and groups that are valuable to advertisers this news bias alters the tradeoff in political competition and therefore introduces a bias in public policy the paper also discusses the effects of broadcast media replacing newspapers as the main information source about politics the model predicts that this change should raise spending on government programmes used by poor and rural voters

the significance of sell off profitability in explaining the market reaction to divestiture announcements abstract previous research on asset sales has emphasized the divestment motivation and the use of the proceeds from the sale as determinants of selling firm value gains in contrast this paper explores the extent to which the relevant information necessary to evaluate sell offs is embodied in the profitability of the sale i e the price received by the seller over the value in use of the divested assets where the latter is a function of past operating earnings and book value our empirical results show that sell off profitability is substantially more significant in explaining the market reaction to divestiture announcements than the previous literature has suggested we provide strong evidence of a positive relation between selling firm abnormal returns during sell off announcements and profit on the sale which remains significant after controlling for the motivation behind the sell off the use of the proceeds from the sale and the presence of agency costs of managerial discretion we conclude that sell off profitability explains a major portion of selling firm abnormal returns and is one of the most significant determinants of the market reaction to divestiture announcements

the wrong kind of transparency in a model of career concerns for experts when is a principal hurt from observing more information about her agent this paper introduces a distinction between information on the consequence of the agent s action and information directly on the agent s action when the latter kind of information is available the agent faces an incentive to disregard useful private signals and act according to how an able agent is expected to act a priori this conformist behavior hurts the principal in two ways the decision made by the agent is less likely to be the right one discipline and ex post it is more difficult to evaluate the agent s ability sorting the paper identifies a necessary and sufficient condition on the agent signal structure under which the principal bene ts from committing not to observe the agent s action the paper also shows the existence of strategic complementarities between information on action and information on consequence the results on the distinction between action and consequence are then used to interpret existing disclosure policies in delegated portfolio management in particular they are consistent with hitherto puzzling evidence that mutual funds systematically overperform pension funds

why hang on to losers divestitures and takeovers we study the divestiture decisions of managers who care about their reputations managers divestiture and investment decisions are publicly observable but managers privately observe signals with respect to the future payoff distribution of investments they have initiated we establish that in equilibrium there is too little divestiture these inefficiencies create the opportunity for wealth enhancing divestiture motivated takeovers a key result is that only managers of targets with middle of the road asset specificity should consider the takeover threat credible these findings suggest that uniqueness of assets is an important determinant of both agency costs and takeover activity our analysis leads to several empirical predictions overwhelming empirical evidence has documented large gains in shareholder wealth that arise from takeovers jarrell brickley and netter 1988 and jensen and ruback 1983 the source of these gains has remained elusive however although takeovers are followed by some infusion of new managerial talent we have not witnessed the kind of profound post takeover restructuring of the productive activities of target firms that would readily justify the documented wealth gains a commonly observed post takeover initiative is divestiture of some of the target s lines of business bhide 1989 and bhagat shleifer and vishny 1990 what is puzzling is that if the gains from takeovers stem from the anticipation of such divestitures then why were these divestitures not undertaken by the target firm s management in the first place the purpose of this paper is to provide a possible answer to this question our focus is on the divergence in incentives between managers and shareholders with respect to divestitures of ongoing projects we show that managers might rationally decide to hang on to projects that should be divested in

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

real effects of accounting rules evidence from multinational firms investment location and profit repatriation decisions we analyze survey responses from nearly 600 tax executives to better understand corporate decisions about real investment location and profit repatriation our evidence indicates that avoiding financial accounting income tax expense is as important as avoiding cash income taxes when corporations decide where to locate operations and whether to repatriate foreign earnings this result is important in light of the recent research about whether financial accounting affects investment and in light of the decades of research on foreign investment that examines the role of cash income taxes but heretofore has not investigated the importance of financial reporting effects our analysis suggests that financial reporting is an important factor to be considered in the policy debates focused on bringing investment to the united states

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

the effect of voluntary sell off announcements on shareholder wealth sell off activities arise when a firm sells part of its assets e g a segment a division etc but continues to exist in essentially the same form this study investigates the effect of voluntary sell offs on stock returns from a sample of over 1000 sell off events first public announcements the evidence shows that both sellers and buyers earn significant positive excess returns from these transactions the excess returns earned by buyers are smaller than those earned by sellers there is also evidence that sell off announcements are preceded by a period of significant negative returns for the sellers which suggests that the sellers on average performed poorly prior to their sell off activities substantial research has been undertaken in recent years on mergers acquisitions tender offers capital structure changes and other financial planning topics this research has considerably expanded our knowledge about the association of these decisions with the welfare of the stockholders involved in these transactions selling a portion of the firm s assets is another important financial planning decision 2 this paper investigates the effect of voluntary sell off announcements on shareholder wealth a sell off is defined as selling part of a firm s assets e g a segment a division etc while the firm continues to exist in essentially the same form as that prior to the sell off this study does not examine the effects of involuntary ordered by the government sell offs and other similar activities such as spin offs leveraged buy outs liquidations reorganizations etc 3

oil shocks and aggregate macroeconomic behavior the role of monetary policy a recent paper by bernanke gertler and watson 1997 suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock this paper challenges this conclusion on two grounds first we question whether the federal reserve actually has the power to implement such a policy for example we consider it unlikely that additional money creation would have succeeded in reducing the fed funds rate by 900 basis points relative to the values seen in 1974 second we point out that the size of the effect that bernanke gertler and watson attribute to oil shocks is substantially smaller than that reported by other researchers primarily due to their choice of a shorter lag length than that used by other researchers we offer evidence in favor of the longer lag length employed by previous research and show that under this specification even the aggressive federal reserve policies proposed would not have succeeded in averting a downturn